Bigger cities are engines for inequality

Cross-posted from The Conversation:

Australia’s global cities are a very large part of the nation’s economic success, but they are also generating significantly unequal incomes. Our recent research found that as Australian cities have grown, their income inequality has increased.

Cities provide many social and cultural opportunities and allow large numbers of people to stay connected. But bigger is better only if we can make it better for everyone.

We propose a solution: rather than concentrate activity around a single city centre, we need to develop multiple centres of activity – polycentric cities.

How are city size and incomes related?

Large cities, particularly global cities, are great sources of wealth and income generation. Their impacts on inequality, though, are less positive.

Much recent research has focused on measuring the relationship between city size and income and wealth generation. Various studies show that as cities increase in size, income and wealth grow “superlinearly”. This means that if the city size grows by 10%, income and wealth generation grow by more than 10%.

The benefits of large cities to the economy overall are well recognised. The most significant economic engines of many countries are one or two of the largest cities – think New York for the US, London for the UK, Sydney and Melbourne for Australia.

Large cities may be where growth and wealth are concentrated. And, by inference, average quality of life is improved. But the uneven distribution of wealth among residents is of concern.

A reasonable question might be whether cities, which many regard as humankind’s greatest invention, are machines for concentrating wealth inequitably. Is there any relationship between city size and income distribution?

We investigated this relationship across the entire spectrum of Australian cities. Using income distribution data from the 2011 Census across all the 101 significant urban areas, or “cities”, we did find a superlinear relationship. That is, overall, as city populations increased, total income did increase by more than the rate of population growth.

Bigger is better for the rich

We also analysed the proportion of households in different income bands. This analysis showed that while income growth increased as Australian cities got larger, this was concentrated in the upper income categories.

The Australian Bureau of Statistics defines ten income categories, ranging from lowest to highest incomes per capita, with people counts in each category. We found that incomes of poor and middle-income categories grow in proportion with city size, or more slowly. Those of the higher-income categories grow disproportionately faster.

Every citizen should be concerned about this trend. If total incomes and the incomes of top earners grow faster than city size, but not those of lower income earners, then most of the income that makes bigger cities richer is only going to the top earners.

Why do cities concentrate wealth?

This is probably not a surprising finding. Large cities attract many economic activities, particularly those in financial services, that can generate very large incomes. However, it highlights an issue that has received increasing attention in recent years – the significant increases in inequality in many Western economies.

While our research was largely a data-driven exercise, it does help us think about what might be some of the sources of inequality in our cities and the geography of that inequality. What policy response might help to counter this characteristic of increased city size?

The agglomeration and spillover effects of clustering related businesses, particularly finance and business service and “knowledge workers”, is well recognised, but these beneficial effects are indeed highly concentrated. An extensive global review of agglomeration in 2014 noted that “agglomeration economies do not spill over much space”.

How do we spread the benefits?

As big cities like Sydney and Melbourne expand, it will be very important to establish and support clusters of activity away from the principal city centre. Polycentric cities are more likely to achieve more equitable access to higher-paying jobs.

Additionally, it will be important to establish spatial policies that support a mix of higher, middle and lower-income jobs in business districts to prevent the agglomeration of the super-rich in pockets of the city.

This has implications for establishing housing market stability (encouraging a good spatial mix of all housing types in the vicinity) and efficient commuting (middle-income or poorer people not needing to travel long distances for work).

This has been a strategic planning objective for decades. Yet only now, in Sydney’s case, does the city’s economic geography have the potential to be significantly rebalanced. One example would be the development of a new airport in western Sydney.

Proximity to the airport is likely to stimulate investment in other economic activities. Population demand itself combined with the development of the “second city” of Parramatta, which is now capitalising on its geographic centrality, and will become more pronounced as the west develops.

The development of a “third city” centred on the airport, but building on a network of existing centres, has the potential to significantly change the distribution, accessibility and types of employment across the city.

Housing policy has a critical role to play

If we want to tackle inequality in our cities, housing is a very good place to start.

As city housing markets become more expensive, households on lower and moderate incomes spend an increasing proportion of their incomes on housing. The number of locations where they can live in the city becomes smaller, especially when certain pockets show agglomerations of super-rich.

The costs of housing mean the amount of spare income those on moderate and low incomes can invest in themselves and their children to improve their employment prospects (what economists call investing in human capital) becomes smaller. The educational outcomes for their children are often poor. Also, because of rising transport costs, the number of potential jobs they can access gets smaller.

This is why developing polycentricity is so critical.

To reduce inequalities in cities, it is also important that we spread affordable housing out across the city. Proposed inclusionary zoning provisions in the new Sydney District Plans, while modest, are a good first step.

Whether such measures will be sufficient to counter the inherent tendency for income inequality to increase non-linearly as city size grows remains to be seen.

Economic processes will take their own course: generally the larger the agglomeration, the higher the probability of further growth. However, recognising and reducing spatial inequality and changing the economic geography of the city should be planning’s role.

And finally, there is the question of city size distributions, and focusing on the growth of regional and smaller cities, instead of putting every cent of focus on our biggest cities. These are, clearly, very long-term goals in the current environment.

Article by Somwrita Sarkar, Peter Phibbs and Roderick Simpson from the University of Sydney

Comments

  1. All sensible stuff but it would take intervention at all levels of Government to make it a reality. I don’t see the politicians in this country within a cooee of moving down that path unless it can be handballed to the private sector and we’ve all seen how that works out. Anyway, the .1% has no intention of allowing income equality, so we can all stop looking for reason to prevail. It’s about wealth capture and the cosy relationship between our elected representatives and the elites is so well embedded it will take a nuke in the South China Sea to bring real Government for the people back into the game.

  2. The easy answer is to stop growing the population and develop “other cities”, not decentralised cities. Their example in Western Sydney illustrates the rubbish this is especially in Australia – the only thing airports encourage is hotels and warehouses. Everyone with money wants to live near the coastline. For every example of an airport that kind of worked (normally very close to the financial CBD and built after the city not before) there’s many examples of airports fitted afterwards creating even more slums, intensification, annoyance and lower class suburbs. Continuing on the example high paying workers won’t want to live out in Western Sydney in the heat and far away from the coastline; high paying job locations are dictated in part by where their workers “want to live” being higher on the “hierarchy of needs”. Only cost sensitive industries (normally low end paying, high polluting, industrialized industries) move out to these areas entrenching the divide. If it was so good everyone would want this near their place – there’s a reason why NIMBY’s exist after all.

    Easy answer is to reduce migration to stop cities needing to grow and diversifying the economy away from the FIRE sector so other industries have a chance. Both are not happening; in fact the reverse is happening.

    • The new airport in Western Sydney exists to solve one problem : aircraft noise over blue ribbon seats.

    • AK precisely!!!
      As soon as you read the first sentence
      ”Australia’s global cities are a very large part of the nation’s economic success” you know these clowns have not got the first clue about the economics involved.
      Strewth!

  3. Are they? Who gives a sh1t. I’ve got a Penfolds Grange vertical vintage dinner to get to. Cheers.

  4. DarkMatterMEMBER

    “Large cities, particularly global cities, are great sources of wealth and income generation.” – but not productivity. Not efficient use of resources. They have become a type of parasite. In fact, if you look at cities like Sydney/Melbourne, they have become an extension of the banking and financial system. The lifeblood of the city is debt and finance. It is the fundamental model that everything is seen through. That is why when an immigrant comes in an Airbus, every step they take will be from the City Script. They will be funnelled into the same queue as everyone else that soon arrives at rent or mortgage and being a cog in the city.

    We have allowed the financial system to become our civilization. All problems are financial problems, so inequality, environment, culture are alien concepts to the financial organism. Until more people see this clearly nothing will work. Logic, debate, voting, policy. None of that will work because it is meaningless babble to the financial organism.

    • You are largely correct, and yet several decades of New York history shows that it sustained a surprisingly affordable housing market even as it was cementing its position as one of the top five global finance cities. The reason is that nobody stopped the urban area from spreading out, and non-finance industries continued to thrive in ever-spreading-out suburban locations. New York urban area, if it did not have Manhattan or Wall Street at all, would still be as significant as Chicago.

      The inequitable element in the global cities we are discussing, is always the result of regulations that prevent the city from spreading out, which turns urban land rent into a kind of centrifuge, sucking in a substantial share of incomes. New York itself has started to suffer from this kind of effect, not because of central planners trying to save the planet, but accidentally, because the urban area’s fringes have run up against rural municipalities with their own local governments that maintain “rural” character via zoning against housing.

      Experts studying this inequity phenomenon desperately need to wake up to the role of urban planning / zoning in all this. It is perfectly possible to turn non-powerhouse cities into machines of inequity too, with urban planning. The UK really has no city of any size immune to this effect. A comparison between 20 or so “average” cities in the UK with comparators in the USA shows the reality starkly. The USA’s cities generally have much lower house prices, for much larger, more modern and better appointed houses; they have a flat urban land rent curve that enables far more location options for the most; and they have highly dispersed employment.

      It is hardly necessary for government policy leadership to “disperse” employment – this is a natural trend. It is an absence of dispersion that needs to be explained by reference to obstructions of market function, via prescriptive zoning. You do not even need to build highways – as long as developers are free to convert rural land to urban use, they will provide at least adequate local roads and arterials. Problems begin when “planning” of highways starts too late and the land is already all built-out private property.

      “Interstate” highways intended for long distance travel do of course enable ribbon-like development, but natural, market-driven dispersion of employment and housing occurs continually in the gaps between highway “spokes” anyway. Even if there were no highways there, the dispersion would occur as long as there were no prohibitions on it.

      • DarkMatterMEMBER

        Historically, the city performed a function because putting people and materials in close proximity was efficient. That even applied to financial service that enabled society to prosper, develop and grow. New York was a hive of activity, with small factories, businesses, products, all benefiting from the critical mass of the compact city layout.

        Functionally, the city has moved past that point due to technology. All the myriad things we use now come from a container via Shenzen. You no longer need to courier a document to the office across town. Factories and warehouses are being converted to apartments. The flavour of the city as a hub of activity is now a manufactured fake. The function of the city as a productive hub is imaginary, however the financial system has made the cities their corporeal avatars which exist as a perverted 20th century zombie conjured up from the addled brains of soulless advertising executives.

        If the politicians and bankers have their way, the cities will end up like potemkin villages of teeming masses doing fake jobs, burning real resources, sucking the rest of the country dry.

      • I have that problem repeatedly too! Frantic emails to the MB crew usually result in comment being released.

      • DarkMatterMEMBER

        Historically, the city performed a function because putting people and materials in close proximity was efficient. That even applied to financial service that enabled society to prosper, develop and grow. New York was a hive of activity, with small factories, businesses, products, all benefiting from the critical mass of the compact city layout.

        Functionally, the city has moved past that point due to technology. All the myriad things we use now come from a container via Shenzen. You no longer need to courier a document to the office across town. Factories and warehouses are being converted to apartments. The flavour of the city as a hub of activity is now a manufactured fake. The function of the city as a productive hub is imaginary, however the financial system has made the cities their corporeal avatars which exist as a perverted 20th century zombie conjured up from the addled brains of soulless advertising executives.

        If the politicians and bankers have their way, the cities will end up like potemkin villages of teeming masses doing fake jobs, burning real resources, sucking the rest of the country dry.

      • DarkMatterMEMBER

        Historically, the city performed a function because putting people and materials in close proximity was efficient. That even applied to financial service that enabled society to prosper, develop and grow. New York was a hive of activity, with small factories, businesses, products, all benefiting from the critical mass of the compact city layout.

      • DarkMatterMEMBER

        Functionally, the city has moved past that point due to technology. All the myriad things we use now come from a container via Shenzen. You no longer need to courier a document to the office across town. Factories and warehouses are being converted to apartments.

      • The flavour of the city as a hub of activity is now a manufactured fake. The function of the city as a productive hub is imaginary, however the financial system has made the cities their corporeal avatars which exist as a perverted 20th century zombie conjured up from the addled brains of soulless advertising executives.

      • however the financial system has made the cities their corporeal avatars which exist as a perverted 20th century zombie conjured up from the addled brains of soulless advertising executives.

      • … [redacted – z word for animated dead people who get up to no good] conjured up from the addled brains of soulless advertising executives.

        If the politicians and bankers have their way, the cities will end up like potemkin villages of teeming masses doing fake jobs, burning real resources, sucking the rest of the country dry.

      • Thanks, Dark Matter. It is a pleasure to find someone else awake to all this.

        “…If the politicians and bankers have their way, the cities will end up like potemkin villages of teeming masses doing fake jobs, burning real resources, sucking the rest of the country dry.”

        Urban planners are the useful idiots in all this. They look at how “sustainable” cities based on global finance are (eg in resource consumption per dollar of income) and they make a conceptual assumption that this can be replicated in every city, superseding what every city is currently based on. As if the real world is a mere game of “Second Life” being run by the Planners!

        DUH! The world can’t exist on everyone working in global finance / bureaucracy / “services” etc. Most cities, most of the time, need to be allowed to host industries (and their workforces) that need low-cost space, that consume resources, and that provide employment that adds to total production.

        The best short-read remedial education to this nonsense, is William Fruth: “The Flow of Money: How Local Economies Grow and Expand”:

        http://www.policom.com/PDFs/2015%20FLOW%20OF%20MONEY.pdf

      • Re the reduced need for “proximity”, even in the finance sector, Tom Wolfe’s “Eunuchs of the Universe” essay should have been better known, as picking a systemic change here. Unfortunately it got taken offline not long after its original posting, which makes me suspect that it upset the powers-that-be.

        Down the bottom of this thread, I will post extracts from it that I saved while it was live.

  5. The increasing inequality in cities is because the land tax is absent or too low. The proposal above to decentralise big cities has a long, checkered but ongoing history in Australia. It will continue to help a little but this will only be visible in the regions, for the big bad city it will continue to fail.
    As cities get bigger those who own the land (the landed gentry) earn higher rents.
    Hello, they are sitting on a monopoly asset. Think about it. Yes, it is a monopoly asset.
    Every bit of GDP growth from higher populations and productivity improvements from anything, produces higher demand for the LIMITED amount of land and up go the rents.
    Add in Australian tax breaks and the speculation demand also squeezes into this LIMITED monopoly asset.
    Resources: Henry George, Fred Harrison, Phillip J Anderson, Prosper etc.

    • A land tax will not remedy the distortions that create economic rent in land, primarily the rationing of the rate at which rural land can be converted to urban use. This is usually because of some form of central planning.

      A land tax will suppress the price of land to some extent, but this will always be a small factor relative to the overall level of economic rent. For example, the UK’s urban planning system imposed in 1947, was noted in studies with 1974, 1984, and other data points, to have caused a growing divergence in land rent relative to comparator cities in the USA that did not have the rationing of land supply. By 1998 the real urban land price difference was a FACTOR of between 100 and 325.

      Land taxes might make the land prices 10 percent, or 20 percent, lower than otherwise; or something like that. So having a land-supply rationing policy might be ameliorated in its impact to the extent that after a few decades the land prices might be inflated by a factor of “only” 80 instead of 100, or “only” 260 instead of 325. Everybody without exception, considering this subject rationally, needs to direct their attention to land-rationing schemes first and foremost. Land taxes are just a diversion, like many other proposed “solutions” that are no such thing (CGT’s, abolished NG, high interest rates, a halt to immigration, etc etc).

      IF the urban land prices were as they should be, introducing a land tax would be merely a way of spreading the tax base and minimising counter-productive distortions. It would not be a “solution to affordability / inequity” issues because these would not exist anyway. Some small, non-essential enhancement to affordability / equity would probably be part of the overall beneficial effects. Note that I say “beneficial effects” because I believe land taxes to be justified regardless, for a range of reasons. But they should not be sold as something they are not, and they are not a remedy for blatant top-down central-planning land-rationing schemes.

      • Thanks Phil, and if you have foundational links or papers please post them.
        I would have thought the land tax could solve the problem of high prices much more than your figure of only 20-30% (over how many years are you talking?). We are talking about cutting a compound annual growth rate via reducing the annual rental yield by the amount of the tax. At a rental yield of 3-5% it wont take much to get it to zero and then into negative. Over time you will see massively reduced house prices. Please provide your reasoning/ calculations.
        Yes I agree that ridding the urban planning boundary will eliminate some inequity. That refers to the affordability inequity. How will service provision be funded to ensure they aren’t just the equivalent of shanty towns which cut people off from opportunity?

      • Just read your other post above which relates to my last para, so I will check out New York as an example of a good outcome from an absence of urban planning. This is such a complex topic. Have you considered creating your own website which hosts your referenced argument? Or is someone already doing this and if so who? I have your New City link.

      • I recommend Cheshire, Overman and Nathan (2015) “Urban economics and urban policy: challenging conventional policy wisdom”. It is an expensive text book, so interloan it if you have to. It includes summaries of literature and references that you won’t easily assemble from anywhere else.

        Also Alan W. Evans (2004): “Economics, Real Estate, and the Supply of Land”. Chapter 17 is entitled “The Taxation of Land and Development Gains”.

        The problem with taxing away economic rent, is that either it is low enough that it is merely a share of gains that remain ongoing, or it is so steep that it sabotages the “price signals” system for allocating land to the best use.

        In general, British urban economists understand this better, because they have decades of evidence from the kind of growth-containment planning that other nations are now discovering (tragically).

        There is a brilliant rhetorical argument from Mason Gaffney in 1964, against what he calls “negative growth containment” – zoning and growth boundaries. But there are many economists who point out the same thing – that fiscal and “pricing” measures (including land taxes of the right level) will achieve the stated aims on which the negative growth containment policy is justified, only without doing the harms that the negative growth containment policy does. “Containment Policies for Urban Sprawl”

        http://www.masongaffney.org/publications/E3Containment_policies.CV.pdf

        Anthony Downs in “Still Stuck in Traffic” (2004), likens growth boundaries as a means of tackling excessive energy consumption, to remedying the wrong position of a picture on the living-room wall, by jacking up the whole house and moving it around. A simple tax on the energy (and proper pricing of infrastructure use) would be like “moving the picture”.

        I haven’t started my own blog (yet), but I am trying to make a difference in other ways. Like converting economists working in this subject area. It is shocking how badly trained they are.

  6. 100% agree that decentralisation would help a lot; not just in terms of easing demand on housing but also reducing burden on CBD-centric transport systems.

    On a related note there’s an interesting article in Domain this arvo, Mirvac is allowing reduced deposits for bona-fide FHBs for its new development at Olympic Park. Not currently the most convenient place in the world to live, but it will be served by Paramatta light rail within 5 years and the Metro West within 10. Hopefully this is just the tip of the FHB-berg, why don’t all developers offer otp apartments like this?

    http://domain.com.au/news/nsw-government-urges-developers-to-follow-mirvac-plan-to-help-first-home-buyers-20170224-gukj0l/

    Suddenly the “middle ring” is looking like a more attractive place to live. Perhaps there is life beyond Newtown?

  7. I really think people need to get across what Agenda 21 is. Australian governments since the 70s have signed up to this New World Order without the citizen’s consent. Funny how not many people know what the fuck it is.

  8. From “Eunuchs of the Universe”, by Tom Wolfe.(2013)

    “…James Simons hid his operation so well, it was more than a decade before Wall Street woke up to what Simons had there. For a start, he set up shop with a team of other quants, virtually all strangers to Wall Street, in a town on the north shore of Long Island out in Suffolk County, named East Setauket. East Setauket was the sort of town so small in scale, so given over to little buildings in a colonial—New England style—the first settlers had sailed across Long Island Sound from New England three centuries ago—people went away saying, “Oh, how picturesque.” East Setauket had two advantages: it was very near Simons’s office at Stony Brook—and nobody, nobody, in the Wall Street financial world ever heard of it. Good. Simons didn’t want anybody from Wall Street to come near the place.

    With one exception, he hired no one tainted by Wall Street experience or even Wall Street ambitions… such as business-school graduates, M.B.A.s. Their young minds had already been twisted too far. They had been expertly educated to become dim-witted macho blowhard frat-boy losers. Simons wanted only mathematicians and scientists…

    “…In its first 24 years, Renaissance Technologies brought its investors—and its help—yearly returns averaging 38.5 percent… net of fees, and his fees were the stiffest in the business: 5 percent of each account each year and 36 percent of the fund’s profits. Simons’s own yearly income ran in the hundreds of millions. In its third year, 1990, the Medallion Fund turned a 55.9 percent profit, again net of fees. In 2000, during the dotcom crash, the Standard & Poor’s 500 Index fell 10.1 percent—and the Medallion Fund rose 98.5 percent, net…

    “…By 2007 he was by far the biggest player the markets had. Next to James Simons, Warren Buffett and George Soros were elves of the Old Time variety. Yet news stories about Simons were rare….

    “…The “quants” robo-monster accounted for 10 percent of all trades in 2000. Thereafter, the number rose in a steep, steady climb to a peak of 73 percent in 2009, close to three of every four trades—and nobody in the outside world, not even the press, had ever heard of it! The first mention of it in the press was not until July 23, 2009, in the New York Times. The majority of men working full-time right here on Wall Street didn’t know much more. They were as innocent as the suckers, the guppies, the muppets. They learned in such tiny steps, they didn’t get the whole picture until very late in the game. Their first inkling came when the investment banks’ trading floors began to calm down… fewer and fewer traders yelling at each other or into the telephone or at Fate. Before long they were sitting at desks behind banks of computer screens and communicating with each other by text message.

    The robots cost some old traders and salesmen their jobs but, again, gradually, and intermittently, somebody still had to attend to the muppets and marks who continued to come to Wall Street to invest—to the quants the word seemed so archaic—to “invest” their money. What the Masters didn’t realize was that their muppets, marks, guppies, and chumps provided only the liquidity—i.e., ready money… useful mainly to provide the quants’ robo-diddlers with numbers to play with, discrepancies the robot battle machinery could game and exploit….

    “…Two things showed quite concretely how lowly the traders and salesmen had fallen. For a hot quant prospect, employers would pay up to five times as much as for a Master of the Universe. Or as a New York Post headline put it recently: “Slick ‘Wall Street’ guys ousted by $1M geeks.” And a quant’s rogue algorithm for a single stock could bring down the entire market, as in the “flash crash” of 2010 and the 1,000-point nosedive of 2012…”