Do The Urban Poor Gain from Local Economic Growth?

I have co-authored a new book that argues that the answer is “YES” but there are many people who disagree with this claim.

 At Johns Hopkins University, I taught Urban Economics in Spring 2020.  Many of my students were skeptical about the possibility that “gentrification” of cities such as Baltimore would improve the quality of life of local long time residents.  I brought in one speaker from the City Government who told my class that she hoped that no billionaires would move to Baltimore.  On my Twitter feed, I often “meet” people who voice deep concerns about the consequences of “unlocking the economic potential” of post-industrial cities such as Baltimore and Detroit.

What do we know about shared prosperity?  Is life a zero-sum game such that what I gain , you lose? 

The City of Baltimore is home to 600,000 people and 25% are poor.  What do we know about the consumption and quality of life for these 150,000 poor people?

Let’s start with a person’s budget constraint;

private Consumption = Government Transfers + Earnings -  Rent

Note my assumptions;

1. The person pays no taxes on earnings

2. The person has no assets such as stocks or savings so he isn’t earning interest on assets

One’s well being  is also a function of local public goods including;  school quality, environmental quality (i.e clean air, clean water, garbage pickup,  public cooling places), public transit quality and street safety.  Suppose we have a formula for measuring the quality of all of these services offered by a city such as Baltimore in 2021.  Suppose that everyone in a given neighborhood is offered the same level of these local public goods.

We are now ready to answer the core question.

If Matthew is poor and lives in West Baltimore in 2021, is my quality of life improved as Baltimore grows richer? If Matthew has two children of ages 6 and 11, do they have a brighter future because Baltimore is gentrifying?

The formal economic analysis features the following steps.   As more rich people move to Baltimore, as more Chinese tourists arrive in Baltimore, as more rich suburbanites visit the City, what happens next to all of the algebra terms I introduced above?  

Here are some predictions;

1. Government transfers to the poor would increase because the City Government is less poor.

2.  The Poor’s earnings would increase because new service sector jobs would be created.  Since many of the poor do not own cars, the money would be spent in their local communities and this would increase demand for small businesses and offer a second round of economic growth.

3.  Local rents will increase.  The amount they will increase hinges on housing regulation. If real estate developers are allowed to build with little red tape then the City’s rents do not soar.  Progressive cities introduce more red tape and this creates an inelastic housing supply curve. In this case, rising demand leads to soaring rents.

4. Local public goods improve (schools, safety, local greenness) as the city becomes richer. It can pay civil servants more and build up a higher quality , lower turnover public sector.  

5.  The Children of the poor gain as the city makes a comeback because they have a brighter future local labor market. The expectation of local opportunity creates a type of self fulfilling prophesy.  Both history and expectations are crucial in determining a city’s dynamics. We discuss this point at length in the conclusion of our book.

Unleashing the private sector is the key to reversing the challenges that post-industrial cities have faced.  President Biden’s transfers to cities are not sufficient to help the poor to achieve their goals.

Shared prosperity is built up through coordinated investment along 4 key dimensions;

people in their skills

firms in creating businesses

real estate interests rebuilding a crumbling city

government providing the rules of the game and the local public goods that create a safe, green setting where people want to spend their time and $.

For more details on this vision, click here. 

Returning to the locational choice of the Billionaires,  it is an exaggeration to say that they alone cause local economic growth. Instead, I would say that their migration to cities such as Baltimore and Detroit would signal that these cities have enjoyed a large enough improvement in their quality of life so that the super-rich are eager to live there.

In our emerging Work from Home economy, urban quality of life becomes even more important in determining which cities attract and retain people going forward.  See my paper #1 and paper #2.

During a time of great growth in the Federal Government transfers, I understand that urban thought leaders are trying to make the case for larger transfers to their cities.  Such short run stimulus is not a substitute for long run investment in building a robust city economy.  

Finally, for those who are Emily Badger fans, we had a great talk with her about urban gentrification and here is the YouTube Video.