The Emerging New Economic Geography of the United States

 Back in 2011, my old friend Enrico Moretti published his important New Geography of Jobs book.  You can read a synopsis here.  Along with many other urban economic scholars, I am fascinated by how different geographic locations compete for jobs and people. Every geographic location represents a bundle of production possibilities, learning opportunities and quality of life opportunities.   A distinctive feature of my long time research is that I have argued that we are increasingly footloose and that places with great quality of life (such as my West Los Angeles) attract affluent, educated people and this quality of life cluster then creates productive hubs due to the learning externalities.  So, this logic says that local quality of life causes economics growth if the geography of the location and the political economy of local land use regulation is such that the place allows new construction to take place.

In 2021, I have published two books that flesh out this point.  As we face the climate change challenge, those geographic areas that develop an edge in being resilient in the face of climate risks will experience greater economic growth. This resilience edge can be built up either due to natural advantage (their physical location and topography) or due to local collective action in figuring out how to protect themselves against threats ranging from extreme heat, to drought to sea level rise to local fire risk.  My Yale Press book Adapting to Climate Change explores the microeconomics of how the choices made by households, firms and local governments interact to determine the pricing of real estate and the location of real estate and its quality across the nation. The emerging spatial equilibrium determines how much risk climate change poses to us.  While real estate is durable, it isn’t infinitely durable and we always hold an option to rebuild our cities in places that are relatively safe.   This 2 pager I wrote in 2010 highlights some key ideas about our system of cities and how it accommodates our diverse goals in coping with climate risk. My 2021 book builds on these themes.  America is a huge nation and the whole world could move to our land mass if we opened up our borders. Open borders is one global adaptation strategy that I discuss later in my book.

My Yale Press book challenges a lurking theme in academic climate economics that we are passive victims in the face of increasingly tough punches being thrown by Mother Nature.  Climate economists are quite confident about the rise of the “green economy” and the role that innovation plays in decarbonizing our electricity grid and transport sector but then many are leery about exploring the role of innovation in fueling our ability to adapt to anticipated risks.  My book challenges my colleagues to be logically consistent and I push hard to explore how basic microeconomic ideas inform our understanding of how prudent people cope with ambiguous risks. My book highlights several of the implicit behavioral economic themes that adaptation pessimists are making and discusses whether their logic holds up in a general equilibrium setting where we have access to markets to allocate scarce goods such as land and real estate to those bidders who can make the best use of them in the face of the new economic conditions we face.

In 2021, I also co-authored my new book “Unlocking the Potential of Post-Industrial Cities”.  This book mainly focuses on Baltimore but it also studies 5 other cities that all share the following features. These center cities are losing population.  Whites are moving away. The remaining population has a higher percentage African-American than the country as a whole and a higher poverty rate than the nation as a whole. Real Estate prices are low in these cities relative to other cities of similar size.  Each of the cities feature environmental hazards and crime levels higher than the national average.  Our book explores the long run arc for these cities.  Circa 2021, how did these cities arrive in their current situation?  Taking the reality of the challenges as given and knowing that there are no easy solutions (such as multi-Billion $ transfers from the Biden Administration), how will these cities better compete in the system of cities?Many educated people and firms are choosing not to locate within their borders.  What can these cities do to make a comeback?

Macroeconomists point to the co-ordination failure as a leading explanation for how an economy can get trapped in a poverty trap.  In a co-ordination failure, the Bad Nash Equilibrium occurs as each private investor (whether she is a teen at a local public school,  a business thinking of opening a new business in a center city Baltimore,  a Mayor choosing to upgrade local degraded roads or sewer systems, or a real estate investor thinking of buying a decaying building and upgrading it) chooses to under-invest because each is pessimistic about the medium term prospects of the area. While these individual choices are rational, each of these choices contributes to slowing down the area’s comeback.  If these investments could be co-ordinated through a Big Push then the area would recover.

We argue that these cities need to sharply improve their quality of life (such as reducing the murder count) to change their reputation with tourists and residents and firms from around the nation.  An improvement in local quality of life would act to unleash the 4 investments I sketched above.  What I find fascinating is that the many renters in these cities are deeply worried that they will lose out if the city becomes more desirable.  The lurking fear of “gentrification” lingers.   To a microeconomist, a key tradeoff emerges.   If cities such as Baltimore enjoy a comeback, yes rents will rise but the tax base will increase and earnings opportunities will increase.  Long time renters who worry about such a comeback must believe that they will gain less from the new city that will emerge.  Are they right?   

To wrap up this long blog post, economists celebrate the rise of new goods because this increases our menu of alternatives and in our diverse society this helps each of us to achieve our conception of the “good life”. In the recent past, the U.S featured a narrow geography of economic opportunity.

In an emerging climate change risk, Work from Home Economy where medium sized cities such as Baltimore make a comeback, Americans of different income levels, race and demographic attributes will have more choice of where to live and to raise their families.  This will be a stronger America that the national income accounts won’t capture.

My forthcoming 2022 book builds on this theme.