Gated Boomtowns

Policy Ideas for the Age of Automation, Part Two

In this series, I have been considering what we can do to smooth the adjustment to a technological revolution in automation—but from the perspective of a skeptical free-marketer who doesn’t buy into ill-conceived utopian schemes like the basic income.

In part one, I considered what policies might make education better and less expensive, making it easier for people to acquire the new skills required in a new economy. The New York Times just offered an update on one really important piece of that puzzle: a movement to shift to “skills-based” hiring for “new-collar jobs,” rather than requiring an expensive four-year college degree for every tech job.

In this installment, I consider the ways government is preventing people from adjusting to the new economy by walling off digital boomtowns.

In an age of automation, wealth is going to flow to new places. If it flows to high technology and robotics and artificial intelligence, a lot of that wealth is going to end up in centers of innovation like Silicon Valley, the San Francisco area, Boston, and New York City.

This has always been the pattern of economic change. As agriculture became mechanized, requiring far fewer workers, millions moved off the farms into the cities. Earlier, as America spread across the continent, the young men were told to go West. People looking for better opportunities have always flocked to rising new boomtowns. We should expect the same thing to happen again. Workers displaced elsewhere—say, in fading industrial towns in Ohio—should be encouraged to move to the new centers of wealth and employment.

Yet these boomtowns are precisely the places that have huge economic walls erected around them. They tend to be prohibitively expensive for ordinary workers looking to buy or rent, yet they still often fail to provide a good quality of essential city services outside of a few well-off neighborhoods in the city center.

In the past few decades, city planners and political leaders have been swept up in a mania for “cool cities” designed to attract a “creative class” of tech elites and hipsters—and no one else. But that’s not what cities really need: they need to become more livable for the middle and lower-middle class, the same people who fled cities for the suburbs over the past 50 years.

A startling graphic shows the process in Chicago, where since 1970 the middle class—represented in grey—gets chased out, and most of the city is divided between enclaves of upper-middle-class prosperity and vast tracts of the desperately poor.

 This stratification is also reflected in the distribution of city services. You can have safe streets, convenient public transportation, and good schools—if you live in select neighborhoods, mostly on the North Side. Vast areas of the city’s South and West are characterized by high crime, spotty public transportation, poor schools, and a hostile environment for starting and running small businesses.

It’s easy to write off the permanent dysfunction of the old Rust Belt cities like Detroit. But you will find elements of the same problems, in some respects much worse, in that “progressive” high-tech center of wealth, San Francisco. Consider a long lamentation recently published in The Atlantic about poverty among farm workers in the South Coast, just over the hill from Silicon Valley. The story centers on the lack of decent affordable housing, and it also mentions the obvious causes—restrictions on new construction in San Francisco and Silicon Valley, which drives up housing prices in the whole region, along with activists who vow to preserve the rural character of the South Coast by fanatically blocking any kind of construction or development—without ever really connecting these two parts of the story.

If our goal is to help smooth the transition to a new technological economy, we’re going to have to fix the cities. Crucially, we’re going to have to fix them, not just for those who gain the most from the new economy, but for those who would like to participate but are most easily shut out. Machine learning experts and robotics professors and venture capitalists are going to be fine in this new economy. But the boom doesn’t have to be restricted to an upper echelon of highly skilled workers, and historically it never has. The wealth created by those on the leading edge of the boom translates into demand for the goods and services produced by everybody else. Boomtowns that bring miners looking to strike gold always bring just as large a group of people looking to sell food, supplies, and entertainment to the miners. Unless they are walled out of the boomtowns.

That’s exactly the problem: high-tech boomtowns are often also the world’s largest gated communities. Yet there are specific policies that would help tear down the walls keeping everybody else from taking advantage of the new prosperity.

1. Loosen restrictions on construction and housing. The biggest barrier walling off the middle class and lower middle class from high-tech boomtowns is the price of housing—which is massively inflated by local regulations. By one estimate, the actual cost of building a new home in San Francisco, just in terms of land, labor, and materials, should be about $280,000. What you will pay for one is about $800,000. The difference is due to the artificial restriction of the market due to regulations, zoning, and explicit limits on growth.

The big irony of cities like San Francisco, or areas like Silicon Valley, is that just about everyone there thinks of themselves as extremely “progressive.” They care so much about poor people and the blue-collar “working class”—so long as they don’t have to live anywhere near them. So they propose slow-growth regulations, restrictions on high-rise apartments, and so on. In what one resident describes as San Francisco’s “hyper-participatory democracy,” residents will turn out in droves to oppose any new real-estate development.

But it doesn’t work this way in other boomtowns. In the epicenter of the fracking boom, Williston, South Dakota, “As the population tripled to more than 36,000, developers built about 10,000 houses and apartments.” That may not seem like much in absolute numbers, but it’s a doubling of local housing in just a few years, something that most big cities would flat-out refuse to allow. Perhaps because an oil boomtown is considerably less glamorous and more blue-collar than other technological boomtowns, it is also a lot more willing to accommodate rapid growth and the construction of inexpensive new housing. They’re also more likely to be located in depressed or undeveloped areas that are grateful for growth and don’t stick up their noses at “micro-housing” (read: trailer homes), so they have no problem adding temporary or permanent housing stock to accommodate young men coming to seek their fortunes. But high-tech boomtowns are unwilling to allow anything so vulgar and downmarket.

In doing so, they’re ensuring that only the very well-off are welcome to participate in urban prosperity. Somehow, it doesn’t sound so progressive when you put it that way.

No matter how snobbish and reactionary this is in practice, the politics is very hard to change because restrictions that drive up the price of housing create a constituency with an interest in preserving the status quo. The thing that would be best for middle- and lower-middle-class workers is a drastic reduction in housing prices—but that would be experienced by current homeowners as an apocalyptic disaster that pushes them all underwater on their mortgages.

The solution will probably have to come from some countervailing political force at a higher political level, as with, SB-35, a law working its way through the California state legislature that “would force cities that have fallen behind on their state housing production goals to reduce some of the hoops they put in place to approve developments.” It’s typical of the tangled web of a hyper-regulated economy that the only way to counteract local central planning is with state-level central planning, setting higher state quotas to counteract restrictive local quotas.

Along with housing that isn’t designed only for the wealthy, cities also need business rules that are survivable by something other than highly profitable digital enterprises.

2. Make it easier to start small businesses. High-tech Internet-based businesses like Google and Facebook can thrive in places with high regulation and a lot of extra costs. These companies have high profit margins, a relatively small number of well-paid employees, and usually no tangible physical product that has to be manufactured, warehoused, or shipped—and least, not on this side of the Pacific. The “Fight for Fifteen” doesn’t affect them, because hardly any of their stateside employees are paid so little. (That’s what the young women at the Foxconn factories in China are for.) So they can bear the freight of red tape and government mandates.

It reminds me of a point made by the economist Hernando de Soto about the regulatory environment in places like his native Peru. If you’re educated and live in the big city and have connections and can afford to hire a sharp lawyer, it’s relatively easy to set up a new business. But if you don’t know the complicated laws, can’t afford a lawyer, and have no connections, regulations are a hopeless morass that makes it impossible to operate a small business legally. In Peru, a lot of people solve that problem simply by operating illegally, but at the cost of giving up secure legal rights and the ability to raise capital from legitimate lenders. In American cities, the high cost of business mostly just drives out low-profit-margin, blue-collar small and medium businesses.

In both cases, regulations have the effect of stratifying the economy and opening up the gap between rich and poor. Along with lifting restrictions on development that jack up real estate prices (which contributes to the high cost of doing business), cities need to lighten the burden of taxes, regulation, and red tape. They need to make it easier to start and run the kinds of businesses that hire people other than software engineers.

Instead, most cities are moving in the opposite direction, pushing for things like huge increases in the minimum wage. If you declare a $15 minimum wage in your city, you are not ensuring that no one will make less money than that. You are simply ensuring that people who earn less won’t be allowed to live or work in your city. It performs the same function of walling off poor people from the “progressive” enclaves.

We saw this in the new University of Washington study about Seattle’s big increase in the minimum wage, which resulted in the average minimum wage worker bringing home $1500 fewer dollars every year because there were fewer hours of work available at the higher mandated wage. At that income level, $1500 is a huge loss, the exact opposite of the law’s advertised goal.

But the Seattle case also shows how difficult it is to change these entrenched attitudes. Seattle’s mayor, who had championed the minimum wage increase, realized the UW study was going to make him look bad, so he hastily commissioned another study from a reliably friendly source making an opposite claim.

That’s what real reformers are up against: people like the mayor (and many of his constituents) who are so committed to feeling like they are helping the poor that they refuse to take seriously any evidence that they might actually be hurting them.

3. Liberate city services. In response to the many failures of big city governments, the people in charge have a tendency to do a lot of grandstanding about racial injustice or about how their city is still going to participate in the Paris Agreement on climate change, whatever that means. They spend a lot less time actually being accountable about the quality of city services. Here’s a rule of thumb we ought to apply: until your city has good transportation, good schools, and safe streets everywhere, in all neighborhoods rich and poor, then you don’t get to talk about anything else.

Part one of this series had a few things to say about education. How to provide safe streets is a bit outside the scope of this series. But transportation is a problem anyone with an interest in technology should have some idea how to solve.

Most forms of public transit—bus and train lines—are highly regulated government monopolies, and boy can you tell it. They produce about as much innovation as Ma Bell and aren’t half as reliable. (Consider the recent meltdown of New York City’s transit system.) What we need to apply to this problem is the basic lesson of Uber, Lyft, and other ride-sharing services. Taxis were a regulated local monopoly, but when Uber exploited grey areas in the law to crack open competition, the result was a much larger supply of transportation at much lower prices—and a lot of opportunity for drivers who could never afford to buy a taxi medallion.

Private bus and train lines are not a utopian scheme. They were common in America in the 19th century, and they are common elsewhere in the world and generally work better than anything in the United States. Developing countries with far less money have myriad small private municipal bus services—legal or not-so-legal—that provide cheap, affordable service. There are even attempts to do this in the United States, such as Brooklyn’s “dollar vans.” But that’s illegal, so instead everyone is expected to wait for run-down municipal buses whose routes keep getting cut because they’re losing money. Except for Google employees, who get their own private commuter buses.

Are you noticing the recurring theme here? Inflated housing prices, taxes, regulations, and poor public transportation are not a problem if you’re starting a business that is extremely profitable, and you’re paying six-figure incomes to a bunch of single guys in their 20s with no families to support. But it means that only the businesses that operate on this model can thrive, while everything and everyone else gets walled out.

The politics of these restrictions tends to be very hard to change, because they create a lot of entrenched interests and because changing them would require questioning whether cherished “progressive” causes are actually progressive in practice. But if the current centers of growth and innovation refuse to change and open up their gated communities, they are creating an opportunity for places that will. Texas, a state with lower taxes, fewer regulations, and famously cheap housing stock (in part thanks to few or no zoning restrictions) has long been engaged in a campaign to eat California’s lunch.

The bottom line is that if we’re concerned that artificial intelligence and automation, invented in the technological boomtowns, will shut everyone else out of the economy, then the first thing these centers of innovation have to do is to look within and realize how they have been distorting their economies to exclude the poor and middle class.

Yet some people don’t want to make it easier for others to adapt to the new era of work because they don’t want them to adapt and they don’t really want them to work. So they champion policies that are quite explicitly designed to discourage such adaptation, which I will address in the next installment of this series.

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