The housing bubble was the ultimate expression, and perhaps the last gasp, of an economic system some 80 years in the making, and now well past its “sell-by” date. The bubble encouraged massive, unsustainable growth in places where land was cheap and the real-estate economy dominant. It encouraged low-density sprawl, which is ill-fitted to a creative, postindustrial economy. And not least, it created a workforce too often stuck in place, anchored by houses that cannot be profitably sold, at a time when flexibility and mobility are of great importance.
So how do we move past the bubble, the crash, and an aging, obsolescent model of economic life? What’s the right spatial fix for the economy today, and how do we achieve it?
The solution begins with the removal of homeownership from its long-privileged place at the center of the U.S. economy. Substantial incentives for homeownership (from tax breaks to artificially low mortgage-interest rates) distort demand, encouraging people to buy bigger houses than they otherwise would. That means less spending on medical technology, or software, or alternative energy—the sectors and products that could drive U.S. growth and exports in the coming years. Artificial demand for bigger houses also skews residential patterns, leading to excessive low-density suburban growth. The measures that prop up this demand should be eliminated.
If anything, our government policies should encourage renting, not buying. Homeownership occupies a central place in the American Dream primarily because decades of policy have put it there. A recent study by Grace Wong, an economist at the Wharton School of Business, shows that, controlling for income and demographics, homeowners are no happier than renters, nor do they report lower levels of stress or higher levels of self-esteem.
And while homeownership has some social benefits—a higher level of civic engagement is one—it is costly to the economy. The economist Andrew Oswald has demonstrated that in both the United States and Europe, those places with higher homeownership rates also suffer from higher unemployment. Homeownership, Oswald found, is a more important predictor of unemployment than rates of unionization or the generosity of welfare benefits. Too often, it ties people to declining or blighted locations, and forces them into work—if they can find it—that is a poor match for their interests and abilities.
As homeownership rates have risen, our society has become less nimble: in the 1950s and 1960s, Americans were nearly twice as likely to move in a given year as they are today. Last year fewer Americans moved, as a percentage of the population, than in any year since the Census Bureau started tracking address changes, in the late 1940s. This sort of creeping rigidity in the labor market is a bad sign for the economy, particularly in a time when businesses, industries, and regions are rising and falling quickly.
The foreclosure crisis creates a real opportunity here. Instead of resisting foreclosures, the government should seek to facilitate them in ways that can minimize pain and disruption. Banks that take back homes, for instance, could be required to offer to rent each home to the previous homeowner, at market rates—which are typically lower than mortgage payments—for some number of years. (At the end of that period, the former homeowner could be given the option to repurchase the home at the prevailing market price.) A bigger, healthier rental market, with more choices, would make renting a more attractive option for many people; it would also make the economy as a whole more flexible and responsive.
Next, we need to encourage growth in the regions and cities that are best positioned to compete in the coming decades: the great mega-regions that already power the economy, and the smaller, talent-attracting innovation centers inside them—places like Silicon Valley, Boulder, Austin, and the North Carolina Research Triangle.
Whatever our government policies, the coming decades will likely see a further clustering of output, jobs, and innovation in a smaller number of bigger cities and city-regions. But properly shaping that growth will be one of the government’s biggest challenges. In part, we need to ensure that key cities and regions continue to circulate people, goods, and ideas quickly and efficiently. This in itself will be no small task; increasing congestion threatens to slowly sap some of these city-regions of their vitality.
Just as important, though, we need to make elite cities and key mega-regions more attractive and affordable for all of America’s classes, not just the upper crust. High housing costs in these cities and in the more convenient suburbs around them, along with congested sprawl farther afield, have conspired to drive lower-income Americans away from these places over the past 30 years. This is profoundly unhealthy for our society.
In his forthcoming book, The Wealth of Cities, my University of Toronto colleague Chris Kennedy shows that only wholesale structural changes, from major upgrades in infrastructure to new housing patterns to big shifts in consumption, allow places to recover from severe economic crises and to resume rapid expansion. London laid the groundwork for its later commercial dominance by changing its building code and widening its streets after the catastrophic fire of 1666. The United States rose to economic preeminence by periodically developing entirely new systems of infrastructure—from canals and railroads to modern water-and-sewer systems to federal highways. Each played a major role in shaping and enabling whole eras of growth.
The Obama administration has declared its intention to open the federal government’s pocketbook wide to help us get through this recession, and infrastructure spending seems poised to play a key role. Done right, such spending could position the United States for the next round of growth. But that will entail more than patching up roads and bridges.
If there is one constant in the history of capitalist development, it is the ever-more-intensive use of space. Today, we need to begin making smarter use of both our urban spaces and the suburban rings that surround them—packing in more people, more affordably, while at the same time improving their quality of life. That means liberal zoning and building codes within cities to allow more residential development, more mixed-use development in suburbs and cities alike, the in-filling of suburban cores near rail links, new investment in rail, and congestion pricing for travel on our roads. Not everyone wants to live in city centers, and the suburbs are not about to disappear. But we can do a much better job of connecting suburbs to cities and to each other, and allowing regions to grow bigger and denser without losing their velocity.
Finally, we need to be clear that ultimately, we can’t stop the decline of some places, and that we would be foolish to try. Places like Pittsburgh have shown that a city can stay vibrant as it shrinks, by redeveloping its core to attract young professionals and creative types, and by cultivating high-growth services and industries. And in limited ways, we can help faltering cities to manage their decline better, and to sustain better lives for the people who stay in them.
But different eras favor different places, along with the industries and lifestyles those places embody. Band-Aids and bailouts cannot change that. Neither auto-company rescue packages nor policies designed to artificially prop up housing prices will position the country for renewed growth, at least not of the sustainable variety. We need to let demand for the key products and lifestyles of the old order fall, and begin building a new economy, based on a new geography.
What will this geography look like? It will likely be sparser in the Midwest and also, ultimately, in those parts of the Southeast that are dependent on manufacturing. Its suburbs will be thinner and its houses, perhaps, smaller. Some of its southwestern cities will grow less quickly. Its great mega-regions will rise farther upward and extend farther outward. It will feature a lower rate of homeownership, and a more mobile population of renters. In short, it will be a more concentrated geography, one that allows more people to mix more freely and interact more efficiently in a discrete number of dense, innovative mega-regions and creative cities. Serendipitously, it will be a landscape suited to a world in which petroleum is no longer cheap by any measure. But most of all, it will be a landscape that can accommodate and accelerate invention, innovation, and creation—the activities in which the U.S. still holds a big competitive advantage.
The Stanford economist Paul Romer famously said, “A crisis is a terrible thing to waste.” The United States, whatever its flaws, has seldom wasted its crises in the past. On the contrary, it has used them, time and again, to reinvent itself, clearing away the old and making way for the new. Throughout U.S. history, adaptability has been perhaps the best and most quintessential of American attributes. Over the course of the 19th century’s Long Depression, the country remade itself from an agricultural power into an industrial one. After the Great Depression, it discovered a new way of living, working, and producing, which contributed to an unprecedented period of mass prosperity. At critical moments, Americans have always looked forward, not back, and surprised the world with our resilience. Can we do it again?
The print version of this piece also incorrectly identified Christopher Berry as a Harvard economist. He is an assistant professor at the University of Chicago's Harris School of Public Policy Studies.