Trickle-Down Fails The Urban Renewal Equation, Too
In “More Losers Than Winners In America’s New Economic Geography,” Atlantic Cities Editor Richard Florida faces a fundamental problem in urban planning and commercial real estate. The active attraction of the affluent and educated to a city’s central neighborhoods has long been touted as an economic cure-all for cities more broadly. The premise was that these high-tech high-education worker enclaves would cause the surrounding rings of neighborhoods to experience follow-on benefits of price stabilization and heightened quality of life.
All that was needed, went the doctrine, (sometimes called “Creative Class”) was city government to subsidize the creation of such enclaves and the magic would happen. The more stolidly middle-class worker would benefit from the help handed to the upper class in a familiar “trickle-down” mechanism.
The mechanism is familiar because we hear about it a lot. Over the past 30 years, we’ve seen it touted in tax policy and in the lionization of “job creators” as public priorities are constantly rearranged to serve concentrations of wealth first, always with the promise that such largesse will “trickle down” to the middle class.
But we almost never actually see anything trickle anywhere. Certainly not today: corporate profits, productivity and equity markets are near all-time highs and effective tax rates on wealth concentrations spent the decade at all-time lows. There is nothing the top needs that it doesn’t already have to create jobs. If trickle-down worked, we’d be drowning in jobs nationally. Yet the unemployment numbers are stubbornly slow to recover. Real wages have stagnated since the 1970s. Trickle-down just doesn’t trickle.
Policy Advocates Forced To Take A U-Turn
While there’s not a thing wrong with educated, higher-paid people coming to live in troubled areas of major cities, it’s a trend that has expressed itself organically for decades. The problem occurs when cities, facing declining populations and tax bases fall under the spell of dubious economic theories. They make arrangements to subsidize this trend, with the wrong expectations. As it tuns out, the problems and property values of neighborhoods surrounding such affluent enclaves are their own, and such subsidies do not work to help them.
Atlantic Cities Editor Richard Florida would know: he spent most of the 2000s advocating that cities make such subsidy. Now he is forced to admit that help to the wealthy and developers does not trickle-down to the surrounding neighborhoods. In fact, it tends to make those neighborhoods less affordable and more susceptible to flight to the suburbs.
I’ve been examining the winners and losers from this talent clustering process in ongoing research with Charlotta Mellander and our Martin Prosperity Institute team. This research divides workers into three socio-economic classes — highly skilled knowledge, professional, and creative workers, and less skilled and lower paid blue-collar and service workers — and takes into the account the wages and housing costs borne by each.
Our main takeaway: On close inspection, talent clustering provides little in the way of trickle-down benefits. Its benefits flow disproportionately to more highly-skilled knowledge, professional and creative workers whose higher wages and salaries are more than sufficient to cover more expensive housing in these locations. While less-skilled service and blue-collar workers also earn more money in knowledge-based metros, those gains disappear once their higher housing costs are taken into account.
The trickle-down effect disappears once the higher housing costs borne by less skilled workers are taken into account. The benefits of highly skilled regions accrue mainly to knowledge, professional, and creative workers. While less-skilled blue-collar and service workers also earn more in these places, more expensive housing costs eat away those gains. There is a rising tide of sorts, but it only lifts about the most advantaged third of the workforce, leaving the other 66 percent much further behind.
Housing and economic policies need to be informed by knowledge, not fads. When the leading salespeople for a policy are forced to admit the benefits for all they promised aren’t there, it’s time to look at the assumptions made in our property markets and to separate wishful thinking from economic reality.
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