Tuesday, March 13, 2007

Good news and bad news

"City economies" are ranked in a graphic in this week's Economist. "Big cities pack a punch equal to some national economies. The GDP of Tokyo or New York, for example, is broadly similar to that of Canada ..."

GDP and (all other accounting conventions) invite controversies. Some of them pop out when applied to cities. In "Superstar Cities" (NBER WP 12355), Gyourko, Mayer and Sinai cite these places' explosive house price growth and report that it is due to the scarcity of housing, the growing number of high-income households and the fact that they (naturally) outbid the less affluent in preferred neighborhoods. But some fast-growing cities (notably Phoenix and Las Vegas) remain outside the "superstar" class because they have been able to add enough housing to dampen house price increases. Living in the "superstar" places has become a luxury good. The less affluent put up with long commutes or try their luck elsewhere.

Regulation creates artificial scarcities that push up prices that help the "superstars" to shine when ranked in terms of GDP or by economic researchers.

GDP accounting practices have long incited discussions of "goods" and "bads" and how they are handled. Here is another. Cities are essential "engines of growth" because they are congenial to entrepreneurial activities. Bottlenecks that originate in politics (notably land market regulations) inevitably detract from this. High land rents are evidence of good news (on the demand side) as well as bad news (on the supply side).