Thursday, March 15, 2007

Nothing to see here- Move on

On the day that I leave New York to return to Mumbai, this article by Tim Harford strikes a chord. One reason I so prefer Mumbai to Bangalore is that the latter is so one-dimensional. The local economy stands on one leg- Information Technology. This is not merely boring, but a dangerous strategy for a community.

Even big cities can struggle if they overspecialise. Liverpool and Manchester are examples. Birmingham, on the other hand, has always been a city bustling away making everything and nothing in particular. As the late author Jane Jacobs once pointed out, Birmingham was thought highly inefficient compared with the specialised mills of Manchester, but when the downturn came Manchester was devastated and Birmingham kept on chugging along.

Both Mumbai and New York benefit from having diverse economies- finance, tourism, movies, fashion, television.

When communities are in visible decline, why do people stay on? There are the obvious reasons- emotional attachments to familiar places and beloved people. This would be a perfectly reasonable choice- paying for those emotional benefits in the form of lower wages. Tim argues, however, that the desire to own one's home- rather than rent it- is another major cause of economic stagnation.

The British are a nation of home owners, apparently happy to pay far more for the privilege of owning their own house than they would ever pay to rent one. Other nations, happier to rent, see unemployment reduced as a result.

The economist Andrew Oswald has shown that across European countries, and across US states, high levels of home ownership are correlated with high levels of unemployment. More conventional factors such as generous welfare benefits or high levels of trade unionisation don’t explain unemployment nearly as well as the tendency to own houses.

I am having some trouble reconciling the above with the very next passage in the article.

Recent research in the Economic Journal by Jakob Munch and colleagues suggests that people who own their own homes do find jobs as quickly as those who are free to move, but do so partly by being less picky about which job to take, and by commuting further..

I would expect this to result in lower incomes- not necessarily higher unemployment. Can it be that a third factor- conservatism- explains both the economic decline and the high rates of home ownership in these regions? As the local economy declines, the more venturesome residents leave the area for greener pastures. Those who stay on tend to be more conservative and, as they consider themselves more rooted in the area, they are also more likely to purchase homes. This becomes easier to do because house prices decline along with the local economy. The last paragraph seems to suggest some such process may be in play

Even if we did all this, the US economists Ed Glaeser and Joe Gyourko argue that one serious barrier remains: houses do not walk. No matter how bad things get in Detroit or Treorchy, the houses will still be there, and if they are cheap enough people will want to live in them. The likely result is a gloomy sort of segregation: those who feel that they can find a good job in the big cities will move there and pay the higher rents. Those who are less confident of that would rather have no job in a cheap house than no job in an expensive house. Detroit will have residents for a long time to come.

Keep moving.

1 comment:

gaddeswarup said...

This is being discussed in both 'Marginal Revolution' and Mark Thoma's blog. Surprisingly, there is very little talk about community, disruption to the family, children's education etc. It would be interesting to compare with Richard Florida's ideas.