The Black Hole of Big-City Abundance

Megacities may look efficient, but they shouldn’t be the goal

I spent the past week in Tokyo and Kyoto at the invitation of the Japan Foundation, meeting with several dozen public officials, business leaders, academics, and journalists. As with my trip last month to Canada, this one had been planned long before the Trump administration began so severely disappointing the liberal-world-order expectations of our economic allies. But to put it politely, that context certainly sharpened the focus of the conversations. I’ll have much more to say about the experience in coming posts.

Today, I want to discuss the problem of Tokyo. It is the largest city in the world, by a lot. It is still growing, even as Japan’s population shrinks. Its ~40 million people (metro area) represent 30% of Japan’s total, whereas New York City’s 20 million people account for 6% of all Americans.

Thanks to liberal building policies, Tokyo is adding housing to accommodate the growth, holding prices in check and encouraging yet more people to move in. “The Big City Where Housing Is Still Affordable,” the New York Times’s Binyamin Appelbaum has written, “remains economically diverse, preserving broad access to urban amenities and opportunities. … As political leaders in urban areas around the developed world grapple with how best to revive their cities in the aftermath of the pandemic, Tokyo offers a template.”

This also sounds like the template for the en vogue “Abundance” agenda. “Housing comes first, man,” Ezra Klein explained to me on the American Compass podcast last week, adding that abundant housing is “a fundamental engine of opportunity and innovation. I talk about the gating of the cities as the true closing of the American frontier.” In a famous 2019 paper, economists Chang-Tai Hsieh and Enrico Moretti estimated that, but for restrictive zoning measures, the average U.S. city would lose 80% of its population while New York City would balloon to eight times its current size. GDP would be trillions of dollars higher. “It’s not so implausible to me,” Moretti told The Atlantic’s Annie Lowrey. “The differences in earnings and labor productivity between the areas that we’re looking at and the rest of the country are so big that if you expand those local economies, you get these big aggregate benefits.”

So what’s the problem here? Has Japan unlocked the abundance that Americans seek? The Japanese do not see it that way. And with the usual caveats that I spoke with only a small number of people who were far from representative of a cross-section of Japanese society, I found it notable how often the issue arose—from officials of the national government and economists, residents of growing Tokyo and residents of shrinking Kyoto. The United Kingdom also provides a good point of reference, where London’s dominance of the economy has prompted not celebration but an aggressive push to “level up” other regions.

The problem is that the scale effects of a megacity dominate other economic and social factors of geography, drawing ever more people and resources into a growing vortex, like a star collapsing in on itself to create a black hole that even light itself can no longer escape from. A big city is nice. But when it becomes so “nice” that talented people and promising businesses feel that they must locate there to succeed, its effects are not nice at all. When one place is winning and everywhere else is losing, the aggregate effect is a loss. Market forces drive “agglomeration” in pursuit of an “efficiency” that bears no relationship to human flourishing or national strength.

In our late-neoliberal era, the strong assumption holds that whatever people appear to be choosing reflects their own preferences and optimizes their individual welfare. These choices, in aggregate, are supposed to optimize the collective welfare. Why doesn’t that work here?

The individual problem: pluralism. For people to have and exercise meaningful choice, they must have options available to them. This was a fundamental theme of The Once and Future Worker, which proposed productive pluralism as a framework for defining and pursuing broad-based prosperity:

Society should maintain a bias in favor of preserving proven options, with the expectation that rising prosperity will open new paths over time. The promise of pluralism lies in maximizing the choices that lead toward productive activity so that they are accessible to as many people as possible. If, historically, small towns and big cities were both able to thrive, economic development that eliminates the former is suspect—boosting overall consumption at the expense of fundamental life choices valued by millions does not raise prosperity.

From this perspective, the problem of the megacity is a kind of collective action problem. Each individual, believing that opportunity is greater in the megacity and that others pursuing opportunity will head to the megacity, makes the decision to move to the megacity. Employers, believing that those seeking opportunity will choose to live in the megacity, create the opportunities only in the megacity. And around it goes. If everyone could somehow coordinate, they might land on a very different and much better equilibrium. But we rely upon the market to facilitate coordination, and if the market prizes efficiency and thus agglomeration, that is what we will get.

The collective problem: community assets. People with a lot of talent and ambition provide large benefits to those around them—building businesses, anchoring communities, and so on—but do not consider those benefits in deciding where to locate themselves. At first glance that might seem not to matter, after all they bring the same benefits wherever they locate. But the marginal value of those benefits will vary substantially. Moving ten innovative entrepreneurs from St. Louis to Silicon Valley isn’t going to have much effect on the culture or opportunity in Silicon Valley; moving them from Silicon Valley to St. Louis could be transformative for St. Louis.

As a matter of personal liberty, the social benefits are irrelevant: of course, each person should be free to move wherever he wants. But as a matter of public policy, we should be cognizant of the tradeoff and recognize that while agglomeration does bring benefits, diffusion can bring larger ones. This is especially true when, even in the most aggressive megacity model, most people will not live in the megacity. An economic model that leaves most people in left-behind places is not one that will deliver well on any margin in the long run.

The national problem: competition. The megacity model also suffers from problems of monopoly. If one or a few cities have “market power” in the society, the efficiency of scale may be most obvious in the short run, but the sclerosis born from lack of competition is likely to be the long-run result. Competition among cities and regions to attract talent and investment provides an important check on the dysfunction of local government and is likely to yield a wider and more innovative range of options (see pluralism, above). A diverse ecosystem of dynamic and productive regions specializing in a wide range of sectors also provides the nation with far greater economic resilience.

Such competition amongst geographic factions also ensures that the national political system remains responsive to the diverse interests of the population. If sufficient economic and political power becomes concentrated in a few places, public policy will focus on serving those places, concentrating yet more economic and political power there. The Hunger Games model of Capital and Districts is not intended as a roadmap to prosperity.

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Markets exacerbate rather than solve each of these problems. Insofar as we recognized them as problems, then, they are ones that must be addressed through politics. Politics provides a mechanism for coordination, for bringing social costs and benefits more closely in line with individual ones, and for distributing power within a society. Whether we want to preserve a pluralistic, dynamic nation is a choice that we get to make together. It bears noting, then, that American Compass research has found that, by more than 2-to-1, Americans say the focus for policymakers should be “helping struggling areas recover” rather than “helping people move to opportunity.” This holds across classes, and for those who do and do not live in coastal cities.

That dichotomy is also helpful in framing the alternatives. Rejection of a megacity future does not mean celebrating the skyrocketing cost of living in places like New York and San Francisco. We live today in the worst of all worlds, with opportunity concentrated in select places, and access to that opportunity closed off. But we should not take for granted the concentration of opportunity and thus focus on housing reform as the main cure. The primary focus for policymakers should be driving economic growth and opportunity beyond those cities.

As a matter of political pragmatism, it’s also the case that the pathway to housing reform in expensive cities runs through greater competition, not greater power. Indeed, we might take note that one result of high housing prices in select cities has been an encouraging boom in others, from Austin to Nashville to Columbus, that might otherwise never have happened. And it is in response to declines in population and economic power, not continued gains, that NIMBYism in the most expensive cities is beginning to give way.

Japan has been suffering from what it calls its “lost decades” of economic stagnation. It would not be fair to say the Tokyo problem has caused the stagnation. But it would be very fair to note that a growing and affordable Tokyo has provided no relief. Promote broad-based prosperity and the affordable cities will follow. But rely upon concentration in megacities and the broad-based prosperity may never arrive.

- Oren