Local government isn’t doing enough to keep costs down for New Yorkers
When I was a kid, one of my mother’s friends told me that you can’t leave the house in New York City without spending $20. It was always one thing or another, she said. At the time, I thought she was crazy because I did it all the time. But as an adult, the only question I have is how much I’d have to adjust that number to capture the increasing costs of living in the city.
Big cities are naturally going to be expensive in certain ways. By definition, more people want to live in them, and that demand has economic consequences. The per-square-foot cost of housing and commercial space is always going to be higher in a successful downtown and its surrounding neighborhoods than it will be in the country. The question is how much higher. That question should be central to the politics of cities, but too rarely is.
New York City is never going to be as cheap as rural Arkansas. But across a huge number of areas — housing, groceries, taxes, health care, professional services — it could be much, much cheaper.
Making New York City cheaper would not only be great for city residents, many of whom pay a large share of their salaries in rent — it would be economically beneficial for the country and world, as more new ideas could be fomented and more talented people could develop in its midst if costs were lower.
Elections in New York are about many things, but this question should be at their core: what can officials do to make it easier to live here?
What are cities, anyway?
Our greatest contemporary urban economist (and Vital City contributor) Ed Glaeser once defined cities, rather unromantically, as “the absence of space between people and firms.” But cities create an economic puzzle. It’s more expensive per square foot to live in a place with lots of other people, so why are profit-maximizing firms or even ordinary people willing to locate in big cities?
The answers economists offer, called “agglomeration economies,” fall into a few buckets. The lower cost of transporting goods between residents of a city used to be a major driver of urban advantage around the turn of the last century, but that has mostly dried up as it has become cheap to ship goods across the country. Instead, the big reasons to locate in cities are deep markets and information spillovers.
Firms and residents move to the metro areas of big cities because of the benefits of deep labor markets. In a big city, a worker can specialize — an actor in L.A. can become an expert in getting killed in zombie movies, because there are enough of them, while one in Topeka has to do whatever work is available, whether it is “Hamlet” or “Paw Patrol: The Musical.” Workers do not face as much firm-specific risk in deep markets; the failure of an energy firm in Houston would simply lead its employees to look for work elsewhere in the city, while the failure of a similar employer in a less deep market would force its employees to move or find another field of work. Employers and workers alike find it easier to find good matches between positions and skills when markets are deeper.
From dating opportunities to restaurants, city residents benefit from having lots of choices and better capacity to find matches. Further, city residents learn from each other, an idea economists call “information spillovers.” Big cities are associated with more inventions and increasing human capital (as measured by wages), as workers learn not only from co-workers, but from the vast number of people they come in contact with in dense cities. Going to bars in Capitol Hill in Washington D.C. is a good way for lobbyists to learn how to do their jobs better; the same thing is true for healthcare experts in Atlanta and energy traders in Houston. Workers in big city metro areas are paid more than other workers. Some of this is selection, and some of it is matching with employers who are better fits, but some of it is learning, as cities are associated with higher wage growth and not just high wage levels (and those wages persist after residents leave).
Notably, some of the economic benefits of cities are felt by non-residents. If AI companies, concentrated in San Francisco, are more productive, we all gain. If young biotech scientists learn from one another in Boston, companies can sell the drugs they invent around the country.
If cities are so great, why don’t more people live in them? Not everyone wants to, of course – indeed, demand to live in cities has fallen in recent years. But cities would attract many more residents if it were not for what economists call “congestion costs.” These are best understood as consisting of two separate types of costs: what one might call true congestion costs and negative agglomerations.
True congestion costs are the higher rents per square foot and increased traffic that come from people competing over the same space. Negative agglomerations are things that benefit from proximity just like agglomeration economies but are bad, like crime. Certain types of criminals can specialize, have more depth in targets and learn from one another, just like technologists; germs spread more the more people interact, turning the huge number of interactions one experiences in a big city — financial, social and personal — into a vector of disease.
What’s important to remember is that these are inevitable downsides of big cities. You can’t have the benefits of a city like New York — the pulsating energy, the financial wizardry, the artistic frisson — without the congestion costs and negative agglomerations.
What should urban governments do?
One way to understand the role city government plays is that its main job is to limit congestion costs and negative agglomerations. Of course, city governments do other things, like providing the type of public services people want, like schools. But if there are necessary downsides to urban life, city government’s job is to minimize them as much as it can.
New York City government has focused substantially on curbing negative agglomerations. One of the greatest policy successes in New York City history was the massive reduction in germs after George Waring revolutionized the city’s Street Cleaning department in 1895. Life expectancy in the city is now higher than the national average. Crime reduction is, of course, a constant focus of city politics. Local voters punish crime increases the way national voters punish macro-economic problems. And despite real problems with disorder, the murder rate in New York City is substantially lower than other comparable American cities (this year, the murder rate is on track to be close to its lowest level since we started keeping statistics). While there’s lots more we can do — there’s no reason to be complacent about still-too-high crime rates — these achievements are nothing to sneeze at either.
But New York has not succeeded at the other major role of government. Congestion costs — rents, the costs of consumer goods and traffic — are caused by people all wanting to be in the same place. That’s what cities are, after all: the absence of distance between people and firms. But we need aggressive policies to accommodate them, lest congestion costs make capturing the economic and social upsides of urban life available to too few.
Traffic is notably awful in New York, despite the extensive transportation infrastructure we built many years ago. Commuting times are higher here than in virtually any other major city. Building new infrastructure doesn’t reduce traffic — if there’s free road space, people drive more — but it does allow more people to get around. And smart investments in trains and buses help too. But building new infrastructure in New York City is far more expensive than it is anywhere else in the country or, indeed, the world. As a result, we’ve built very little of it. For instance, other than the short “stubway” Second Avenue Subway and the 7 train extension to Hudson Yards, the subway system hasn’t expanded since the 1940s. The operating costs of our subways and buses are also extremely high when compared to peer cities. Despite the huge increase in demand to live in New York City since the 1970s — look at the prices! — if someone stepped in a time machine in 1975 and came out today, they would find that getting around the city is in many ways the same, with the exceptions of Citi Bike, other micromobility vehicles and the availability of Uber.
Our congestion pricing system is a major improvement, speeding commutes by pricing road access. But it is not a true congestion pricing system: It doesn’t do enough to variably encourage people to drive at off-peak hours, it only covers part of Manhattan and the prices are too low at peaks. But it is a major step in the right direction, reducing congestion and making traffic flow more reasonably. Even so, New York has a long way to go to make getting around the city cheap and easy.
On housing, the problem is even more acute. It is well known that apartments in New York are ridiculously expensive — that the rent is too damn high. The cause is equally well known: excessively restrictive land use regulations that stop developers from building more and more densely. Prior to the restrictive 1961 zoning resolution, New York was adding more than 300,000 housing units a decade. Since then, we’ve never gotten above 200,000, despite the spiraling high prices. Policies like City of Yes are a step in the right direction, but only a small step. Massive zoning process changes of the type being considered by the City Charter Commission, reforming the way buildings are built and maintained, and moving the property tax system to one more clearly based on actual prices are all necessary to get the city building again.
Other high costs of living are downstream from our bad land use policy too. Wonder why orange juice in New York is so expensive? Market depth in a big city means we have more choices and more competition, which serves to drive quality-and-variety adjusted prices down for high-end products (New York is a great place to buy caviar). But prices that matter for the poor and middle classes are high. Public policy makes this worse. We don’t have a ton of competition among ordinary supermarkets, particularly from low cost retailers like Walmart, because the city makes it hard to build new supermarkets and uses the rules to keep out Walmart specifically. Instead, people regularly shop at expensive bodegas. (Oddly, the decline in retail shopping caused by Amazon may help this by opening up space for supermarkets.).
One final cost that New York City does not reduce is the cost of government itself. Taxes here are very high. That might be okay if the quality of the services people received was extremely high. But there’s no evidence that it is. The cost of incarcerating a single prisoner in New York City is more than $550,000 a year, more than 1.5 times the highest state government average and more than 20 times the lowest (and is Rikers particularly nice?). Funding for our public schools is the highest in the nation per student, but outcomes are middling.
New York City government is not indifferent to prices. New York has long directly regulated rents, through rent stabilization and inclusionary zoning programs. These provide cheaper rents for some residents, but do not increase access to the city — there are only so many rent regulated apartments to go around — and indeed can reduce access to the city by reducing incentives to build.
How are politicians responding?
To their credit, many contemporary politicians understand that the cost of living in the city is too high. But their policy proposals do not really address the problem. Consider Zohran Mamdani’s proposal for city-run grocery stores. What are the odds that a government that runs the most expensive jails, schools and infrastructure projects in America can run grocery stores more efficiently than Walmart or Amazon? They will only be able to offer competitive prices if the city provides huge subsidies. Other ideas, like proposals for free buses, are less about bringing down costs than they are about redistribution, as the cost of the service would still have to be paid through taxes on others. These ideas do not actually address the high costs of living in the city; they simply shift them from consumers to taxpayers (or from one group of taxpayers to another), while likely increasing costs overall.
New York City is a little more than seven months away from an important mayoral election. Perhaps the most important job of big city government is mitigating the inherently higher costs of living in an urban area, so that more people can benefit from the economic and social benefits of urban life. We should judge our government by how well it does this.
New York City has done pretty well in the area of reducing negative agglomerations like crime and germs. But, whether you look at rents, the price of a quart of orange juice or the tax price of government services, it’s safe to say that New York City government isn’t doing much to keep costs for its residents down.
You should be able to leave your apartment and keep your wallet at least somewhat full. We should ask candidates what they will do to drive the cost of living down and to increase the number of people who can access the city.