Paul Krugman on Tricky Urban Economics

Paul Krugman has a post about a New Yorker piece by Tim Wu discussing the surprising and disturbing increase in vacant storefronts in the very prosperous and desirable West Village in Lower Manhattan. I agree with most of what Krugman has to say, but I was struck by what seemed to me to be a misplaced emphasis in his post. My comment is not meant so much as a criticism, as an observation on the complexity of the forces that affect life in the city, which makes it tricky to offer any sort of general ideological prescriptions for policy. Krugman warns against adopting a free-market ideological stance – which is fine – but fails to observe that statist interventionism has had far more devastating effects on urban life. We should be wary of both extremes.

Krugman starts off his discussion with the following statement, with which, in principle, I don’t take issue, but is made so emphatically that it suggests the opposite mistake of the one that Krugman warns against.

First, when it comes to things that make urban life better or worse, there is absolutely no reason to have faith in the invisible hand of the market. External economies are everywhere in an urban environment. After all, external economies — the perceived payoff to being near other people engaged in activities that generate positive spillovers — is the reason cities exist in the first place. And this in turn means that market values can very easily produce destructive incentives. When, say, a bank branch takes over the space formerly occupied by a beloved neighborhood shop, everyone may be maximizing returns, yet the disappearance of that shop may lead to a decline in foot traffic, contribute to the exodus of a few families and their replacement by young bankers who are never home, and so on in a way that reduces the whole neighborhood’s attractiveness.

The basic point is surely correct; urban environments are highly susceptible, owing to their high population density, to both congestion and pollution, on the one hand, and to positive spillovers, on the other, and cities require a host of public services and amenities provided, more or less indiscriminately, to large numbers of people. Market incentives, to the exclusion of various kinds of collective action, cannot be relied upon to cope with congestion and pollution or to provide public services and amenities. But it is equally true that cities cannot function well without ample scope for private initiative and market exchange. The challenge for any city is to find a reasonable balance between allowing individuals to organize their lives, and pursue their own interests, as they see fit, and providing an adequate supply of public services and amenities, while limiting the harmful effects that individuals living in close proximity inevitably have on each other. It is certainly fair to point out that unfettered market forces alone can’t produce good outcomes in dense urban environments, and understandable that Krugman, a leading opponent of free-market dogmatism, would say so, but he curiously misses an opportunity, two paragraphs down, to make an equally cogent point about the dangers of going too far in the other direction.

Curiously, the missed opportunity arises just when, in the spirit of even-handedness and objectivity, Krugman acknowledges that increasing income equality does not necessarily enhance the quality of urban life.

Politically, I’d like to say that inequality is bad for urbanism. That’s far from obvious, however. Jane Jacobs wrote The Death and Life of Great American Cities right in the middle of the great postwar expansion, an era of widely shared economic growth, relatively equal income distribution, empowered labor — and collapsing urban life, as white families fled the cities and a combination of highway building and urban renewal destroyed many neighborhoods.

This just seems strange to me. Krugman focuses on declining income equality, as if that was what was driving the collapse in urban life, while simultaneously seeming to recognize, though with remarkable understatement, that the collapse coincided with white families fleeing cities and neighborhoods being destroyed by highway building and urban renewal, as if the highway building and the urban renewal were exogenous accidents that just then happened to be wreaking havoc on American urban centers. But urban renewal was a deliberate policy adopted by the federal government with the explicit aim of improving urban life, and Jane Jacobs wrote The Death and Life of Great American Cities precisely to show that large-scale redevelopment plans adopted to “renew” urban centers were actually devastating them. And the highway building that Krugman mentions was an integral part of a larger national plan to build the interstate highway system, a system that, to this day, is regarded as one of the great accomplishments of the federal government in the twentieth century, a system that subsidized the flight of white people to the suburbs facilitated the white flight lamented by Krugman. The collapse of urban life did not just happen; it was the direct result of policies adopted by the federal government.

In arguing for his fiscal stimulus package, Barack Obama, who ought to have known better, invoked the memory of the bipartisan consensus supporting the Interstate Highway Act. May God protect us from another such bipartisan consensus. I found the following excerpt from a book by Eric Avila The Folklore of the Freeway: Race and Revolt in the Modernist City, which is worth sharing:

In this age of divided government, we look to the 1950s as a golden age of bipartisan unity. President Barack Obama, a Democrat, often invokes the landmark passage of the 1956 Federal Aid Highway Act to remind the nation that Republicans and Democrats can unite under a shared sense of common purpose. Introduced by President Dwight Eisenhower, a Republican, the Federal Aid Highway Act, originally titled the National Interstate and Defense Highway Act, won unanimous support from Democrats and Republicans alike, uniting the two parties in a shared commitment to building a national highway infrastructure. This was big government at its biggest, the single largest federal expenditure in American history before the advent of the Great Society.

Yet although Congress unified around the construction of a national highway system, the American people did not. Contemporary nostalgia for bipartisan support around the Interstate Highway Act ignores the deep fissures that it inflicted on the American city after World War II: literally, by cleaving the urban built environment into isolated parcels of race and class, and figuratively, by sparking civic wars over the freeway’s threat to specific neighborhoods and communities. This book explores the conflicted legacy of that megaproject: even as the interstate highway program unified a nation around a 42,800-mile highway network, it divided the American people, as it divided their cities, fueling new social tensions that flared during the tumultuous 1960s.

Talk of a “freeway revolt” permeates the annals of American urban history. During the late 1960s and early 1970s, a generation of scholars and journalists introduced this term to describe the groundswell of grassroots opposition to urban highway construction. Their account saluted the urban women and men who stood up to state bulldozers, forging new civic strategies to rally against the highway-building juggernaut and to defeat the powerful interests it represented. It recounted these episodic victories with flair and conviction, doused with righteous invocations of “power to the people.” In the afterglow of the sixties, a narrative of the freeway revolt emerged: a grass- roots uprising of civic-minded people, often neighbors, banding together to defeat the technocrats, the oil companies, the car manufacturers, and ultimately the state itself, saving the city from the onslaught of automobiles, expressways, gas stations, parking lots, and other civic detriments. This story has entered the lore of the sixties, a mythic “shout in the street” that proclaimed the death of the modernist city and its master plans.

By and large, however, the dominant narrative of the freeway revolt is a racialized story, describing the victories of white middle-class or affluent communities that mustered the resources and connections to force concessions from the state. If we look closely at where the freeway revolt found its greatest success—Cambridge, Massachusetts; Lower Manhattan; the French Quarter in New Orleans; Georgetown in Washington D.C.; Beverly Hills, California; Princeton, New Jersey; Fells Point in Baltimore—we discover what this movement was really about and whose interests it served. As bourgeois counterparts to the inner-city uprising, the disparate victories of the freeway revolt illustrate how racial and class privilege structure the metropolitan built environment, demonstrating the skewed geography of power in the postwar American city.

One of my colleagues once told me a joke: if future anthropologists want to find the remains of people of color in a postapocalypse America, they will simply have to find the ruins of the nearest freeway. Yet such collegial jocularity contained a sobering reminder that the victories associated with the freeway revolt usually did not extend to urban communities of color, where highway construction often took a disastrous toll. To greater and lesser degrees, race—racial identity and racial ideology—shaped the geography of highway construction in urban America, fueling new patterns of racial inequality that exacerbated an unfolding “urban crisis” in postwar America. In many southern cities, local city planners took advantage of federal moneys to target black communities point-blank; in other parts of the nation, highway planners found the paths of least resistance, wiping out black commer- cial districts, Mexican barrios, and Chinatowns and desecrating land sacred to indigenous peoples. The bodies and spaces of people of color, historically coded as “blight” in planning discourse, provided an easy target for a federal highway program that usually coordinated its work with private redevelop- ment schemes and public policies like redlining, urban renewal, and slum clearance.

One of my favorite posts in the nearly four years that I’ve been blogging was one with a horrible title: “Intangible Infrastructural Capital.” My main point in that post was that the huge investment in building physical infrastructure during the years of urban renewal and highway building was associated with the mindless destruction of vastly more valuable intangible infrastructure: knowledge, expectations (in both the positive and normative senses of that term), webs of social relationships and hierarchies, authority structures and informal mechanisms of social control that held communities together. I am neither a sociologist nor a social psychologist, but I have no doubt that the tragic dispersal of all those communities took an enormous physical, economic, and psychological toll on the displaced, forced to find new places to live, new environments to adapt to, often in new brand-new dysfunctional communities bereft of the intangible infrastructure needed to preserve social order and peace. But don’t think that it was only cities that suffered. The horrific interstate highway system was also a (slow, but painful) death sentence for hundreds, if not thousands, of small towns, whose economic viability was undermined by the superhighways.

And what about all those vacant storefronts in the West Village? Tim Wu suggests that the owners are keeping the properties off the market in hopes of finding a really lucrative tenant, like maybe a bank branch. Maybe the city should tax properties kept vacant for more than two months by the owner after having terminated a tenant’s lease.

11 Responses to “Paul Krugman on Tricky Urban Economics”


  1. 1 Jacques René Giguère May 29, 2015 at 9:57 pm

    Not only in the US.
    In Toronto, the Spadina expressway fight was epic.
    In my hometown of Québec City, the Chinatown was exterminated to make way for an interchange, a good lot of it never completed or recently downsized. That Chinatown survives only in the theater work of Robert Lepage, who lived nearby as a child.

  2. 2 David May 29, 2015 at 10:25 pm

    I don’t think the highway system was some evil plan to destroy urban hubs. It was the result of a cultural transformation, the car culture and the new American Dream of home ownership. These made the suburbs inevitable though unfortunate.

  3. 3 Dan May 30, 2015 at 4:44 am

    Thank you

  4. 4 kaleberg May 30, 2015 at 1:50 pm

    In the old days, there were often one or two story buildings in New York City, often in prominent locations, that were known as “taxpayers”. The idea was that the business in this building was paying just enough rent to cover the tax payments on the buildings while the owner’s waited for real estate prices to go up. A classic example was the one story tobacco store at the corner of 5th and 42nd. Nowadays, that location would stay empty, rather than housing a suboptimal business. Why? I can only guess that it is because tax payments are so low in comparison to the potential gains in the eyes of the owners at least that there is no need to rent the property to provide some cash flow. An economist might argue that this means that taxes are too low.

  5. 5 jonny bakho May 30, 2015 at 1:59 pm

    Excellent Post.

    Your point about roads routed to dismissively destroy minority neighborhoods is spot on.

    The infrastructure that was destroyed during highway building was in many cases far more valuable than the sprawl that replaces it. Take for instance a fast food joint with a drive thru and massive parking lot (often required by zoning). That property may be worth a half million to a million dollars but will depreciate to the value of the land within 20 years. A cluster of typical 2 or 3 story downtown businesses on a space the same size might be valued at 3-6 times that. The road and utility infrastructure to support the one fast food joint is roughly the same that would support a quarter to a half city block. Thus, the ratio of the cost of infrastructure maintenance to tax base for the fast food joint is many times greater than for a downtown area. Not only does excessive road building destroy neighborhood quality, but it erodes the future tax base. The modern American suburb is no more self sustaining than the cities the FSU built in Siberia that survive on massive subsidies.

    Obama was born in 1961 and too young to appreciate the battles of the late 60s and early 70s. Should he know better? Does anyone in his administration advise on progressive urban policy? He surrounded himself with Republican advisors at the Fed and Treasury. His comfort zone seems to be moderate Republican policies, as in his love for Ike. We should expect better.

  6. 6 ezra abrams May 31, 2015 at 10:49 am

    Both the Tim Wu and the PK pieces show a remarkable lack of historical knowledge.

    the only constant in NYC is change, except maybe for the most baroque real estate tax laws in the history of mankind (do air rights exist anywhere else ?)

    By definition, where the artists are renovating old industrial space is the hip new area; almost by definition, such an area is unknown to the NYT, the New Yorker, etc (village voice, where are u when we need u)

    I would guess that the artists are renovating old light industrial buildings in the S Bronx – Mott Haven, places off the southern end of the grand concourse, still cheap and with subway access

    20 years from now, those will be hip trendy neighborhoods, and 30 years from now, they will be destroyed by gentrification

    you might not know it from PK, but SoHo, with its gorgeous cast iron facade buildings, 25 years ago was decaying light industry that was taken over by artists cause it was cheap

    iirc, early 2000s, friends who lived on the upper west side: our neighborhood has vanished, swallowed by loathsome chain stores

    iirc, Dos Passos, USA, already in the 1920s, the original bohemians had been forced out of Greenwich village due to rising costs….

    iiirc, the AIA guide to NYC architecture, in in 1890 Fifth Avenue north of 59 str was a solid mile and a half of palazzos, chateaux and mansions; none of them survive except for the Frick and the Design Museum

  7. 7 David Glasner June 1, 2015 at 1:00 pm

    Jacques, Certainly not just in the US. By the way Jane Jacobs moved to Toronto in 1968 after being charged with inciting a riot at a public meeting about one of the many attempts to build an expressway through Greenwich Village, where she lived for the last four decades of her life.

    David, I agree. The point of building the interstate highway system was not to destroy urban hubs. But people were in fact oblivious to the damage that they were doing in the name of a certain conception of progress. We can see why things out the way they did, but I don’t think it was inevitable that they did, just as it was not inevitable that Jane Jacobs would emerge from obscurity and stop Robert Moses, the most powerful man in New York, in his tracks.

    Dan, You’re welcome.

    kaleberg, Thanks for that interesting bit of urban economic history.

    jonny, I don’t know who Obama’s Republican advisers are, but I agree that he is far from being the leftist that Fox News likes to portray him as. I also don’t know what a progressive urban policy is. Jane Jacobs was actually a bit of a libertarian, but of an uncharacteristically sane variety.

    Ezra, There is a constant ebb and flow in cities, between the up and coming low rent areas and neighborhoods that gentrify driving up land values and rents and in the process undermine much of what made those neighborhoods so dynamic and attractive in the first place. I think Jane Jacobs has a chapter about that process in The Death and Life of Great American Cities

  8. 8 TravisV September 4, 2015 at 7:41 am

    Paul Romer and Alex Tabarrok had some comments related to this topic:

    http://marginalrevolution.com/marginalrevolution/2015/08/romer-on-urban-growth.html

  9. 9 David Glasner September 8, 2015 at 9:11 am

    Travis, Thanks for the link.

  10. 10 TravisV September 16, 2015 at 5:55 pm

    Tabarrok also had a great clarification within the comments section of that post:

    “Zoning is an interference with private development which neither Romer nor I want. That’s why I analogized the simple, minimal plan to the rules of the game……”

    http://marginalrevolution.com/marginalrevolution/2015/08/romer-on-urban-growth.html

    Kevin Erdmann commented on this post:

    http://idiosyncraticwhisk.blogspot.com/2015/06/housing-tax-policy-series-part-36-we.html

    Also, I thought your comment on “Small Is Beautiful” by E. F. Schumacher was interesting here:

    https://uneasymoney.com/2012/08/22/intangible-infrastructural-capital/#comment-9006

  11. 11 David Glasner September 21, 2015 at 12:54 pm

    Travis, Thanks for these links.


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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