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Financial Times


Our Best Plan For Growth Is To Set Our Cities Free

March 07, 2011

By Edward Glaeser

Advanced economies are struggling to find an economic path past recession. On Sunday, David Cameron, the UK prime minister, promised an assault on the “enemies of enterprise”, while US president Barack Obama used January’s state of the union speech to promote jobs and competitiveness. But this new dash for growth is too often a battle of old ideas. To turn the corner, it must instead embrace the innovation that emerges naturally in our great urban centres.

The figures are stark. Some 18 per cent of America’s output comes from its three largest metropolitan areas while Greater London is more than 50 per cent more productive than the rest of the UK. Technology and globalisation make these cities more important, because both increase the returns to knowledge and innovation.

We are a social species and we learn by being around clever people. Cities have long sped this flow of ideas. Eighteenth-century Birmingham saw textile innovators borrow each other’s insights – and gave us the industrial revolution. Today, older, colder US cities (such as Boston and Chicago) survived deindustrialisation by grabbing on to innovations in finance, computers and biotechnology.

These urban comebacks have let growth theorists better understand the economics of “agglomeration” or why people and businesses become more productive by locating near one another in dense areas. Physical proximity allows the free flow of goods, services and ideas – and this powers the collaboration that creates everything from Ford’s Model T to Facebook, and economic growth too.

What would a growth policy that learns these lessons look like? First, it would forget about transport infrastructure. Nineteenth-century cities grew around transport but, in the 20th century, the US highway system pulled people away from productive cities. Today big new investments, such as Britain’s High Speed Two rail line, are reaching diminishing returns, costing billions to save only a few minutes.

What prosperous cities do need, however, is buildings. Without new privately-funded homes and offices, high demand means prices that are too high, commutes that are too long and too few people participating in a vibrant urban economy. New York has too many land use restrictions; London is even more extreme. Both should preserve their architectural treasures, but cities aren’t museums. London, in particular, should also have fewer height restrictions.

Talent matters too, which is why it should be imported. Urban areas create opportunities for immigrants, who provide the human capital that makes cities productive and fun. Advanced nations need all the brains they can get – and thus should lift caps on skilled immigration. The bedrock of urban human capital that underpins talent at home, meanwhile, is held back by poor schools. The strong results of some US charter schools, such as Harlem’s Promise Academy, show that competition, not higher spending, is the best way to boost results.

Too many tax policies also discriminate against cities. In the US, for example, home mortgage interest deduction bribes people to borrow as much as possible to bet on the gyrations of the housing market. Yet subsidised home ownership also discriminates against renting – which discourages high-density living and slows the supply of new rented housing for rich and poor alike. Tax codes that penalise productive urban regions, and encourage quiet lives in less productive areas, do little for growth.

But this is why it also makes little sense to propose “enterprise zones”, 10 of which were launched by Mr Cameron in Britain last week. These grant tax breaks to businesses in disadvantaged areas singled out for privileged status. They can create jobs, but do so at high cost – while it is hard to see the rationale for bribing enterprises to locate in less productive areas.

Our cities are productive because they magnify humankind’s greatest asset: our ability to learn from the people around us. That asset will only become more important in the years ahead, as innovation becomes ever more important. Our cities do not need favours, but they do deserve a level playing field. If they bloom, our economies will grow too.

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