The Economic Weight of U.S. Urban Regions

Last year, the McKinsey Global Institute issued a report — “Urban world: Cities and the rise of the consuming class” — that included striking statistics on the contribution large metropolitan areas make to the U.S. economy:

The United States urbanized in the 19th century, and today 80 percent of the population lives in large metropolitan areas, which generated almost 85 percent of US GDP in 2010. Despite the fact that Britain started to undergo its urban shift in the late 18th century, Western Europe as a whole is less urban today than the United States with less than 60 percent of its population living in large cities. Interestingly, the economic weight of urban America is largely due not to its two megacities of New York and Los Angeles but rather to its broad swath of more than 250 middleweight cities, compared with just over 180 such cities in Western Europe. It is differences in the concentration and performance of the cities of these two regions that account for about three-quarters of the per capita GDP lead that the United States holds over Western Europe today.

As Ryan Avent has argued, Europe’s middleweight cities appear to be hobbled by regulatory barriers to growth, which limits the ability of Europeans to take advantage of the productivity-enhancing knowledge-sharing that occurs more readily in dense environments. Reducing regulatory barriers to urban growth in the U.S. is one obvious straightforward strategy for encouraging economic growth. 

Though “Urban world” is primarily focused on cities in emerging economies, it does the address the economic potential of U.S. cities:

This is not to say that the cities of developed economies will be unimportant in the world. If Tokyo, New York, and London were nations, they would rank 9th, 14th, and 17th in the world on the basis of their GDP at market exchange rates in 2010. So, even if these developed world megacities were to grow at only moderate rates, their GDPs would still rise significantly. In fact, one in five of City 600 cities is in North America or Western Europe, and we expect them to generate about 14 percent of global growth to 2025. We see the collective GDP of the large cities of the United States increasing by almost $6 trillion to 2025, generating 10 percent of global GDP during this period. [Emphasis added]

Improving the productivity of the construction sector is one way we might increase the size of this pie:

In the United States, productivity growth in the construction industry lags behind that in other local services sectors. Yet MGI finds that a 30 percent productivity increase could be achieved over five to ten years through a range of private-sector initiatives. These might include more focus on sourcing through subcontractors, the optimization of supply chains, fully industrialized prefabricated production, and transparent planning. [Emphasis added]

I highlight prefabricated production because this is one of many domains in which organized labor has proven an obstacle to productivity-enhancing innovation, yet there is at least some reason to believe that construction workers will come along — prefabricated production can mean stable, year-round employment rather than intermittent or seasonal work. 

MGI’s “Urban America” report offers more on why U.S. urban regions weigh so heavily in the U.S. and global economies:

First, cities are home to a higher share of the US population—80 percent of US citizens lives in large cities, compared with 58 percent in Europe. In the United States, the traditionally mobile population has gravitated into clusters of large cities, particularly in coastal regions. In contrast, mobility has been lower within, and between, European countries. National policies aimed at reducing regional economic disparities have limited migration within individual countries, and a combination of language barriers and national borders within Europe has limited cross-border migration. European Union structural and cohesion funds have also transferred funds from richer metropolitan regions in its member states to poorer rural ones. This helps to explain why Europe has a relatively higher share of population living in small cities and rural areas.

A second reason that US metropolitan regions dominate the US economy is their relatively high per capita GDP premium. The average per capita GDP of large US cities is almost 35 percent higher than in smaller cities and rural areas in the United States, versus a premium of about 30 percent in Western Europe. The higher US per capita GDP premium relative to Western Europe largely reflects differences in the mix of cities—a higher share of US population lives in very large metropolitan areas that tend to have higher average per capita GDP. In addition, the share of large city populations in Europe is higher in Southern Europe, where per capita GDP tends to be lower, than in Northern Europe, which is wealthier overall.

So, not only does a big share of the population live in large cities in the United States, but the per capita GDP of those inhabitants is higher, further contributing to the large economic weight of large cities in the United States relative to Europe. Taking the population and per capita GDP of US cities together, we find that they account for around three-quarters of the overall US per capita GDP lead over Western Europe. [Emphasis added]

A few takeaways:

1. We should be skeptical of place-based policies designed to mitigate regional disparities while we should embrace place-based policies designed to reduce the barriers to growth in the most productive regions, as Edward Glaeser and Joshua Gottlieb have argued. (This, incidentally, tends to reinforce the case for competitive federalism as opposed to cooperative or cartel federalism.)

2. Strengthening the largest U.S. cities — which will require resisting the tendency of such cities to use local land use regulation to restrict growth, perhaps via something like Josh Barro’s “Race to the Top” for housing — is important for national economic growth.

3. Yet improving the connectivity, via roads, rail, and broadband, of middleweight cities might represent low-hanging fruit. 

So what does this imply for national policymakers? Barro, Glaeser, and Gottlieb all converge around the idea of offering incentives to high-cost areas to build. A more intuitive response is to improve the productivity of infrastructure expenditures by, for example, encouraging the more widespread use of direct road pricing, as Jack Basso and Tyler Duvall have recommended, auctioning take-off and landing slots at airports to finance increase investment in advanced air-traffic control systems, etc. Improving the efficiency of crime control resources by, for example, emphasizing prevention over long-term incarceration when allocating resources, would also greatly benefit U.S. cities.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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