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Do big cities help economic growth?

Summary:
In recent decades, bigger cities have tended to do better than small towns and rural areas. But that doesn’t necessarily imply that big cities have more pro-growth economic policies, indeed one can make an argument that the opposite is true. Tyler Cowen linked to a Washington Post article that discussed the reasons why the DC suburbs in northern Virginia are growing faster than the suburbs in Maryland: The overall business climate has also played a role. In general, Virginia has had lower taxes and less regulation than its neighbors. For 2019, the corporate income tax rate in Virginia was 6 percent, compared to 8.25 percent in Maryland and the District. Virginia also is a right-to-work state, which means employees cannot be required to join a union as a condition

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In recent decades, bigger cities have tended to do better than small towns and rural areas. But that doesn’t necessarily imply that big cities have more pro-growth economic policies, indeed one can make an argument that the opposite is true.

Tyler Cowen linked to a Washington Post article that discussed the reasons why the DC suburbs in northern Virginia are growing faster than the suburbs in Maryland:

The overall business climate has also played a role. In general, Virginia has had lower taxes and less regulation than its neighbors. For 2019, the corporate income tax rate in Virginia was 6 percent, compared to 8.25 percent in Maryland and the District.

Virginia also is a right-to-work state, which means employees cannot be required to join a union as a condition of employment. In contrast, both Maryland and the District allow union shops.

The different approaches arise partly from political disparities between Virginia and Maryland in parts of the states outside the Washington region. Conservatives from Southern Virginia have frequently wielded power in Richmond and favored corporate-friendly policies. By contrast, liberals from the Baltimore area have tended to dominate the Annapolis state government.

Big cities tend to be governed by left of center politicians that often enacts anti-growth regulations.  On the other hand, big cities also have enormous economic advantages associated with a concentration of high valued-added industries such as finance and tech.  The real problem occurs when big cities are embedded in larger states that contain areas lacking in the benefits of “agglomeration”.  Thus upstate New York has done poorly in recent decades, as firms would have little incentive to locate in smaller New York cities that are burdened by New York State regulations.

Illinois and Indiana are an almost ideal comparison.  The two states are pretty similar, except that Illinois contains the huge Chicago metro area.  As a result, Illinois governance is much more left wing, more in favor of burdensome regulations on business than is the case in relatively conservative Indiana.  For this reason, smaller cities in Illinois are losing population while Indiana continues to grow pretty fast for a northern state.  Since 2010, Illinois’s population has fallen from 12.83 million to 12.67 million.  Indiana has grown from 6.48 million to 6.73 million.  (The Northeast and North Central US are showing very little population growth.)

Of course you don’t want to push this too far.  It’s still true that big cities are outperforming smaller towns.  And there is more population growth in inland California than in West Virginia. (It’s very difficult to build in coastal California.) Nonetheless, the fastest growing places in America tend to be metro areas located in relatively conservative states, such as Austin, Charlotte, Orlando, Nashville, Phoenix, Salt Lake City, etc.  The conservative political establishment leads to a relatively pro-business economic climate, while the cities also gain from the benefits of agglomeration.  Northern Virginia fits that pattern.

BTW, the new census data shows that California’s population growth has slowed sharply.  During the early 2010s, California gained more than 300,000 residents per year.  In the most recent year the growth slowed to 50,000, in percentage terms a rate far below the national average (which is also slowing.)  Now most of America’s population growth is in three places: Texas, the Southeast and the Mountain West.  These states generally have either conservative or centrist governments.

Despite all the talk of reform, NIMBYism in California has actually gotten even worse since the early 2010s.

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Do big cities help economic growth?

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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