Sometimes it's good to play devil's advocate just to keep yourself honest. This is one of those posts.
I've long advocated that rigid land-use controls hurt cities by keeping them too small. This is especially true of "superstar" cities like New York and San Francisco. These cities are so expensive, in part, because they make workers more productive and offer special amenities. Thanks to increasing returns to scale, both productivity and amenities increase with growth*, which makes it important to accommodate new residents. As I've put it before:
New development often has important social benefits that are not captured in the developer's pro formas. A steady supply of new housing keeps homes cheap, or at least keeps home prices from spiraling upward. New development means more room for more people. More people means a larger, deeper market that permits more specialized retail, restaurants, music and arts. More office space means more room for firms and workers to cluster together; these cluster make both firms and workers more productive. A software developer will be more productive in Austin or San Jose than in San Angelo because a lot of learning takes place just by hanging around with other people in the same trade.
Rigid land-use regulations in superstar cities raise housing prices; these high prices sort out low-skilled workers. But even low-skilled residents are more productive when they live in a superstar city. Looser regulations would allow superstar cities to accommodate more low-skilled residents. While an influx of low-skilled residents would lower average productivity, so what? Less-skilled residents would still see higher wages, while higher-skilled residents would enjoy a more diverse and specialized set of amenities and the enhanced productivity provided by a deeper labor pool. Everyone would win (except for incumbent property owners who would see lower rents).
But perhaps there is an argument that the original set of high-skilled workers might lose from looser regulations. Could allowing an influx of lower-skilled workers lower their productivity?
I'm thinking of the difference between a state university and an elite university. I got my undergraduate degree from an SEC school. There were smart people there, but I spent most of my time hobnobbing with people who, frankly, had little interest in academic work. I went to an Ivy League law school, where the situation was reversed — anyone I sat down to talk to had something interesting to say. My education was not limited to the class room; it took place all the time. In fact, I learned more from my classmates than I ever learned in class. (State universities understand this, which is why they create honors colleges to give their best students frequent contact with one another.)
Perhaps the elites in the superstar cities sense it is better to surround themselves with a uniformly high-quality workforce. They want to spend their time with other elites; letting in lots of less-skilled workers would introduce so much static, just as if Harvard were to throw open its doors to anyone with a half-decent high school transcript. In other words, an influx of less-skilled workers might dilute the experience for the high-skilled.
As I said at the beginning, I'm playing devil's advocate. I think this is probably wrong. What matters is being close to other people with the same skill set. A software developer benefits from having a lot of other smart software developers around; a musician benefits from having a lot of other good musicians around. Adding more software developers or musicians who aren't quite as skilled shouldn't dilute this benefit because we city-dwellers largely control whom we interact with. Firms, in fact, segregate themselves by quality all the time. Deepening the labor pool simply can't hurt.
I think the superstar cities are making bad choices. But it's useful to ponder every once and a while whether their residents understand something the rest of us don't.
*Yes, there eventually are limits to increasing returns to scale, principally due to congestion. I don't think cities like San Francisco or New York (or Austin) are anywhere close to these limits, though. But that's a topic for another post.
