Paul Krugman recently published a short paper about growing economic disparities betweeen US regions, arguing that this constitutes a ‘third great transition’ after an urbanisation trend that lasted until around 1920 and a suburbanisation trend that lasted until around 1980.
In this blog post I set out some corroborating evidence that shows similar trends in the UK, show a new way to visualise aggregate population distribution trends, and suggest some implications for the way we think about urban change.
Krugman summarises his paper as follows:
Basically, I want to make three points:
1. The regional divergence we’ve seen since around 1980 probably isn’t trivial or transient. Instead, it reflects a shift in the underlying logic of regional growth — the kind of shift that theories of economic geography predict will happen now and then, when the balance between forces of agglomeration and those of dispersion crosses a tipping point.
2. This isn’t the first time this kind of transition has happened. In fact, it’s the third such shift in the history of the U.S. economy, which went through earlier eras of both regional divergence and regional convergence.
3. There are pretty good although not ironclad arguments for “place-based” policies to limit regional divergence. It’s important to realize, however, that the U.S. system already provides huge de facto subsidies to lagging regions. The fact that we’re diverging anyway suggests that the economic forces at work are quite powerful.
I think each of these points applies to the UK too, which helps both to reinforce Krugman’s argument and to cast some light on causes of regional divergence in the UK that go beyond the usual narratives.
Krugman starts his new paper with a look back to an old one, 1991’s influential “Increasing returns and economic geography“. That paper presented a simple model of regions where firms are assumed to produce either agricultural or manufacturing goods. Because of its economies of scale, manufacturing production will tend to be concentrated in a limited number of areas, which due to transportation costs will usually be closer to centres of demand, i.e. towns and cities. But given that manufacturing workers themselves will add to the population of those areas and create extra demand, you get a process of cumulative causation or reinforcing urbanisation as workplaces locate near people who locate near workplaces. In very simple terms this is how we got industrial cities.
Krugman’s paper shows that these reinforcing processes are fundamentally non-linear , can be triggered by relatively small changes in causal variables and can produce quite different outcomes depending on the interaction of a few important factors. The most important of these factors are the extent of economies of scale in different types of work and the level of transport costs. If economies of scale were low and transport costs high, for example (basically a pre-industrial world), then both workplaces and population would be relatively dispersed, as most people would live in relatively small communities and buy locally produced goods.
So you need some reduction in transport costs to allow production to cluster and cities to form. But what if transport costs fall even further? Railways, for example, slashed the cost of moving goods and people from one station on the network to another, but not the cost of moving stuff off the network. That had to wait for the rise of motor vehicles, which allowed both people and production to spread out along a vast and far more intricate road network. During this new phase, cities generally grew larger but less dense, with city centre populations often declining and suburban ones booming. Some cities, especially those most reliant on particular manufacturing industries, shrank in absolute terms as those industries either moved to cheaper locations or disappeared altogether.
What Krugman highlights in his latest paper is that these trends of urban growth and decline are a major driver of changing regional inequalities. Put simply, forces that push people together in cities tend to pull regions apart in terms of economic outcomes. While the industrialisation phase had been marked by increasingly sharp contrasts between regions and between city and country (as noted by many observers including Engels in The Housing Question), the second phase involved a re-convergence, as the boundaries between city and country became blurred and suburban sprawl became the dominant form of growth (the narrowing of regional inequalities was therefore inextricably linked to the rise of cars and trucks).
Krugman presents various charts that illustrate this, with richer regions of the United States pulling away between the 19th and early 20th centuries, poorer regions catching up somewhat between the 1920s and 1970s, and either stalled convergence or even renewed divergence since then. The chart below is one example, and shows the ratio of output per worker in the early-industrialising New England region and the relatively rural East South Central region, from estimates by Baier at al. Note, for clarity when compared to the other charts in this post I’ve flipped the ratio from the one used by Krugman in his paper.
You see a broadly similar pattern if you look at data for the UK. For example, this chart, made by combining estimates from Nicholas Crafts and Ron Martin, shows the inequality in regional GDP per capita in Britain / the UK (measured by the coefficient of variation) between the 1870s and the 2010s. By this measure, regional inequality peaked in the early 1900s but had fallen sharply by the 1970s. But just as in Krugman’s US chart, inequality between regions then rises again towards the end of the century (and into the new one at an accelerating pace, in the UK data).
The explanation for this resurgence in regional inequality (which seems to be stronger in the UK than in the US) is not that we’ve re-industrialised but that forces of economic concentration are once again in the ascendant. Just as in the industrialisation phase, various factors bundled up in the concept of ‘agglomeration’ (economies of urban scale) are important here. Cities are fundamentally good places for learning, for copying or indeed for stealing the ideas of others, and when knowledge-intensive services are the fastest growing sectors in the economy then firms and workers are both more willing to locate in cities even if they have to pay a premium.
The agglomeration explanation is consistent with Krugman’s story of returns to scale. But he’s the first to admit that his model is a simplification, and one important thing it leaves out is the role of quality of life in cities, or urban amenities to use the term from economics. Industrialisation and rapid urbanisation exacted some serious tolls on quality of life (and indeed length of life) in cities via pollution, disease and crime, to the extent that there was a large urban mortality penalty around the end of the 19th century. The dangers of urban life meant that as soon as people were able to move out of cities and still access good jobs they did so in large numbers, fuelling the outward movement of both population and employment in the suburbanisation phase described above.
But many of these urban malaises have been addressed by improved technology or policy. The infant mortality rate in London is now below the national rate, crime rates in US cities have fallen faster than in the suburbs (and New York City now has a lower murder rate than the US as a whole, for example), larger cities have generally made faster advances in terms of quality of life than smaller ones or rural areas, and in the US at least there has been a growing rural mortality penalty since the late 1980s. All these changes have made cities more attractive places to live, contributing to the agglomeration effects that push up city incomes relative to other areas.
It’s important to consider quality of life because the rise of cities in the 19th century and the rise of suburbs after WW2 was not just a story of where work happened but of where people lived. These two phases left many cities that had thrived during industrialisation with large swathes of depopulated, dilapidated or even abandoned neighbourhoods, while creating vast and largely car-dependent suburbs in the US, UK and many other countries.
It’s difficult to summarise these population trends, which are the sum of huge changes in births, deaths and migration, but one way of doing so is by looking at changes in average ‘lived density’ over time, where lived density is defined as the average population density of a country when divided into neighbourhoods or some other small area and where each of those areas is weighted by its population. That’s a mouthful, but it basically means that this measure tells you what the most typical neighbourhood density of a country is, and as long as your definition of neighbourhoods is fairly stable over time it gives a useful indication of whether a country’s population is becoming more or less concentrated. The first chart below shows what this looks like for counties in the US, using Jonathan Schroeder’s estimates of county population densities up to 2010 and my calculations for 2017.
The second chart below shows the trend in average lived density for England and Wales, this time using data on local authority populations from the Vision of Britain historical GIS. I’ve suggested dividing it into three periods – urbanisation, suburbanisation and re-urbanisation. So far the re-urbanisation process has not brought us back to the densities of the early 20th century, and the restrictions on densifying housing in our existing urban neighbourhoods mean we are unlikely to get there.
Please note that the scales used in these two charts are very different – the US chart uses people per square mile at county level, while the England and Wales chart uses people per hectare at local authority level. But the important thing in each case is the trend, and these look quite similar to each other, and also to the trends in economic concentration shown earlier in this post.
The lesson, I think, is that the resurgence of cities in Britain, the US and elsewhere is a predictable consequence of the disproportionate growth of economic sectors that experience increasing returns to urban scale, as well as improvements in urban amenities (and continued stagnation in transport technologies). It’s not really a result of conscious policy choices, at least not ones that were made with this end in mind – in fact, the balance of policy in most countries is quite anti-urban, in so far as it supports cars over public transport, owner occupation over renting and low-density housing over apartments.
The implication, supported by divergence in land and house prices between urban and suburban areas, is that there is massive latent and frustrated demand to live in urban areas. Given the very different environmental footprint of urban versus non-urban lifestyles, this seems like quite a large missed opportunity.
Acknowledgement for use of Vision of Britain data: This work is based in part on data provided through http://www.VisionofBritain.org.uk and uses statistical material which is copyright of the Great Britain Historical GIS Project, Humphrey Southall and the University of Portsmouth. Parts of the data are Crown copyright, adapted from data from the Office for National Statistics and licensed under the Open Government Licence v.1.0. Parts are based on historical material which has been re-districted by the Linking Censuses through Time system, created as part of ESRC Award H507255151 by Danny Dorling, David Martin and Richard Mitchell.