Most Saturdays we dig into the archives. This post by Peter was originally published in September 2014.

Last week I took a look at whether government policy to support regional economies could divert growth away from Auckland. Based on the historical evidence, the answer seems to be no – people want to live in Auckland and start businesses here, and it’s senseless to try and stop that.

Today, I want to look at this issue from a different angle, and ask: If we somehow succeeded in stifling Auckland’s growth, would we be better off as a result? Would New Zealand be richer if it cancelled the City Rail Link, banned any new dwelling construction in Auckland, and told newcomers to bugger off to Timaru (or, more likely, Melbourne)?

Once again, we don’t have to speculate, as we can examine the results of previous “natural experiments”. Paul Krugman suggests that we could learn from recent population growth in the United States. (In between gaining academic renown for his work in new trade theory and public notoriety as a harsh critic of the second Bush administration, Krugman helped develop the new economic geography literature, which explains why cities form and grow.) He takes a look at the rapid growth of the “sunbelt” states, including Arizona and Texas, and finds that it has probably reduced economic growth in the US:

It turns out, however, that wages in the places within the United States attracting the most migrants are typically lower than in the places those migrants come from, suggesting that the places Americans are leaving actually have higher productivity and more job opportunities than the places they’re going. The average job in greater Houston pays 12 percent less than the average job in greater New York; the average job in greater Atlanta pays 22 percent less.

So why are people moving to these relatively low-wage areas? Because living there is cheaper, basically because of housing. According to the Bureau of Economic Analysis, rents (including the equivalent rent involved in buying a house) in metropolitan New York are about 60 percent higher than in Houston, 70 percent higher than in Atlanta.

In other words, what the facts really suggest is that Americans are being pushed out of the Northeast (and, more recently, California) by high housing costs rather than pulled out by superior economic performance in the Sunbelt.

But why are housing prices in New York or California so high? Population density and geography are part of the answer. For example, Los Angeles, which pioneered the kind of sprawl now epitomized by Atlanta, has run out of room and become a surprisingly dense metropolis. However, as Harvard’s Edward Glaeser and others have emphasized, high housing prices in slow-growing states also owe a lot to policies that sharply limit construction. Limits on building height in the cities, zoning that blocks denser development in the suburbs and other policies constrict housing on both coasts; meanwhile, looser regulation in the South has kept the supply of housing elastic and the cost of living low.

In short, restrictions on population growth in productive places – i.e. large, relatively dense cities – force people to move to less productive places, and earn less. A recent working paper by American economists Chang-Tai Hsieh and Enrico Moretti put a figure on the economic cost of these restrictions: housing supply restrictions in high-productivity cities like New York and San Francisco over the last three decades has lowered the US’s GDP by an estimated 10-14%. That’s absolutely huge.

This is agglomeration at work – or rather, “deglomeration”. The economic literature has identified a strong relationship between the scale and density of cities and the productivity of firms that locate within them. But rather than recognising and taking advantage of this phenomenon – for example, by allowing more office space to be built in San Francisco for the expanding tech industry and more apartments to be built in Silicon Valley for urbanophile tech workers – some American cities have chosen to reject it.

So could the same thing happen in New Zealand? In a word, yes. It’s definitely a risk and one that we should be careful to avoid.

First, the facts. Firms based in Auckland are more productive than firms elsewhere in New Zealand, after controlling for industry and firm characteristics. And firms in the Auckland city centre are even more productive. The table below, compiled from data in Dave Mare’s great 2008 paper on the topic (“Labour productivity in Auckland firms”), shows that there is a substantial “productivity premium” in Auckland:

AreaEmployment density (2006 jobs/sq km)Value added per worker (2006)Productivity relative to non-Auckland
New Zealand excl. Auckland6.7$45,550
Auckland urbanised area518$68,435+51%
Auckland city centre13,584$106,873+139%

I just want to say a brief word about the “productivity premium” of the city centre. A lot of people say that New Zealand’s an agricultural exporter, earning its way off the sheep’s back (or, more recently, the cow’s teats), and that downtown jobs are just an unproductive drain on farm revenues. However, service exports from urban businesses play an underappreciated role in NZ’s international trade picture. The two companies I’ve worked for in the Auckland city centre are both exporters of professional services. I’ve personally exported to Hong Kong, Australia, Fiji, and Papua New Guinea; my colleagues have also worked in Indonesia, Uganda, Canada, Saudi Arabia, the UK, and a whole host of other places. If we want to grow our exports in a smarter way, we need to encourage this sort of thing rather than deny that it’s happening.

As a result of the urban productivity premium, policies that stifle the growth of Auckland are likely to put a drag on New Zealand’s economy. In the US, a reluctance to let productive cities grow caused people to move to lower-wage cities like Phoenix, Houston, and Atlanta. Down here, the results are likely to be even worse, as New Zealanders are much more internationally mobile than Americans. If we put a lid on Auckland’s growth, some people will go to Hamilton or Tauranga instead, but many others will head to Australia or the UK.

Fortunately, we’ve got a much better option: Improve New Zealand’s cities rather than trying to smother them. Moreover, we’ve got some great opportunities to do just that. In Auckland, that means:

  • Making cost-effective investments in more transport choices, including better walking and cycling
  • Building the City Rail Link to unlock access to the city centre and allow firms to grow and benefit from the knowledge spillovers floating around
  • Preserving and improving our parks and public spaces – Waterfront Auckland is a truly world-class waterfront development agency and we should build on its success
  • And, as Krugman and Glaeser point out, it’s absolutely vital that we allow dwellings to be built in the places where people want to live – which increasingly means building more in places like Ponsonby and Mount Eden that are close to jobs and amenities.

We shouldn’t limit our vision to Auckland, either. While Auckland’s larger and faster-growing than Christchurch or Wellington, those cities also support agglomeration economies and interesting urban lifestyles. Investments in better cities will pay off there as well. Some of the same policies can also make small cities more liveable – although Hamilton will probably never need a CRL, look at the difference that NZTA’s Model Cycling Communities programme has made to Hastings and New Plymouth.

Why don’t we get on with it then?

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8 comments

  1. Auckland,IMO has outgrown it’s usefulness,there are far more negatives to staying in ,moving to Auckland,than elsewhere in NZ,As a non Aucklander,(the majority),l have seen two of my offspring,opt to move, for better lifestyle options. I certainly wouldn’t, want to retire here,as there are far “better retirement options elsewhere in NZ. When a major metropolis cannot provide for service workers,it needs a rethink.

    1. Think of Auckland as being like the Greater Auckland comment section: lots of activity, which brings with it a lot of nonsense. Is there a greater *proportion* of nonsense than in the internet generally? Probably not. But this comment section is all in one place, so it’s easy to point your finger at it and say “herein lies the problem.”

  2. I disagree with this all-or-nothing argument about growth in Auckland versus the potential for growth elsewhere in New Zealand. Through my decades of involvement in Local Government NZ I have spoken with mayors of numerous smaller centres who lament the constant loss of their younger talent drawn to Auckland. To me and many others it is not all about Auckland versus the rest but rather having a reasonable balance so that smaller towns and cities remain viable. Auckland’s problem is that constant growth requires constant investment in infrastructure of all kinds (parks and libraries as well as transport and pipes, etc.) which leaves us forever running hard just to remain still), whereas if Auckland grew a bit more slowly we could better keep pace with the required investment. Conversely, if our rural and small-town cousins had a slightly larger share of growth they could retain more of their people. I have been criticised many times over the years for advocating this principle but still hold true to it.

    1. I agree in part; there needs to be a balance. In a way Peter is right because better regulations would have helped to put growth in the right places. But better people friendly planning and investment was needed, too. Together, these measures needed to:

      – prevent sprawl, require development to be regenerative, and enable intensification in all towns and cities. Towns can and should be walkable, well maintained, and be compact, and not have hollowed out centres.
      – deliver sustainable active and public transport to the entire country.

      With these systems in place, growth would have been more balanced without ‘where’ having to be ‘decided’ in advance.

      Auckland has been running to keep still because of sprawl, not because of growth, as the Strong Towns advocacy explains so well. It is cheaper to maintain community facilities and infrastructure when there are more people and ratepayers per facility or plant or km of infrastructure.

      It is NIMBYism preventing intensification that has impoverished or city

    2. The way you seem to be pitching it (and saying anecdotes from mayors etc) is extremely negative. Ie we can suppress Auckland’s growth and that will induce growth in the rest of the country, and entrap people in their small towns so that petty local governments and be slightly more relevant. That is an absolutely dire think to try do.

      The reason young talent is moving to Auckland is because it is better for them. They choose to move (and take the negatives that come with the city ) because it’s net better for them. Individuals are obviously in the best position to decide this for themselves, not micro management from government. Trying to control this would be straight up active denial of people improving their lives. “sorry young professional, you have to stay in your small town. You’ll have less opportunities, you’ll have lower earning potential, less access to services (even uni), less exposure to ideas. You don’t get to do what other people in this country will get to do, you were born in the wrong area.”

      The major city in any country has a moral obligation to allow anyone in that country to move there and share (and create) its wealth and economic prosperity.

      The methods of actually implementing this kind of top-down negatively implemented growth distribution stuff are even more dire to think about:
      1) Supress home building -> continue the spike in home prices in certain areas. Further degrade living standards and push more and more overcrowding. People are already proven to pay more to live in Auckland for lower housing standards. They already have the option to move elsewhere in the country, yet live in garages / caravans / mouldy villas. This would only escalate.
      2) Subsidise various businesses in regions, and penalise businesses for concentrating in the most efficient place. Enormous straight economic loss that could have otherwise been spent on infra / living standards. Huge net drag on the country.
      3) Straight up internally controlled migration. Apply to move to Auckland, wait years for a home to live in on some list. Remove the ability for people to move around and experience / work on different things for shorter times.

      In the sense that small towns could improve themselves and grow then sure I agree that they could share in the total growth and it would be more ideal if they did. Unfortunately this is (in my experience) almost entirely local governments shoving sticks in their own bicycle spokes. I am in the position as a young professional to be moving out of Auckland, having moved here from Southland 5 years ago to go to uni and start a career. I’m headed back to southland. This town that I intend to move to has spent the last 4 / (5?) decades building 3 to 5 bedroom mc-mansions on 800+ square meter lots. A large part of this is zoning and development requirements, it’s practically impossible to go out and buy a small amount of land for a little house. Let alone purchase a townhouse or (gasp) apartment. I don’t want a 3+ bedroom home, only needing a 1 or 2 bedroom place. These are the kinds of decisions that LGs have made that chase any young couple or single person out. Either I face sharing with multiple other people again, might as well be in Auckland then, or overpay for far more house than I need. Luckily I can afford to overcome these challenges because of the opportunities (money) that Auckland gave me. But life could have been made far, far, far easier with competent LG in southland, and in Auckland. I’m only leaving so early because of the failures of the city to provide reasonable housing and transport making my life harder than it has to be.

      /rant

  3. “housing supply restrictions in high-productivity cities like New York and San Francisco over the last three decades has lowered the US’s GDP by an estimated 10-14%. That’s absolutely huge.”

    US real house prices relative to income arent even very high whereas NZ’s have been near or at the top. NZ’s lowered GDP must be of the order of 25%+. Insane.

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