Taking the Core Out of the Apple

Paul Krugman made similar points about new York:

Cities Shed Middle Class, and Are Richer and Poorer for It, by Janny Scott, NY Times:  Some big American cities are flourishing as at no time in recent memory. Places like New York and San Francisco appear to be richer and more dazzling than ever: crime remains low, new arrivals pour in, neighborhoods have risen from the dead. ... But middle-class city dwellers across the country are being squeezed.

[T]hey are ... a casualty of high housing costs and the thinning out of the country’s once broad economic middle. The percentage of middle-income neighborhoods in metropolitan areas like Los Angeles, Chicago and Washington has dropped since 1970, according to a recent Brookings Institution report. The percentage of higher-income neighborhoods in many places has gone up. ...

Does it matter if there is less room for a middle class? ... Obviously, cities benefit economically from the presence of the rich. Tax revenues go up when the rich pour into what some economists now call “superstar cities,” places like New York, San Francisco, San Diego, Boston and Washington that attract highly skilled people but have limits on the ability to build housing. ...

Edward L. Glaeser, a Harvard economist who studied 300 large cities with a range of levels of income inequality in the 1960’s and 1970’s, says he found little evidence that those levels later affected the growth of housing prices, income or population there.

Of course, cities need police officers, firefighters, teachers. But as long as they can get the labor they need from somewhere nearby, ... middle-class shrinkage may not hurt. In Southern California, developers import construction workers from Las Vegas and put them up in hotels; costs go up but rich clients can pay. ... Pay for essential workers like plumbers and cabdrivers will tend to go up...

Professor Glaeser said: “There’s no obvious smoking gun saying cities will be substantially worse off. There’s a whole lot of America that does a very good job of taking care of the middle class. The great sprawling edge cities of the American hinterland provide remarkably cheap housing, fast commutes, decent public services and incredibly cheap products available in big box stores. As a New Yorker, I understand the view that exile from New York is consignment to hell; but that’s not accurate. The majority of middle-class people that have moved out have presumably found themselves better lives out there.”

But sociologists and many economists believe that there can be non-economic consequences for cities that lose a lot of middle-income residents. The disappearance of middle-income neighborhoods can limit opportunities for upward mobility... It becomes harder for lower-income homeowners to move up the property ladder, buy into safer neighborhoods, send their children to better schools and even make the kinds of personal contacts that can be a route to better jobs. ...

With a dwindling middle class, rich and poor become more separate. Alan Berube, an author of the Brookings study, said a two-tiered marketplace can develop: Whole Foods for the upper classes, bodegas for the lower, with no competition from stores courting the middle. “If the two models are check cashers on the one hand and major national financial institutions on the other, who’s thinking about how to hold down costs for the basic consumer?” he asked.

School systems may suffer, too. While some upper-middle-class families rely on the public schools, many that can afford private-school education opt out. ...

Politics can become polarized without the moderating force of an engaged middle, sociologists and economists said. And while cities can import middle-level workers, there is a cost in productivity, family time and other intangibles. “People have a stake in the place that they’re living in,” said Chris Mayer, a professor at Columbia Business School. “If you have a police and firefighting force saving their city as opposed to somebody else’s city, it makes a difference. In the same sense, local shopkeepers just seem to be better...’ ”

“This trend toward living and interacting with people who are like you is intensifying a lot,” said Professor Gyourko, who lives in the affluent suburb of Swarthmore, Pa. “I do not meet the full range of incomes and social classes within my neighborhood. Well, think about what happens if metropolitan areas like New York, San Francisco and the like turn into my suburb. You’ll have even less interaction. The most interesting and potentially foreboding implication of this sorting is that it changes the way we view life.”

Update: From the LA Times:

It Costs More in Compton, by Matt Fellowes, LA Times: When you think of Compton, the high cost of living probably doesn't come to mind. But it should. Turns out that being poor is expensive. Everything from a loaf of bread to a mortgage costs more in Hub City than in more plush areas of Los Angeles, ... even though nearly one out of every three people in Compton lives below the poverty line.

Take a drive down Compton Boulevard and you can see some of these higher prices in storefront windows. But you won't see many banks. ... Instead, it has hundreds of alternative financial services — mostly absent from wealthy areas of Los Angeles — that charge jaw-dropping prices. Cashing checks, for instance, costs 3% or more of the check's value. ... It's not just basic banking products that cost more in Compton, though. Instead of large, modern grocery stores, there are more than 200 tiny bodegas, which generally charge higher prices.

And insurance is more expensive too. Insuring a car in Compton cost $400 more every year, on average, than in wealthier places. But probably the priciest thing to buy in Compton these days is a house. That's ironic because even though the median home value is 40% cheaper than the Los Angeles county median, Compton home-buyers pay some of the steepest prices for mortgages. In fact, more than 20% of recent home-buyers bought what the Federal Reserve defines as "high-cost" mortgages (usually at least 3 percentage points above the prime rate). Compare that to Manhattan Beach, where about 3% of the mortgages were considered "high cost." The counterintuitive bottom line is that living in Compton often means paying hundreds, sometimes thousands of dollars more than better-off neighbors for basic necessities.

Outrage at the "gouging" of poor consumers would, in some cases, be appropriate. But higher prices also reflect the real higher costs that businesses face in Compton. For instance, Compton residents have less money to deposit in interest-bearing accounts (the ones banks make money on). That means banks cannot profitably (and responsibly) operate branches in some of these neighborhoods. Similarly, lower-income families miss more bill payments than higher-income families, which means they look like riskier customers for loans and insurance. The costs of those higher risks are passed on in the form of higher prices.

At the same time, numerous surveys by the Federal Reserve, the Government Accountability Office and the Consumer Federation of America find that lower-income consumers do less comparative shopping than higher-income consumers, opening the door for unscrupulous businesses.

To bring down these higher prices, leaders cannot look for a silver bullet. Mainstream businesses need to be given incentives to move into lower-income neighborhoods, unscrupulous businesses need to be weeded out of the marketplace and consumers need to be given the education necessary to make savvy financial decisions. ...