August 12, 2014

The Return of America’s Cities: Economic Rebound and the Future of America’s Urban Centers

By: Richard Voith and Susan Wachter
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Cities are back. For the first time in decades, and, for three consecutive years, cities in the United States are growing faster than their surrounding suburbs. The innovation occurring in cities is critical to the ongoing economic recovery. Nonetheless, legacy problems stemming from the historical decline of America’s cities in the second half of the 20th century, coupled with obsolete governance, persist. Cities will likely continue on their new path and prosper in the coming years, but the failure to address the legacy issues as well as the new challenges of affordability in today’s prosperous cities will be costly in the long run for cities, their surrounding suburbs, and the U.S. economy overall. 

From the 1960s to the turn of the 21st century, the U.S. urban landscape was plagued by decline, with former city residents moving to surrounding communities and creating new suburbs. Declines in transportation costs stemming from automotive and later telecommunication and internet technology, along with the availability of single-family housing that was accessible and affordable to middle income households (although not lower income households), made suburbs an appealing option for those who could afford it.  At the same time, the prospect of declining asset values, racial strife, and social disarray fueled further urban decline. Individuals with higher income were able to move into high amenity suburbs, resulting in the concentration of lower income residents in central cities. Jobs followed people out of the city. Through 2000, two out of three of the largest cities were losing population. The Great Recession reinforced these trends hitting lower income areas of cities hard.

Nonetheless, after decades of relentless decentralization of urban centers in the U.S., an urban transformation is occurring:  Moving from an industrial to a “knowledge-based” economy, cities are reinventing themselves and becoming magnets for human capital and hubs for innovation. The close proximity offered by dense urban centers enables faster exchange of information and development of new technologies. And at the same time, as has been widely noted, downtowns that offer consumption amenities sought after by highly-skilled, high-income workers, such as restaurants, museums and concerts, are resurgent. This new demand is coupled with the near complete build out of many suburbs, increased transportation costs from congestion and increased development costs in suburban locations. These “push” forces of recentralization are contributing to the repopulation of cities. 

Demographic changes over the next decades will reinforce the growth of urban areas, as echo boomers entering their household formation age, as well as aging baby boomers, and recent immigrants increasingly choose cities. The return to economic health of cities is a win-win for cities and suburbs. Cities’ return to growth will take the pressure off of suburban growth, allowing suburban areas to grow in a more sustainable way. Additionally, cities will be better able to provide urban amenities to their suburban neighbors.

But not all cities and certainly not all urban neighborhoods are participating in this new urban prosperity and the prosperity itself results in new challenges for urban affordable housing. The conundrum of successful turnaround is less affordable housing.  Moreover, fiscal challenges, evident now in Detroit and other declining cities, will grow more pervasive and stronger in coming decades with the aging of the urban public labor force. Central cities will need to grapple with unfunded pension liabilities at the same time as they face the need to improve struggling school systems. Cities have to develop the governance and fiscal structure to provide good schools, affordable housing, quality infrastructure, and amenities while establishing a sound fiscal basis that will retain existing residents in the long-run and attract new ones across various income groups, education levels, and cultural backgrounds. Dysfunctional schools and unfunded pensions are largely the legacy of the depopulation and failed policies of the second half of the 20th century. Yet failure to address these issues today will threaten the viability of cities in the future. One thing empirical literature has surely established is that cities which continue to flourish are those that are able to attract and keep high-skill workers. Quality education and services, and sound finances are important elements in the attractiveness of cities.

What’s more, cities and suburbs are in it together. Metropolitan areas, while comprised of many communities, function largely as a single economic area; yet regional public organizations typically have little power to address regional issues. Now that the prospects for economic growth of cities have improved, it is time to address ongoing urban challenges: to fix big city schools, reform pension systems, and invest in needed regional infrastructure, for the nation’s urban future.

Richard Voith is a Penn IUR Faculty Fellow, president and principal at Econsult Solutions, and an adjunct professor at the Wharton School at the University of Pennsylvania. Susan Wachter, co-director of Penn IUR, is Sussman Professor and Professor of Real Estate and Finance at The Wharton School of the University of Pennsylvania. She is the co-editor of the recently released Penn Press volume, "Revitalizing American Cities."

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