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     Jul 2, '13


THE BEAR'S LAIR
Giant cities not the future
By Martin Hutchinson

Once interest rates return to normal levels, much urban real estate will become completely unaffordable as capital gains will turn into losses.

China is reportedly planning a city of 250 million people within the next 10 years, hoping it will spur economic growth. The United Nations' population estimates for 2100 have Lagos, Nigeria with a population of about 150 million in that year. The Financial Times recently had a snooty editorial asserting that the 21st century will be "the century of the city." Needless to say, all this 1950s Marxist determinist utopianism raised my hackles, so I thought it worth exploring whether the 21st century really will be the



"century of the city" and if so, how we can ensure that this unpleasant development would be reversed in the 22nd.

Cities have always had a certain popularity. John Milton in L'Allegro (about 1630) wrote:
Tower'd cities please us then,
And the busy hum of men ...
We should however be aware that Milton's understanding of cities differed from our own. At the time of L'Allegro he had not been outside England, so his experience of cities was limited to London, in which he grew up, which in 1630 had a population of around 250,000. The next largest cities in England would have been Norwich and Bristol, each with a population of about 20,000. While London would just about qualify as a city by modern standards, though its center was hardly Times Square, Norwich would barely have managed a "busy hum" even on Market Day. Of other pre-industrial cities, ancient Rome may have managed a population of 1 million at its peak, though Rome was around a tenth of that size when Milton saw it in 1638.

London itself had a population of 959,000 at the 1801 census, but modern cities of multi-million people are a product of the Industrial Revolution and the pathological increase in global population to which it led. With global population projected to multiply tenfold by 2100, it's not surprising that some clumping would occur. London itself suffered its clumping early on: its population peaked at 8.6 million in 1939, around nine times its 1801 figure, a considerably greater increase than the approximate doubling in world population to that date.

The move from agriculture to manufacturing also caused cities to grow, although as I shall argue later that growth will not necessarily continue now the global economy has become largely devoted to services. London illustrates this: since 1939 it has lost manufacturing steadily and its population declined by almost 20%, to 6.8 million, between 1939 and 1991. Since then it has rebounded (though still below its 1939 figure) because of Britain's economically damaging, politically driven immigration policy, which has both introduced to London a vast rootless proletariat and driven its house prices to infinity.

At this point therefore the further agglomeration of cities depends crucially on global population. In poor countries, where population is still increasing by 1.5% or 2% annually and manufacturing is growing rapidly, massive further urbanization is inevitable. Conversely in Japan, where population has begun to decline and the country maintains an admirable reluctance to dilute its estimable culture with large supplies of cheap foreign labor, urbanization is even declining. For example the Tokyo subway system is beginning to phase out the "pushers" squeezing in additional commuters, as its peak hour usage declines from 200% of capacity towards 150%.

If global population soars through 10 billion and continues toward 20 billion, we will all be living in gigantic, polluted, diseased slums in the 22nd century - the vision of a Lagos with a population of 150 million will be repeated worldwide. If, to take the other extreme, the post-Industrial Revolution population blip fully reverses and we return to a global population around 1 billion, then we may achieve a Nirvana in which we all live like Henry Fielding's Squires Allworthy and Western, in country houses surrounded by rolling parkland, albeit with robots instead of menials to handle the domestic chores. For the remainder of this piece, I shall assume the more optimistic mainstream current population projections are correct, with global population peaking a little above 9 billion in mid-century and beginning a modest decline thereafter.

Beyond population, other current trends have exacerbated the move to cities. Bernankeism - ultra-low interest rates worldwide - for example encourages real-estate speculation and reduces the deadweight cost to living standards of excessive urban real estate prices. It also encourages through leverage the growth of hedge fund and"Russian mafia" money which itself pushes up real estate costs and establishes ghettos of the vulgar ultra-rich in the largest urban centers. The comfort is that once Bernankeism has exploded, as it is bound to do, and we have returned to modestly positive real interest rates, these effects should reverse.

In China, an inevitable urbanization as the rural poor have moved off the land has been encouraged by the regime itself. Fueled by cheap money from the state-controlled banking system, the regime has deliberately built out major urban centers, with massive collections of high-rise apartment blocks and municipal office facilities. In some of these, the population has arrived to fill the facilities, in others it has not, so that cities like Dongsheng that were meant to house 1 million people are left as decaying ghost towns with populations of maybe 50,000 settled among the ruins. Ancient Rome achieved the same effect, but over the 500 years or so until the 8th century; China is managing it in ten.

Current plans for a city of 250 million to house the remaining migrants from China's back country are, one hopes, merely a dystopian fantasy that will be quelled by the banking collapse that appears to be advancing inexorably on the Middle Kingdom. Meanwhile the Foxconn factory of 300,000 employees, itself a major city by Milton's standards, is proving a white elephant as demand for pointless gadgetry begins to decline.

Urbanization has a strong political bias. In most countries and eras, cities are the refuge of the avant-garde, cosmopolitanism and the Left, while rural areas and to a lesser extent suburbs are the homes of traditional values and national ideals. Consequently the Left and the media (not quite synonymous, but the media is urban and culturally Left even when it is not politically so) celebrate urbanization and portray it as both benign and inevitable. While striving to remain relatively apolitical, one can at least attempt to correct for this cognitive bias. In many respects, especially in the Third World mega-cities such as Lagos, Sao Paulo and Jakarta, the urban environment is a pretty good example of dystopia.

There are a number of technological factors which make me think that in spite of the Left's wishes to dragoon us all into communal living in socially-owned apartment blocks, the trend to cities is not irreversible.

First, there's modern communications, the Internet and cellphones. I am writing this from the modest "City" (35,000 population) of Poughkeepsie, which I would not have been able to do 40 years ago because of the need for copy to be published physically. (Twenty years ago it would have been possible but very kludgy.) Even in emerging markets, cellphones are now all but universal; in Nigeria, for example there are 160 million cellphones in a population of 165 million people. This makes an enormous difference to rural societies through their connectivity to international markets.

A generation ago, a rural villager would have had no idea what prices his crop would fetch on the international market, and no ability to explore employment opportunities without physically moving to a big city. That explains the growth of Lagos - at that time the one location in Nigeria that was properly connected to international communications. Today, employment and business opportunities can be accessed over the Internet, and even villagers with only a simple non-smart cellphone can take advantage of business opportunities in distant locations. Unless you want to work for Foxconn, it's no longer necessary to move to the big city.

Second, occupations have changed, especially in wealthy countries. Foxconn's factory of 300,000 employees is now an anomaly; even among the major automobile companies there are no employee agglomerations like Ford's River Rouge complex, employing 100,000 people on its completion in 1928 - today Ford employs about 6,000 there although other companies have facilities also. While service sector companies can grow to employ huge numbers of staff, they tend to be more dispersed - Google's Googleplex in Mountain View, CA, for example contains only some 10,000 employees. With facilities more dispersed, the need for city-sized agglomerations of people has diminished.

Third, transportation is about to be revolutionized, more fundamentally initially in rich countries than poor ones. The advent of the self-driving car will make it far more tolerable to undertake lengthy commutes between"spokes" of a large conurbation, rather than going to the hub, as is necessary on a railway or even a bus system. Currently, a 45-minute automobile commute is highly stressful and detracts massively from the commuter's productivity at work. With robots doing the driving that will no longer be the case; the commuter will be able to read the newspaper, catch up on his e-mail or play video games while the robots undertake the stress of driving.

The result will be that cities will no longer need to be like 19th-century London, in which commuters had to live on a railway line or within walking distance of their office/factory. Instead an office 40 miles from the center of a city will be staffed by people from the city itself (if young and affluent) from nearby suburbs (for the less affluent and those with families) and from cottages or mansions deep in the country (for older workers who prefer solitude to stress). With facilities in general spread more evenly, offices within the city itself will find themselves at a disadvantage because journeys into the city, narrowing into a small funnel of congestion, will be more subject to delay than journeys between ex-urban locations.

The final factor promoting de-urbanization will be real estate costs. The last 20 years of ultra-low interest rates have caused the costs of residential property in big cities to soar. This has already taken city housing out of reach of the young and modestly paid, but for those already on the"housing ladder" it has subsidized their lifestyle through massive capital gains that mortgage re-financings can turn into cash. Once interest rates return to normal levels much urban real estate will become completely unaffordable, as capital gains will turn into losses and thus no longer available to subsidize higher mortgage costs. That, together with an equivalent rise in office rents as landlords adjust for higher interest rates, will give cities a big competitive disadvantage compared to their outer suburbs and rural areas.

The move to cities is not inevitable. With two technological factors tending to oppose it, one already past and aimed at poor countries and one in the near future and aimed at rich countries - employment factors no longer requiring it and economics giving cities a competitive disadvantage - their magnetism is likely to reduce sharply over the next couple of decades. In wealthy countries at least they will suffer a loss of population and status similar to London in 1939-91. Suburban areas, small towns and the deep country will all benefit from this, both economically and socially - and the world will be a happier place.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.

(Republished with permission from PrudentBear.com. Copyright 2005-13 David W Tice & Associates.)





 

 

 
 



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