Gentrification and Its Discontents

Just as improvements in air quality can have unintended consequences, a stronger labor market can sometimes have a dark side. Higher real estate prices can displace the poor, significantly altering the mix of residents in a community. Eventually these changes can affect a city’s very identity. For example, think of Boston in the 1970s. Its economy was in terrible condition, bogged down by an old manufacturing base and high unemployment. But over the past three decades it has flourished, thanks to jobs in innovation and finance. The transformation was not just economic but also demographic and cultural. It resulted in a profound remaking of the social texture of the city, its urban form, and its quality of life. While many of these changes were for the better, there were also significant social costs. Many longtime residents ended up being priced out of their own neighborhoods. And even those who stayed were not spared, as the character of some communities shifted in sudden and sometimes uncomfortable ways. Those who moved to Boston between 1990 and 2010 tended to have college degrees and professional occupations. Those who moved out tended to have low levels of schooling and nonprofessional jobs. The lifestyles, values, and social identities of the two groups could not have been more different.

The debate about the costs of local economic development can get acrimonious. Local activists in cities such as Cambridge, Berkeley, Washington, D.C., and Santa Monica love to hate this sort of economic change, arguing that it should be stopped at any cost because it ends up hurting communities. While it is clear that there are costs, it is useful to clarify who bears them and what the best way to minimize them is.

 As we have seen, original homeowners benefit from gentrification. It is important to recognize that this group can be socially quite distinct from the gentrifiers—the college-educated professionals, the innovators, the entrepreneurs. Almost by definition, a gentrifying neighborhood is one in which many of the original residents, including the property owners, are not particularly wealthy. Take the Mission District, the neighborhood of San Francisco where I live. It is one of the areas of the city that has been most affected by the influx of college-educated high-tech professionals. Since it is close to the freeway, many workers in Silicon Valley who prefer an urban lifestyle end up here. Remarkably, the people who are benefiting most from this influx of high-tech workers are the largely Latino homeowners who have been selling their property to the newcomers—people like the Mexican American couple who owned a nice two-story Victorian near my house that had been in the family for decades. They decided to sell it for $950,000 and move to the suburbs, where they could buy a similar-sized house for half the price and live off the balance.

What about all the other residents, people who never had any property to begin with? In many large urban areas, most residents are renters and are therefore hit hard by an increase in cost of living. This is especially painful for the elderly and those with low incomes who end up relinquishing their houses, memories, neighbors, and social networks—in a word, much of their lives—and have to start from scratch somewhere else. What should we do to protect them from sudden displacement?

The typical reaction in many communities is stringent land-use regulation designed to slow down socioeconomic change. These laws tend to come in two flavors. The first focuses on commercial real estate and seeks to moderate gentrification by limiting the number of new office buildings. One of the most extreme cases is the city of Berkeley, which in an effort to protect “good blue-collar jobs” has effectively stunted high-tech growth in the entire west side of the city. Large parts of eastern San Francisco are also slated for light manufacturing in the vain hope that the industry will bounce back. The second kind focuses on residential real estate and seeks to limit new market-rate construction, particularly in transforming neighborhoods. In effect, the first kind seeks to limit the inflow of new employers in the innovation sector, while the second seeks to limit the inflow of new residents. Both aim to reduce private investment with the intent of preserving the existing economic and cultural demographics.

 In my view, both approaches are misguided and unlikely to be effective at managing gentrification. Constraining new high-tech office buildings amounts to reducing the number of jobs that a city can create, because it is quite unlikely that factories will open in the urban core of cities like San Francisco and Santa Monica. Because of the multiplier and spillover effects, this policy ends up hurting the very people it is intended to help. Indeed, the most important lesson of the multiplier and spillover effects is that unskilled workers in a city have much to gain from the fortunes of the more skilled workers who live next door, as their very livelihoods often depend on sustained growth in the innovation sector: more skilled residents in a city mean more and better jobs for the less skilled. The policy also hurts nonresidents. As we have seen, innovation hubs are among the most productive areas in the United States, and this higher productivity attracts workers from everywhere in the nation. This level of productivity cannot be easily replicated elsewhere, because of the strong forces of agglomeration. Thus, curtailing job creation in America’s innovation hubs is apt to result in a net job loss for the country. It is a terrible waste of resources—one that makes our unemployment rate worse.

 Curtailing new residential developments also makes little sense. It is the equivalent of creating jobs in a city but then denying those jobs to any applicant who comes from somewhere else. Moreover, it is likely to accelerate the displacement of poor residents, not to slow it down. The reason is quite simple: rationing new housing in a city invariably results in even higher real estate prices. It makes intuitive sense: if there is high demand for housing in a city, reducing supply can only raise the price. In a series of recent studies, the urban economist Ed Glaeser and various collaborators have uncovered clear evidence that cities that adopt more restrictive residential development policies invariably end up with higher housing costs relative to wage levels. By contrast, cities that are proactive in allowing urban housing development end up with lower housing costs.

The real solution to the problem of gentrification is exactly the opposite of restricting new residential development. Instead of limiting new housing, innovation hubs should encourage it. If managed correctly through smart growth policies, more housing does not mean more sprawl and congestion, especially if it is concentrated in the urban core and is accompanied by an expansion of the public transit system. These kinds of progressive urban development policies can significantly mitigate the negative effects of gentrification while promoting the serendipitous urban social interactions that foster knowledge spillovers and innovation.

A good example is Seattle. When economic conditions there began to improve, thanks to the expansion of high-tech jobs, the city decided to increase the number of new housing units available to families by allowing a significant amount of infill urban development—the type of development that focuses on making an area denser by renovating existing buildings and developing empty lots, thus avoiding sprawl. This increase in supply kept real estate prices in check. While there clearly were price increases, they were lower than those of cities like San Francisco and Boston, which aggressively limit new housing. Essentially, this acted like a redistribution mechanism that favored renters over homeowners. It meant that a larger share of the wealth created by the rise of the local high-tech sector went to the former group instead of the latter.

 Seattle was also fortunate to have farsighted business leaders. In contrast to those in most other American cities, major retailers in Seattle decided to stay downtown. The Nordstrom family, together with the other department stores at the time—most important, Frederick & Nelson—wanted to head off the “exodus to the mall” phenomenon. This decision encouraged urban planners to embrace a retail-based urban center, an unusual move for American cities. Things would be very different today if Nordstrom had fled. The simultaneous growth of high-tech jobs in and around the downtown area and high-density housing in the city’s walkable neighborhoods reversed middle-class flight from the city center and ultimately resulted in a lower crime rate, vibrant cultural offerings, and new restaurants. As new residents flocked to the urban core, public schools experienced noticeable improvements. Test scores increased, and not just for those children who had well-educated parents but also for children whose parents were less well educated and who had non-high-tech jobs.

In the end, from the point of view of a city, gentrification is a good problem to have, because it is a sign of economic success and job growth. Dozens of decaying cities would love to have this problem. At the same time, gentrification has serious social consequences. The solution is not to discourage local job creation in the innovation sector, hoping that manufacturing jobs will magically return. The solution is to manage the process of economic growth in smart ways, to minimize the negative consequences for the weakest residents and maximize the economic benefits for all.