Recently, the Economist published an article that highlights a relatively unexplored explanation for the difference in per-person GDP between the US and Western Europe nations.
Differences in metropolitan populations may help explain gaps in productivity and incomes. Western Europe’s per-person GDP is 72% of America’s, on a purchasing-power-parity basis. A recent study by the McKinsey Global Institute, the consultancy’s research arm, reckons that some three-quarters of this gap can be chalked up to Europe’s relatively diminutive cities. More Americans than Europeans live in big cities: there is a particular divergence in the size of each region’s “middleweight” cities, those that teem just a little less than the likes of New York and Paris (see chart). And the premium earned by Americans in large cities relative to those in the countryside is larger than that earned by urban Europeans.
The article mentions regulatory impediments to growth that should be familiar to the readers of this blog: tight zoning rules that limit housing supply, in addition to language and cultural barriers that have substantially limited international and even regional migration within national borders. While our regulatory impediments are significantly fewer and smaller than those in Europe, it’s easy to imagine that an even more free system here could increase our own prosperity. Just as $2,000 a month average rents are keeping people from moving to the Bay Area and making themselves and our economy better off, $1500 a month average rents in the city and $1,142 a month average rents in the Greater Seattle Area are keeping Seattle residents from enjoying greater prosperity and local government agencies from enjoying a larger tax base.
It’s easy to look at Europe and conclude “if only people from Spain could move to Germany, the euro-zone economy would be better off”. But the same is true here.