Who is the "Superstar" City?

Austin. It's Austin.

I frequently push back against the “Superstar City” idea. Today, I’m going to just walk through some basic numbers on the topic.

The core of the basic Superstar idea is that some cities have high average incomes, which must come from higher productivity, and so households bid up the rents and prices of local real estate to get access to that productivity.

Figure 1 shows per capita income in Austin, Dallas, Los Angeles, New York, Detroit, San Francisco, and the US. Income has been elevated in New York for years. It has been elevated and growing in San Francisco. And, in the other metros, income growth has been relatively similar, and incomes today fall in a relatively tight range somewhat below New York and San Francisco. Though, if you look close, incomes in Los Angeles have risen a bit more than normal while in Detroit they have lagged.

Figure 1 - Per Capita Personal Income

Figure 2 estimates the change in the average home price relative to per capita incomes in each of these metros, indexed to 1980. Along with their above-average income trends, New York, Los Angeles, and San Francisco have had positive trends in relative home values. That draws attention to them as “superstar cities”. Would “superstar cities” be a big topic if their housing prices weren’t so high? I don’t think so.

Figure 2 - Home Price/Income (see Figure 1 for legend)

One criticism I have with this approach is that I think, since we don’t have great methods for measuring consumer surplus - after all, it’s the value that we don’t have to put a price on - there isn’t enough of a distinction made between producer surplus and consumer surplus on this topic. I don’t think it is so much a boost in urban productivity that has made the “superstar cities” noticeable. It is a boost in urban rent-seeking so that productivity is flowing more to producer surplus (higher wages and profits flowing ultimately to real estate owners) than to consumer surplus (lower prices for the goods and services that are being more efficiently produced).

One way to look at this is with GDP growth. How much has the total GDP grown in each metro over time? FRED has this data from 2000. By this measure, there is one “superstar”, and that is Austin. San Francisco and Dallas are “stars”. Los Angeles and New York are average, and Detroit is struggling.

Figure 3 - GDP Over Time (2000 = 100)

Of course, the difference between the changes in per capita income and total GDP growth, as shown in Figure 4, is population growth. Since 2000, Austin has grown by nearly 90%, Dallas by 50%, and the others are all below the US average, which is just under 20%.

Figure 4 - Population Over Time

And, for population to grow, you need homes. Figure 5 shows annual new housing permits per capita x 1,000 for these cities. The difference, more or less, matches the rate of change in population growth.

Figure 5 - New Housing Permits per capita (see Figure 4 for legend)

If we could shop for cities we would like to share an economy with, which city would you consider a “superstar”? A city that had double the average GDP growth? Or a city that had average GDP growth, and that shared the income generated by that GDP in an increasingly limited and unequal way? Is there any question?

Figure 6 compares real GDP growth from 2001 to 2020 for the 30 largest metro areas. (The y-axis is centered on the US average.) Austin is in a class by itself. Then there is Seattle, closely followed by Dallas, San Antonio, San Francisco, Portland, and Charlotte. The cities commonly associated with “superstar” status are not particularly correlated with strong real GDP growth.

Figure 6 - Real GDP Growth 2001-2020

Figure 7 compares a measure of housing affordability for several metro areas. Basically, what this measures is how much housing affordability varies by income. A very high number, like in New York, means that housing is especially expensive for families with lower incomes in New York. Low numbers, like in Austin, Seattle, and Dallas (until recently) meant that housing expenses weren’t that much worse for families with low incomes than they were for families with high incomes.

This measure is strongly correlated with things like net domestic migration. Families with lower incomes move away from places where housing is especially expensive for families with low incomes.

Figure 7 - Data Available to Founding Member Subcribers

Think of GDP growth as each city’s net “superstar” status. Austin is the winner here. Hands down.

Think of high housing costs, high per capita income, and low population growth as measures of lost potential.

San Francisco clearly has a lot of potential to be a superstar city, and it actually achieved a lot of it. For all the criticism San Francisco earns with its noticeably dysfunctional governance, it does marginally better than Los Angeles and New York City in terms of population growth, housing permits, and relative cost of housing for families with low incomes. It could be an Austin. It isn’t. But, it’s still pretty good. Probably good enough, along with Seattle, to be included as a true “superstar”, though an imperfect one.

New York and Los Angeles only have the potential to be superstars. And, much of what is measured and highlighted as emblems of being superstars, is actually evidence of their failed potential. Now, that’s not nothing. Having potential may be better than not having potential. But, having potential is not enough to be a superstar. And, maybe having potential and only turning that potential into dislocation and inequity isn’t much better than not having potential at all. In fact, on the question of whether unmet potential is better or worse than lacking potential, there may be evidence. When a major corporation announces that they may create a lot of good-paying jobs in a place like New York City, they face opposition - literally opposition to creating jobs in the city. Literally, opposition to raising the city’s potential. That may be your answer to the question of whether it is good to have unmet potential. And, I would submit, a place where economic opportunity is opposed because locals correctly assess that the pain of distributing it inequitably will more than outweigh the benefits, is definitely not a superstar. Though, imagine how lucky we are that being superstars is an option simply waiting for us to accept it.