Redistribution and urban inequality

Matthew Kahn's blog on environmental and urban economics is well worth your time, and I really enjoyed this analysis of Joel Kotkin's recent piece on 'middle-class' cities. Read the whole thing, but I just wanted to pick up on one part of it, where Kahn writes:

Big cities such as NYC have been generous to their urban poor and to balance the budget taxes do need to rise. In the "efficient cities" that Kotkin celebrates such as

"The winners included business-friendly Texas cities and other Southern locales like Raleigh-Durham, now the nation's fastest-growing metro area with over one million people. You can add rising heartland cities like Columbus, Indianapolis, Des Moines, Omaha, Sioux Falls, Oklahoma City and Fargo."

How do they treat their poor? There is a welfare magnets effect here. Cities such as San Francisco end up with more poor people and more taxes because they are "nice" to the poor. Non-liberal cities are rewarded for being not nice in terms of redistribution. While Kotkin would call that "efficient", there are other words for that such as "cheap" and "nasty".

Consider the dynamic at work in the 'liberal' cities Kahn describes*. City councils know that there are poor people out there they can choose to help or not. There are economic costs associated with pro-poor policies, in terms of some mix of higher expenditures, lower tax revenues, and distortions to the housing market (in the form of opportunity cost of land) if you directly provide 'public housing' or social housing as we call it. The net effect is to raise taxes or housing costs, which has a particularly negative impact on those middle-income households not poor enough to qualify for help. So there is a tendency for a city that wants to be pro-poor to become more unequal and push the middle-classes out.

I'm interested in the long-run impacts of this kind of process. Here's one scenario: if middle-income households are filtered out by higher taxes and housing costs, then higher income households might 'filter in'. Overall, the city grows richer, and so more costly, and so the affordability problems faced by the poor get worse. Simultaneously, the cost of providing housing support (directly or indirectly) for the poor also increases.

Where do we end up? Perhaps the presence of poor people in ever-richer cities eventually become too anomolous or 'costly' for some.I suspect that's a large part of what's happening in London now, with cuts to housing benefit and social housing provision.

*Kahn goes on to suggest that moving responsibility for redistribution to the federal level could deal with this problem, but I'm not convinced, as housing and planning policy are likely to remain both very important for policy towards 'the poor' and fundamentally locally controlled.