June 06, 2018

Yes, cities can be great, but these can also be dangerous bombs in the making.

Sir, Edward Luce writes about how trying to attract big companies like Amazon to the cities might make it harder on the poor in the city. “Beauty contest reveals ugly truths” June 6.

Yes, of course, the weaker, the poorer, they will always be relatively more squeezed by any development that occurs in cramp conditions where there will be a fight for space.

But it is when Luce quotes Richard Florida with, “America’s most dynamic cities have played right into the company’s hands, rushing to subsidise one of the world’s largest corporations rather than building up their own economic capacities.” where the real discussion should start.

Why would a city want to bet so much of its future on so few actors as would here be the case with Amazon? Have they not seen what happened to Motor City Detroit? If you want to use incentives to attract jobs, which is of course to start “a race to the bottom”, why bet all on a number, would you not be better off diversifying your bets? 

If I was responsible for a city, one of the first things I would be doing is to analyze how its riskiness would be rated compared to other cities? For instance, what are the chances that suddenly another city offers your city’s wealthy, the possibility of moving to a place that has not accumulated impossibly high debts that will need to be served, supposedly primarily by them?

And, if your city faces a financial crash, what would be ones’ first priorities, to help the poor, or to make sure the rich do not leave without being substituted for by other rich?

PS. Luce writes: “Big fund managers… are putting cash into global urban real estate portfolios. As a result, property prices are becoming a function of global capital movements rather than local economic conditions”

Again, for the umpteenth time, what initially feeds high property prices is the inordinate ease of access to financing it, provided among others by regulators allowing banks to leverage much more with “safe” residential mortgages than with “risky” loans to entrepreneurs. 

The fund managers are just following the results of it… when that regulation-easing plan begins to be reversed, which will happen sooner or later, they run the risk of being left holding the bag.