Declining suburbs: cause or symptom?

Last week I wrote about why I don’t think Chris Leinberger is correct in his assessment that the American suburb drove the financial crisis. I noted that increases in unemployment–there was some discussion about whether that increase in unemployment was particularly severe or not–revealed the fragility of credit markets, and thus the dominoes began to fall.

So I’m less convinced that declining suburbs are the reason for the continued lag in US employment after the crash and subsequent recession. This article from the FT explains why: Pay gap a $740bn threat to the US economy. Three points: a) new technology is replacing labor at a much more rapid pace; b) greater labor supply in general has depressed wages (there was similar discussion of wage decline after women entered the workforce in large numbers); and investment simply isn’t moving despite high profit-taking. That is, companies are cutting labor due to a) and b) and yet still posting large profits. Still, investment isn’t moving. In theory, investment should be available to help those laid off back to work in new endeavors, but if investment isn’t moving, it can’t do that. It smells of a saving trap not unlike Japan’s. Trickle-down theories only work if people who have the means to trickle do trickle rather than keeping the money in the old oak chest.

The saving trap problems adds fuel to the Keynesian fire. Sure, gummint spending may be less productive than private sector spending, but it (in the past) hasn’t had the same incentives that investors have faced and has (prior to our current problems) been able to take on risk that private investors eschew. Sparks are meant to work in both directions.

In the end, the long-term factors pushing down real wage growth whittle away the wealth available to people who would consume housing, both urban and suburban. Once easy credit dries up, it’s not hard to see why geographic locations where new homeowners have typically been able to buy, like suburbs, show decline.

I like the reasoning. No data to prove anything though.