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Gateway Cities and the Death of Information Monopolies

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Gateway Cities and the Death of Information Monopolies

The last time Mike visited New York (before Covid-19, of course), he decided to stop somewhere he hadn’t been in 15 years: the New York Public Library. A lot had changed since his last visit there.  And as he walked into the building—then named after the man who the last time was his boss (ok…boss’s boss’s boss’s…)—he couldn’t help but stand there frozen, in awe of its beauty. He’d never even noticed the elegant symmetry of the rows of desks in the main hall, filled with people of all ages on laptops, surrounded by rows and rows of obscure reference books. Very few other cities in the world could boast such a treasure.

At that moment, all he could think was “what a fantastically wonderful… museum”.

Mike and Adam had been debating the future of gateway cities in the weeks prior. They weren’t debating whether Alpha cities would survive, or even whether they’d fall behind their Beta and Gamma brethren. We think it’s silly to suggest that New York or London or Tokyo could recede into insignificance after having been centres of civilisation for hundreds, even thousands, of years. The pandemic doesn’t change that either.

We do, however, believe that the monopoly-like power the gateway cities held during the latter half of the twentieth century and into the turn of the twenty-first is being dismantled primarily by improved information and communication technologies, particularly in the face of rising costs of agglomeration in these gateway markets. Moreover, we think Covid-19 will serve to accelerate this trend.

Gateway cities were by all accounts the big winners of the last 40 years.

For example, from 1980 to 2015, 75th-percentile real wages grew by about 65% in New York and 75% in San Francisco, compared to just 35% in the United States at large. Richard Florida attributes these cities’ success to what he calls “winner-takes-all urbanism”—a defining feature of the late twentieth century knowledge economy. Superstar employees moved to superstar cities because it was there that their talents would be appropriately valued (wages after all, approximate productivity), and even enhanced by their proximity to other superstars.

Not only financially, but socially, too, Alpha cities attracted the world’s top performers for over four decades. If you were highly productive and you wanted to find a like-minded partner and have access to top-quality amenities, then you could hardly find a better place to live than somewhere like New York or London—two cities which the urban economist Edward Glaeser described as “marriage market[s]” in his 2011 book, The Triumph of the City.

And while the world’s top cities still hold a material advantage in terms of productivity and social benefit, the world’s Beta and Gamma cities have started to close the gap.

Consider the marriage market. When Edward Glaeser wrote those words, he lived in a world where only about 10 to 15% of Americans met their partner through online dating. Today that number approaches 40%, which means that a Nashville resident doesn’t only have access to possible mates at the local bar, or at work, or through a friend of a friend, but can search through the entire city’s metro population of two million people. If you want to meet a guy with a bachelor’s degree or higher, between the ages of 20 and 35, there are probably one or two hundred thousand to choose from, many of whom are single and now use online dating, too.

Or take, for instance, the ways in which productivity gains in the world’s gateway markets have been offset by the costs of agglomeration. Many secondary cities—thanks to the technologies we’ve all depended on in the past year—can now offer a better quality-of-life balance. Sure, wages in London are about 30% higher than wages in Manchester. But because of restricted land use planning over the last 50 years, London’s housing prices are nearly double Manchester’s. Based on a quick analysis we ran, a typical Londoner earns about £860 per month, after subtracting the costs of housing (a one-bedroom flat rental outside the city centre), public transportation, and taxes. Compare that with Manchester, where a similar person nets closer to £1,075.

And it’s not only ordinary people who have had to rethink the value of gateway cities—so too have the workers whom Dror Poleg calls the “10X class”, the non-CEOs who nonetheless significantly out-earn their peers. In the UK, for example, this might represent a worker in the top 0.5% of the personal income distribution, who earns about £240,000 per year. There’s a strong chance she currently works in London, but now, in a world in which telecommuting allows for jobs to be less location-specific, these 10X-class workers may no longer need to live in gateway markets to earn their higher standards of living. This gives them a considerable incentive to escape the high costs to agglomeration that have made London and New York expensive and inconvenient, even for those in the top half-percent of wage earners.

We could go on all day about what the Alpha cities used to offer that secondaries cities could not at all. And the full experience for most of these things can still only be offered by the world’s gateway markets. If one would like to listen to top quality opera or watch the world’s premier theatre, that person would have to go to New York’s Met or to London’s West End. If one would like the best shopping, that person might stroll down Tokyo’s Omotesando. If one would like to understand the fashion trends changing the world, that individual might want to be in Milan or Paris. But compared to what existed only five to ten years ago, 4G and now 5G-streaming on Spotify, Netflix and YouTube; Amazon prime delivery and other e-commerce options; and tens or hundreds of thousands of food- and fashion-related Instagram feeds to follow—all that means that one is not completely out of luck if that person decided to live in a medium-sized city.

The point of all this? London and New York probably won’t slip behind Manchester and Nashville any time soon. But the monopoly that Alpha cities held for the past four decades will dissipate.

9th March 2021

Market Commentary