Urban recovery: Pareto improvement is hard

The first time I visited Pasadena, in 1980, the place was a bit down-in-the mouth.  The corner of Fair Oaks and Colorado (the heart of what would become Old Town) featured disreputable establishments, and many beautiful old houses had fallen into disrepair.  Air quality was dreadful.

Now, 30 years later, Pasadena is among the loveliest and most lively cities I know (it also happens to be where I live).  New Urbanists should love the place: pedestrians fill Old Town and, to a lesser extent, Lake Avenue.  The craftsman bungalows--the sort of houses that people like Andres Duany like to copy--have been restored to their former glory, and range in size from modest to obscenely large.  Air quality, while still not great, is much, much better.  One can see the San Gabriel Mountains every day.

This produces unhappiness on the part of Occidental College sociologist Peter Drier.  He writes:

New US Census data reveal a troublesome reality about the Rose City. Pasadena’s has become a tale of two cities — one that welcomes affluent residents and another in which middle-class and poor families are pushed out by rising housing prices. 

Pasadena officials like to boast about the city’s recent “renaissance,” pointing to the major (and expensive) renovations of City Hall ($117 million) and the Convention Center ($150 million), and the just-approved $152 million facelift for the Rose Bowl, as well as the addition of new condominium complexes and upscale stores. 

 But who, exactly, is benefiting from the city’s renaissance?...

...At the very top, the wealthiest 5 percent of Pasadena households — those with household incomes above $249,841 — have almost one-quarter (22.7 percent) of city residents’ total income. Only five cities – Los Angeles (25.9 percent), Glendale (25.8 percent), Rancho Cucamonga (25.2 percent) San Francisco (23.4 percent) and Oakland (23.1 percent) — have a higher concentration of income among the richest 5 percent.

 In contrast, the poorest one-fifth of Pasadena households — those with incomes below $23,042 — combined have only 2.6 percent of all residents’ income. As Table 2 reveals, only in San Francisco do poor households have a smaller share of citywide income.

In Pasadena, those in the next poorest one-fifth — those with household incomes between $23,043 and $45,174 — bring home only 7.6 percent of residents’ incomes. Together, the poorest 40 percent of Pasadena’s households have only 10.2 percent of Pasadenans’ total income.

...Pasadena lost 2,420 households with incomes below $50,000 — an 8.8 percent drop. By far the biggest losses were among households earning under $10,000. The number of these households fell from 5,273 to 4,094 — a 22.9 percent decline.

None of this should be surprising in light of spiraling rents and house prices, the accelerating conversion of affordable apartments to expensive condominiums, the predominance of new luxury units among the condos approved by city officials and the paucity of affordable housing in Pasadena’s development pipeline. 

So Peter underscores a fundamental problem.  We want out cities (and inner ring suburbs, such as Pasadena) to improve.  But when cities get better, they become more desirable places to live.  To use a metaphor, 30 years ago, Pasadena was a K-car, and now it is an Acura (one needs to travel south to San Marino for the BMW).  Consequently, when cities become successful, they tend to attract richer people and push out poorer people.  This is true in New York, San Francisco, London, Paris, and so on.


So whom does this help?  It certainly helps homeowners, regardless of income, because it leads to greater wealth.  The median person in Pasadena is a homeowner, but just barely; nearly 50 percent of Pasadenans are renters.  Because rents are higher, renters might appear to be worse off.  On the other hand, rents reflect desirability.  If the change of the value of the bundle of amenities arising from living in Pasadena is greater than or equal to the change in rents, renters are at least as well off as before.  Pasadena is cleaner, safer and healthier than in was 30 years ago, and these things are valuable.


The exception is those people who are forced to move because wealth prevents them from choosing to live in Pasadena.  Those who are forced out of their homes are worse off than before, and so a revived Pasadena is not a Pareto improvement (in the strict sense of the phrase) over dowdy Pasadena.


So what should we do?  Discourage the kind of renaissance that Pasadena has produced?  I think not.  I can think of three policy responses that might help.  First, make Section 8 vouchers and entitlement, so that people can choose to live in whatever city they like.  That is a federal responsibility.  Second, use Pasadena's relatively high property values (relative to other communities; not to five years ago) to improve social services.  But that is not possible to do without changes to Proposition 13 (parcel taxes are not as efficient or equitable as ad valorem taxes).  Third, get rid of regulations that make in extremely difficult to build inexpensive units, such as granny flats, in Pasadena.  This is the only lever than is in Pasadena's hands.


It is difficult to get around a very uncomfortable question: should all people have financial access to all communities?  As an economist, I tend to think the answer is no.  As a human being, I am not sure at all.