Is the American South beating the Northeast?

New York State's Latin motto may mean “ever rising,” but its region's relative economic importance is declining in the United States. For the first time, six southern states—Florida, Texas, North and South Carolina, Tennessee and Georgia—contribute more to the nation's GDP than the 11 northeastern states and Washington, D.C., according to Bloomberg. article reported last week. In 2021, the South gained $100 billion, in part due to economic activity diverted from companies transplanted from the Northeast, and the region now accounts for more than two-thirds of post-pandemic job growth. New York City alone lost an adjusted gross income of $61 billion in 2021, by far the most among major US cities.

While this competition should not be mistaken for a zero-sum game, it does reveal the extent to which the New York-Washington DC-Boston megalopolis has blunted the Northeast's economic advantage. Regional leaders are largely failing to meet a two-pronged challenge: growth-oriented governance and greater affordability. “We now have more employees in Texas than New York state. It shouldn't have been this way,” lamented JP Morgan CEO Jamie Dimon.

Indeed, they shouldn't, but Florida, Texas and their neighbors don't stumble into success – their policies bring it about. First, the tax, regulatory and bureaucratic systems in places like New York make starting and doing business more difficult and expensive. Bryan Hipsher, CFO of accounting firm Dun & Bradstreet, said the company would not have relocated to Jacksonville, Fla., but for the compelling combination of a lower cost of living that allows the company to pay workers less than in the Northeast, 100 millions of dollars worth of cash incentives and tax breaks—and, of course, beaches and warm weather.

Every talented individual and company that decides that a place like New York is too expensive, too bureaucratic and too messy represents a missed opportunity to boost the Northeast's most important asset: economies of agglomeration. Urban density allows immediate access to new opportunities—jobs, customers, and innovative solutions. Therefore, dense cities should concentrate human capital and business like gravity, without having to incentives. But when developing jurisdictions offer more streamlined regulatory environments and incentives, the combination can prove too tempting to pass up, especially when office work is not as important as it was before the Covid-19 pandemic. As a result, companies like Dun & Bradstreet are leaving the metro area, weakening the ties that bind its employees and clients to New York.

High taxes may be tolerated in return for the uniquely valuable urban agglomerations facilitated through public investment. But there is no addressing the deterioration of public services and extreme unaffordability in much of the Northeast, particularly New York. The city and state's biggest obstacle to continued economic leadership stems from their refusal to build more housing. Case in point: most underutilized office buildings in New York State cannot be converted for home use, unless they were made before 1977. Worse, in most cityzoning limits convertible offices to those built before 1961. So the law expressly stands in the way of a seamless solution for potentially hundreds of office buildings built over the past six decades.

State and local leaders have also acceded to community controls that limit supply, expensive building requirements for parking, and the vested interests of incumbent homeowners who want to increase their property values ​​by limiting supply rather than expanding the economic pie.

Ossification of government and housing affordability are not as pronounced in the car-dependent South. There, governments don't have to build mass transit systems (for better or worse), and housing developers can expand supply with relative ease, enabling new construction with modern finishes at a fraction of the price of a smaller, older apartment or house. Despite having the most extensive urban mass transit infrastructure in the US, New York City has few longer commutes in the country, thanks in part to the MTA's long-running operational woes. Combine that with Americans' general preference for transportation by car, and it's easy to see the appeal of moving into a big, brand-new home for less money and the same commute as a private vehicle.

Lots of good economicsocial and environmental reasons favor dense urbanization over suburban sprawl. But city policymakers must be willing to make it possible to build housing and infrastructure efficiently within the urban environment, especially now, when they face persistent inflexibility competition with the rapidly developing South.

This does not happen in Megalopolis. The Sun Belt, the region in the US where population growth is strongest, has too seen strong development of residential units. In fact, the nationwide correlation between population growth and new housing supply is striking. Regardless of whether housing moves where jobs are or vice versa, housing supply growth, economic opportunity, and domestic migration move in the same direction nationally. The South's post-pandemic growth strategy differs significantly from New York's post-Great Recession strategy: between 2009 and 2019, the Big Apple grew up by 907,600 jobs, or 24.3 percent, attracting 629,057 new residents — yet during this decade, the city was manufactured just 206,000 net homes, just six percent above the 2010 housing stock.

None of these trends are irreversible. Decades ago, Walter Wriston, the legendary chairman and CEO of Citicorp, said, “Capital goes where it is welcome and stays where it is treated.” Northeast leaders just need to start addressing capital and talent better. And they better hurry.

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