The geography of innovation and economic growth is changing. In the 1990s, technology companies like Google and Yahoo were founded in the leafy suburbs of Silicon Valley. More recently, entrepreneurs have flocked instead to downtown San Francisco to start companies like Uber and Airbnb.

That’s part of a larger trend: Economic progress is increasingly being driven by big cities. During the business boom of the 1990s, suburbs and small towns tended to add jobs more quickly than the most populous areas. But a recent study showed that this pattern has reversed, with urban centers emerging as America’s most prolific job engines.

That’s a huge shift for the US economy. And it’s one economists, policymakers, and ordinary Americans are only starting to grapple with.

Economic growth is increasingly urban growth. And so if we want the economy as a whole to grow faster, we need to figure out how to get cities to grow faster. That may require rethinking how we build housing, office space, and transportation infrastructure.

How big cities make workers more productive

In the 1990s, there was a lot of talk about the "death of distance" as the rise of telecommuting allowed people to do their work from anywhere.

"The expectation in the 1990s was that you could work in high tech in Phoenix and be as productive as if you were in Palo Alto or San Francisco," says Enrico Moretti, an economist who studies cities and economic growth. "And therefore, the high rents that people are paying in places like San Francisco or San Jose would go away because you can just do it from Phoenix or Kansas."

Instead, the opposite happened. Jobs — especially high-paying white-collar jobs — are becoming increasingly concentrated in big cities like San Francisco, Los Angeles, New York, Washington, DC, Houston, and Seattle.

"The share of investment in research and development, the share of patents, the share of startups, the share of venture capital" — all have been going up, not down, in America’s leading high-tech clusters, Moretti argues. "We even see companies moving back from the suburbs to downtown locations, even though the costs of doing that are pretty steep."

Why are companies willing to do this? The most important reason is that it’s often where the best workers are. The best programmers disproportionately live in the San Francisco Bay Area — and increasingly in San Francisco itself. New York City is a magnet for design talent. Houston is a mecca for petroleum engineers. And so forth.

And, of course, this works in reverse too: Talented workers move to big cities because that’s often where the opportunities are greatest.

In fast-changing and intellectually demanding professions like software development or biotechnology, working with other smart, ambitious people is essential to getting better at your job. Working for cutting-edge companies allows employees to tackle hard problems, learn new skills, and increase their impact.

The informal spread of information between companies in the same city helps drive innovation, Moretti says. When an employee jumps from one company to another, she brings her skills and experience with her. People share knowledge at the bar after work. Over time, this kind of promiscuous information sharing helps an entire region become more productive.

The Pokémon Go economy

Why is all this happening now? Globalization is creating a lot of giant winner-take-all markets where the best companies are hugely profitable — think Apple, Nike, or Coca-Cola — while everyone else gets left in the dust. So companies are willing to pay more than ever to make sure they have the best talent.

Meanwhile, the IT revolution means that more of a company’s operations can be managed from headquarters, eliminating many regional and local jobs. This is especially true for media products, which can now be distributed entirely online, eliminating the need for complex infrastructure to ship CDs, movie reels, or other physical media around the world.

The runaway success of the smartphone game Pokémon Go this summer provides a good illustration of the economic forces that are concentrating opportunity in large cities. Pokémon Go could generate as much as $1 billion in its first year, and almost all of it is going to flow to big technology companies like Niantic (located in San Francisco) and Nintendo (based in Kyoto, Japan).

People in the rest of the country will certainly play a lot of Pokémon Go, and the game’s geographical focus may lure some people out to patronize existing bars and restaurants. But the game will not directly create any jobs in most parts of the country. That’s a big contrast with older media industries like movies — which created jobs selling tickets and popcorn — and music recording, which created jobs in record stores.





More housing would mean lower rent and a bigger economy

If big cities like New York and San Francisco are the future of the economy, and if we want the economy to grow, then there’s an urgent need to figure out ways for these cities to grow faster.

The issue isn’t a lack of opportunities. Last month, for example, the Wall Street Journal reported that the city of San Jose was opposing the construction of new office space because "it would add far too many jobs, exacerbating the region’s housing shortage."

Of course, the real problem here isn’t an excess of jobs but a shortage of housing. San Jose — like most other big, prosperous cities — has adopted strict housing regulations that make it impossible for developers to significantly expand the housing supply. These restrictions include prohibitions on apartment buildings and townhomes in many areas, limits on building heights, minimum lot size requirements, parking mandates, and bans on adding basement apartments or "granny flats" to existing homes.

If San Jose reformed these laws to allow more housing to be built, then an influx of new jobs wouldn’t be such a problem. Growing demand for homes would simply trigger a building boom.

Critics of strict housing regulations — including me — usually emphasize that reforming these laws would help keep rents down. That’s true, but it’s not the only argument for reform.

The other key reason is that many workers would become more productive — and enjoy substantial raises — if they moved to big cities. And if enough people did that, it would have a substantial effect on the nation’s productivity.

If more people moved to San Francisco, some of them would be highly skilled workers taking jobs at fast-growing companies like Google and Apple. But expanding the housing supply could also create opportunities farther down the income spectrum.

A barber in the San Francisco Bay Area makes a lot more money than a barber in the Phoenix area. So moving some barbers from Phoenix to San Francisco would raise those barbers’ incomes while reducing the high cost of hair-cutting in the Bay Area.

Unfortunately, housing restrictions make this kind of move very difficult. Indeed, in recent years there has been more migration in the opposite direction: people leaving high-wage, high-cost cities for low-wage, low-cost ones.

Over the last five years, the fastest population growth has been in low-wage sun belt cities like Dallas, Houston, and Phoenix. The San Francisco and Washington metropolitan areas have seen moderate growth, while growth in Boston and New York has been downright anemic.

How much richer could better housing laws make the country? In a 2015 study, Moretti and co-author Chang-Tai Hsieh estimated that fully eliminating restrictive housing regulations could boost the output of the US economy by 13.5 percent.

However, that number is worth treating with considerable skepticism. To capture those large gains, more than half of the US population would need to relocate. New York City would have to grow eightfold — making it far larger than any city in the world right now. And the American city would lose 80 percent of its population. Obviously that’s not realistic.

But even in a less extreme scenario in which 10 percent of the US population moves to higher-paying cities, Moretti and Hsieh estimate that the US GDP would be boosted by 3.4 percent, or almost $2,000 per American.

Serious population growth will take serious planning

If rising demand for urban housing is a long-term trend, then city leaders are going to have to change how they think about urban planning. So far, even the most progressive city leaders have taken a largely reactive approach to the issue — liberalizing housing regulations at the margins in an effort to relieve soaring housing costs.

But what city leaders haven’t done is take seriously the possibility that their populations can and probably should add millions of new residents over the coming decades.

Is that feasible? Moretti and Hsieh’s projections show that New York’s population would have to nearly double, and the San Francisco Bay Area would have to grow by around 75 percent, to achieve a 3.4 percent gain in national economic output. That’s a lot faster growth than we’ve seen in those cities recently, but China has shown that this kind of rapid growth is possible, even for very large cities.

Shanghai’s population was 13.3 million in 1990 — already much larger than the San Francisco Bay Area’s population of 7.7 million. Since then, Shanghai has grown by 70 percent to 23 million people. During the same period, the San Francisco Bay Area grew its population by just 27 percent.

The city of San Francisco is half as dense as Brooklyn, and San Jose and Silicon Valley are much less dense than that. So there’s a lot of potential to build more housing. The region would also have to build more transportation infrastructure — probably including a more extensive subway system — to support an expanded population.

To be sure, many people in the San Francisco Bay Area don’t want it to look more like Brooklyn. But they also probably don’t want housing to become so expensive that their children can’t afford to stay in the area. And that’s ultimately the choice they face.

Technology millionaires aren’t going away. If the region doesn’t find ways to accommodate soaring demand for housing, it will wind up being a place where only technology millionaires can afford the rent.

And leaders in other major metropolitan areas, including Los Angeles, DC, Boston, and New York, face less severe versions of the same dilemma. More and more people want to live in these areas. Leaders can either find ways to accommodate that growing demand — through relaxed housing regulations and investments in transit infrastructure — or they can watch gentrification steadily erode opportunities for ordinary, middle-class people.

This story is part of The new new economy, a series on what the 21st century holds for how we live, travel, and work.