Segregation is a normal good

There’s a view that, since much of American inequality can be explained by the dynamics of housing wealth (as famously argued by Matthew Rognlie), then we could remedy inequality, or at least prevent its increase, if we took a battering ram to the gated city by eliminating height limits and exclusionary zoning and other restrictions that make it difficult for developers to add housing supply as prices increase in desirable cities and neighborhoods. I think this view is mistaken. It gets causality backwards.

It is not hard to find explanations for the increase in inequality in the US. There has been an evisceration of labor unions; selective globalization that puts the working class but not the professional class in competition with labor in developing countries; skill-biased technical change and automation that substitutes labor for capital or threatens to. All of these reduce the power of labor to bargain for their share of the economic pie. Market power increasingly concentrates income and wealth, via Facebook or Google with their unassailable platforms, via Pharma and Hollywood thanks to the expansion of narrowly conceived patents and copyrights into amorphous “intellectual property”. Deregulation of finance and various forms of “financial innovation” made it possible for skilled financiers to lay claim to gains while offloading risks, creating a class of people who won big until they didn’t but never lost very much. The professional class, thanks to the general bailout of creditors when things came apart, hitched a ride on the coattails of the gamesters of finance and came through the great financial crisis largely unscathed, while the middle and working class lost their homes and marriages and self-esteem to a margin call on housing, which has since recovered in other people’s hands.

You can certainly add having bought the right properties in the right cities in the 1970s and 1980s to the list of drivers of inequality, but I don’t think it is a big piece of the puzzle. Instead, I think it is more accurate to point out that one of the first and most valuable amenities people purchase when they become wealthier is wealthier neighbors. Wealthy people self-segregate, and the places to which they self-segregate become valuable, because the way you get a place limited to wealthy people is by bidding up the price of being in that place. The community, or the city, is gated for a reason.

Now this sounds like a story of dastardly rich people. It is not. It is a story of humans, and how humans naturally and understandably behave in the society that we have built. To be successful in our society, to be a good person, is to be a successful capitalist. One should accumulate educational and financial resources, steward them responsibly, and invest them in labor and capital markets or business entrepreneurship to yield decent returns. Failing to do this is waste. Consideration of the welfare of others is mostly delegated to the state, or else to arms-length charities to which one budgets as one sees fit. The misfortune of your neighbor, or of your cousin, is not your misfortune directly. One could never be a successful microcapitalist, and therefore a good person, if one took it upon oneself to indemnify the mishaps and misfortunes of ones neighborhood and extended family. To do too much of that is a kind of squandering, a kind of waste. If it puts the welfare of your own family at risk, especially if it reduces your child’s quality of life or education, it segues from failure to sin.

This ethos is very difficult to maintain, for human beings most of whom do strive to be good, do try to be virtuous, if we live directly among misfortune. We strive to find ways of reconciling being good and doing well, and to consider ourselves good we want to feel and be viewed as generous within our own, directly experienced communities. But we cannot simultaneously be successful microcapitalists and generous people according to the norms of less fortunate communities. Because while in theory, under mixed-economy capitalism, the state provides the less fortunate with the insurance they require to live decent lives in a topsy-turvy economy, in practice, in the United States, it does a pathetically inadequate job of it. In poorer communities, people manage their risks by pooling them directly, helping a neighbor with a rent check to prevent an eviction, or else letting her crash at their place for a while. Poorer people insure one another by forming lasting human relationships under which they make directly available, or directly draw upon, one another’s real and financial resources. Wealthier people “self-insure”, but of course that is an oxymoron. What insurance means is to create claims upon others’ resources that we can draw upon if we suffer misfortune. The “self-insurance” of the wealthy replaces the interpersonal claims of informal insurance with financial claims exercised via arms-length markets. Wealthier people save money they can draw upon in times of trouble. They purchase formal insurance contracts. Most of us try very hard not to trouble our neighbors with our misfortunes, but wealthier people are much more likely to succeed. Which makes wealthier people desirable neighbors, especially for wealthier people upon whose disproportionate resources the misfortunes of poorer people might make strong emotional and moral claims.

The wealthy huff a lot about efficiency, but what fundamentally distinguishes the insurance behavior of the wealthy and the poor is that the poor insure one another with much greater capital efficiency than the rich. The wealthy prefund their insurance individually, each household accumulating cushions of financial savings and contingent assets, the majority of which are rarely drawn upon. The poor never hold much in the way of assets they do not require, but draw upon the resources of their community and family on an as-needed basis. Wealthy communities hold financial assets multiples in value of what members of the community will ever actually use, but each household within a wealthy community may genuinely have no resources to spare, in the sense of having endowed themselves sufficiently to buffer their family’s customary lifestyle against potential shocks. At a social level, the capital inefficiency of financial “self-insurance” need not be a problem. Financial resources aren’t inherently scarce like real resources, and one can imagine a policy regime in which some sort of financial claim was made so broadly available that all households could “self-insure” in this way without increasing any burden on real resources. But in the world as it is, wisely or not, only the wealthy can afford the luxury of dormant, underutilized financial claims. The not-so-wealthy must find ways of managing their risks without the intermediation of money and markets. They call upon on another for help, and when disputes arise, as they often do with respect to need-based claims, rather than hire a lawyer to fight the insurer as a wealthy household might, neighbors and families must argue it out, in discussions that may become painful and personal and destructive of valuable relationships. Like most efficiencies, capital-efficient mutual insurance has costs invisible to the outputs-over-inputs computation. As we become wealthier, we trade less intensive use of the financial claims at our disposal for the peace of not having to field or make claims upon our neighbors.

This would all be true even if it were not the case — but of course it is the case — that various sorts of crime and discomfiting behavior correlate geographically with poverty. That correlation is itself, I think, a function of reconciling inequality with a liberal society, an effect much more than a cause of that inequality. You can agree with that or not, but the correlation still stands, and people want to move to nice neighborhoods, where “nice” is defined by the behavior of your neighbors, and wealthier people are more likely to be “nice” in the sense of troubling you less than poorer people.

Segregation is a normal good, for individuals and families. As people become wealthier, they want to insulate themselves from the chaos of other people’s lives. In a relatively equal society, there is no community of people more or less capable of substituting formal, maket-intermediated forms of mutual insurance for interpersonal and relationship-based mutual insurance. As a society that celebrates personal accumulation and self-reliance becomes unequal, then unless the state itself provides sufficient formal insurance, those capable of “self-insurance” will migrate away from those who survive by sometimes tugging on their neighbors heart strings and purse strings. Some will move explicitly into gated communities. For the more liberal and cosmopolitan among the wealthy, the quiet gate of high market prices — which they themselves must work and sacrifice to pay! — is more spiritually congenial. Individually we take prices as just a fact of nature, so the control prices exercise seems natural and legitimate, even if, from some idealistic perspective, lamentable.

In the US, segregation is overdetermined. If by the path-dependence of horrible history, we find that wealth and race become correlated, this tendency of the wealthy to segregate themselves from the poor would be sufficient to engender racial segregation. Add, gently, a modest preference for same-race neighbors or, less gently, outright racial animus, and it’s unsurprising that in the US we see the sharpest segregation across racial lines that are also economic lines. And of course, while segregation may be an outcome of yesterday’s economic tournaments, it also shapes the outcomes of tomorrow’s tournaments. The children of parents who could afford to withdraw themselves to gated communities with great schools are much more likely to be able to do so themselves, as they inherit both social capital and much of the financial capital their parents held as insurance. Race and racism very obviously shape and harden segregation in America. But we would and will have it in some shape or form regardless, as long as we are so unequal in our capacities to insure ourselves by impersonal means, and liberal enough to accommodate the preference of the wealthy to withdraw from the very personal claims of the less well insured. And just as race shapes segregation, segregation shapes race. Segregated communities don’t remain just groups of different individuals for very long. Across the lines, the different communities give one another names, turn anecdote and experience into stereotypes, attribute differences in circumstance to differences of character, behave in ways that presume and reinforce group differences. Over a generational time horizon, the phrase “racial segregation” is a tautology.

Update History:

  • 27-Jan-2018, 10:20 p.m. PST: “…Matthew Rognlie), that then we could remedy inequality, or at least prevent its increase, if…”

20 Responses to “Segregation is a normal good”

  1. Nicholas Weininger writes:

    A few quick points on this:

    — On the global level this reduces to the argument for effective altruism and open borders. If residential segregation is a means to protect wealthy Americans from having to deal with the importunings of poor neighbors, then aren’t immigration controls even more so?

    — This seems much more of an argument for why segregation is hard to change (because the demand for segregation is so strong) than for why it’s not actually a large factor behind inequality, or why a Magic Policy Wand that forced economic desegregation wouldn’t make a big dent.

    — You have a just-so story here, Rognlie has data. In general in such situations one is well advised to believe the person with the data, no?

    — You seem also to be implying that the poor rely more on network wealth than the wealthy. I don’t think this is true. Wealthy people call upon family members, schoolmates, neighbors, etc for favors all the time, often very lucrative favors like referrals to good jobs. It’s true that the wealthy use their network wealth less often to hedge against catastrophic downside risks, but as an overall contributor to expected lifetime income and projected living standards, it’s still a huge deal. And conversely, poor people’s lack of access to those kinds of network opportunities is a significant part of what keeps them poor, at least as much as not having wealthy neighbors to call upon for help with the rent.

  2. Craig Morris (@PPchef) writes:

    How can you write a piece about segregation and housing and not mention actual segregation policies? There is no need to posit the options of “a modest preference for same-race neighbors or, less gently, outright racial animus” as though this history did not exist. Alvin Chang wrote about one example quite well here: Or, if you want a more sweeping history (not just housing), you can read Coates:

    I like your blog, and you are basically correct above: the wealthy self-segregate. In fact, because this is true everywhere, it is all the easier to separate out what only happens in America. Your article doesn’t go there, but that’s where you’ll find the main causes of the current situation in the US. Once we have remedied those problems, we can deal with the self-segregating wealthy like everyone else does.

    In short, suburbs were built for white America; GIs returning from World War II were eligible for subsidized housing, while black Americans were stuck in black neighborhoods. White families thus saw their real estate investments rise in value, while black neighborhoods depreciated. So it wasn’t just self-segregation; white Americans had entitlements not offered to blacks. When these and other entitlements (Social Security in particular) were expanded to cover all Americans, the discussion started about government handouts making poor blacks dependent (“welfare queen”). But when state funding had been made available for new all-white neighborhoods, no one even used the word “entitlements.”

  3. Lawrence D'Anna writes:

    In your first paragraph, it sounded like you were promising a defense of California’s insane land use policy. But by the end of the post I’m still waiting for it. You make a lot of interesting claims about inequality, but so what? Texas and Japan have inequality, nothing like the kinds of housing dysfunction you see here. I don’t think you’ve offered anything to rebut the simple neoliberal claim that the way to address a housing shortage is to build more housing.

  4. Becky Hargrove writes:

    The real issue for segregation is that pricing is mostly the only signal we have. For instance, there are no platforms (that I am aware of) that encourage the segregation people want, which include major considerations other than housing and work/school location. In other words, many more people would like to live close to one another who hold shared values (along a full range of the income spectrum) which real estate markets don’t take into account. One reason this is such a problem, is that if only 25% of people in the near future have full time well compensated work with benefits, cities and communities will still be building infrastructure as if everyone had full time well compensated work with benefits. Hence part of the valuations analysis that should go into preferred segregation patterns, should involve a wide range of infrastructure choice – both physical and time management based, which take income and other resource capacity into account.

  5. Scott Solomon writes:

    All the problems could be fixed creating a global, $25TR not-for-profit that funded (say) 10MM not-for-profits.

  6. A thoughtful post, and a lot of interesting stuff to chew on here.

    But, on the main point, I think you are too dismissive of the role of metro housing policy in creating inequality. On the margin, aspirational households that move to housing constrained cities where incomes are high, move into diverse neighborhoods. This is the source of much of the distress, and it is derided as “gentrification”. Gentrification doesn’t become a central issue because households with high incomes are walling themselves off in order to segregate. It is a central issue because they are willing to do anything to access the high incomes that are available where entry is limited. Gentrification is the complaint that too many rich white people are moving into neighborhoods full of diverse or minority working class households.

  7. asdf writes:

    “attribute differences in circumstance to differences of character”

    The rich and poor are mostly so because of genetics. As are things like criminal tendencies, agreeableness, conscientiousness, etc. The poor don’t seem to “insure each other” as much as you claim. If anything they seem to victimize one another quite a bit. I haven’t seen a lot of noble behavior going on in the bad part of town. I think that sort of “help each other out” stuff is less underclass and more middle class.

    We could get into a definitional argument over whether “character” includes genetics, but bottom line there is no government program that is going to change this stuff. Sweden can’t fix Malmo, and that problem relative to available resources only grows as Malmo grows. Nor does it seem that many well intentioned private initiatives can (just ask yourself how many young idealistic types frequently “burn out” trying to fix the inner city, its depressing).

    Mostly it would be nice if the non-pathological middle class could afford a way to live close to jobs while achieving the same segregation that the rich achieve via high rent. This would probably require formal rather then informal segregation, and then at some point someone would call them racist and pass a law against it. The segregation wouldn’t even need to be racial in nature, it could just say “no criminals” but since blacks are more likely to be criminals it would get shot down by disparate impact.

  8. Phil H writes:

    Very elegant argument. At the end you mention the “social capital” inherited by the children of the rich; but earlier you were arguing that the rich substitute financial capital for social capital. It’s not obvious that you can have the argument both ways. If the rich are moving, as you suggest, not so much into gated communities as gated mansions, insulated from *all* other families (low social capital), then the rich classes should be very permeable. There would be no community barrier to stop rich minorities joining. But if the rich are forming separate communities of their own, with large accumulations of (some varieties of) social capital, then there is still an explanatory gap: why are the new, withdrawn communities so white?
    It may be that the racial division is just an emergent product of the social insulation process, but it’s not obvious from the arguments presented here.

  9. Brett Jones writes:

    Really interesting argument, thanks for sharing!

    While some may criticize you for not giving due weight to the role of explicitly segregationist housing policies, to me your main point made perfect sense: even without redlining or other such policies, all of the ingredients necessary for segregation are present in spades. I think that distinction matters, because it’s easy for those who may wish to blame America’s problems in the present on specific bad actors in the past. But in fact, the conditions exist for these kinds of disparities to emerge, even absent explicitly racist actors. A mere mild preference for racially homogeneity is sufficient.

    One more thing I might add – I think that another root of segregation along racial and wealth lines is liberal society’s distribution of housing as a commodity and investment. If much of a household’s wealth is vested in their home, it makes perfect sense to protect that investment by selling at the first sign of trouble. White flight today doesn’t require any kind of racial animus at all to reproduce itself: self-interest alone is more than enough. To expect any other kind of behavior from homeowners is unrealistic.

  10. reason writes:

    Another great piece.

    I have long thought that self-segregation is one of the major problems of our time. Yes and inequality helps it along.

    But I don’t think inequality is all of the story.

    I live in Germany which has for various historical reasons avoided the great centralisation that affects many countries. (I really think the relatively decentralised nature of the Holy Roman Empire had a lot to do with it.) And they require each of their communities to dedicate some of their releases of new building land to social housing. So although the rich and poor still self-segregate, they are not too far apart.

    They have many compact towns with some space between them that can be used to expand connections. Mega-cities always struggle with infrastructure that doesn’t scale.

    If the world is going to handle increasing urbanisation I think it should handle it more by building new cities rather than making the ones that already exist ever more massive.

    Oh, and what “Debt and the Devil” (the best book on macro-economics for a long, long time), restrict lending on real estate and don’t subsidise housing loans via tax deductions.

  11. reason writes:

    Brett Jones,
    yes, but I think Steve already said that (but I agree it was hidden a bit – he tends to talk very abstractly).

  12. reason writes:

    “The rich and poor are mostly so because of genetics. As are things like criminal tendencies, agreeableness, conscientiousness, etc. ”

    Have you been paying attention to Trump? He makes that argument look as ridiculous as it is.

  13. Excellent.

    It does amaze me that it takes this many words to undue the confusion wrought by the existence of an economic discipline known as “economics.”

    Think how much more we could understand our world if we explored it by saying:
    1. These realtors say the three most important things in real estate are location, location, location.
    2. That appears to be true.
    3. What set of human behavior gets us to that result? Let’s observe…

  14. “undo” and “academic” for undue and economic

  15. Alfonso Renart writes:

    Great to have you back!! You were much missed…
    Thanks for the piece. I also very much liked the link on “No choice but Freedom”… I felt like your ‘conjecture’ is very much in line with a whole body of work by Harry Frankfurt on “free will”, which he examines at the level of the individual. You took this idea and explored its repercussions for societal organization, landing squarely in the realm of Byung Chul Han’s recent works on the structure of liberal society, whose success he explains as deriving from having replaced external forms of coercion, by internal ‘self-exploitation’, the freedom to compete in the rat race whose costs you have no one but yourself to blame for… I had never realized the connection between Frakfurt and Byung Chul Han which you have very nicely captured!

  16. Longtooth writes:

    Thoughtful piece. Unfortunately also simplistic. Wealth / economic class has always self-segregated — go back to 1066 for reference. They self-segregate because they can afford to do so. Which brings the issue to why can they afford it? They can afford it because they also wrote the laws that enabled them to retain their position and wealth, and pass it on to their kin.

    Fast forward to colonial North America which the wealthy from England established by land grants for bringing labor as servants and tradesman with them.. the more they brought to serve their interests to supply labor the more land they were granted.

    This quickly extended to increasing the use of labor for free — slaves brought from Africa because the blacks were sub-human species and on this Earth for the sole purpose of being enslaved by whites.

    Add the laws that gave whites all the power to write them to benefit themselves and another 100 years after the Civil War to enshrine them in Jim Crow, supported by “legal opinions” serving white’s interests only under the auspices of the “rule of law” and you land where your assessment begins: In the middle of a system of “individual freedoms” designed to insure whites could have them by virtue of their already superior (white supremacist) economic and legal system.

    Stated more simply your assessment is predicated on the already established paradigm of a laissez-faire libertarian system established and maintained in practice by “individual freedom”. Where is this written in stone? Our Constitution perhaps which is simply enshrining it in “rule of law”. It’s a self serving self-perpetuating intentionally segregating system.

    Economic and racial segregation exist only because they serve the interests of those that have the power to enforce them, via laws they wrote, interpreted, still write to do so. in other words we let it persist and enforce it’s persistence. We chose to do this. But we can also chose not to. The issue is then only why we chose not to. All the rest is just self-justifications and rationalizations for maintaining what we have intentionally created.

    FWIW, I’m lily white. My ancestors from pre-Revolutionary War England and 1800’s Ireland and Sweden. I’m among the “haves” of white America.

  17. marris writes:

    This beautifully written (as usual), and worthy of deep reflection.

    While I am reflecting, can you flex those eminent domain muscles, knock down every last tenement in my city and put up a few high rises? Give the old tenement owners apartments in the high rise if you feel bad for them. Give them access to the roof. Sell the rest of the units at market rates. Use the profits for whatever you want: local schools, far-away schools, transportation, tax cuts. Repeat. I will check in on you in 20 or 30 years and see how things are going.

  18. Detroit Dan writes:

    As others have said, very thought provoking as usual. I am interested in the book referenced by commenter “reason”. Thanks again.

  19. Larry writes:

    Welcome back.

  20. Longtooth writes:


    “Race and racism very obviously shape and harden segregation in America. But we would and will have it in some shape or form regardless, as long as we are so unequal in our capacities to insure ourselves by impersonal means, and liberal enough to accommodate the preference of the wealthy to withdraw from the very personal claims of the less well insured”

    What you described ate mutually reinforcing conditions or preference. liberal enough in your context is also known as “individualism” or “libertarianism”. Both serve the interests of the group with the most power (physical power translated to political). In the U.S. from our inherited English law that group has always been the one with the wealth which has by virtue of that power constructed a system to preserve and extend it by insuring the incapacity of the non-wealthy to insure ourselves by impersonal means. But for that power we would NOT have racism “regardless” as you conclude.

    You also stated earlier that the State seeks to counteract or mitigate the self-segregating interests (my synopsis of what you stated)but that is a patently false assertion .. an outright lie in fact. Throughout our entire history the State has reinforced and promoted it. You can go back to English law and it’s direct derivative in U.S. immigration law. Then to Dred Scott (1857) that no black could every be a citizen, followed by Plessy v Ferguson (1896) which directly and intentionally gave the State the power to segregate (economically & socially)race, which was the law of the land until Brown v Board of Education (1954) which only applied to public schools and which wasn’t even vehemently enforced (most southern states didn’t impose them for decades). It wasn’t until 1964 (year I graduated high school) and for voting rights until 1965 that Brown extended further and made Plessy and the Jim Crow laws illegal. California and then the U.S. passed the Chinese Exclusion acts (1882) which in one form or another made property ownership by U.S citizens of Chinese descent illegal.

    It wasn’t even until 1972 that racial integrated marriages were made legal (Love v Virginia).

    We now have and still have a vehement racial animus supported by the State to immigrants from South of our border, which immigrants have always been a vital necessity of western States economies, especially California, Texas, and Arizona, by virtue of the fact that they are deemed “illegal” and thus can be and are exploited economically and socially. But despite that those immigrants have contributed immensely to the nation’s benefit as each generation passes — just as the Southern and Eastern European poor immigrants also did (my own grandmothers and one grandfather were poor immigrants, though white).

    So the State has NEVER in our history NOT been a promoter and supporter of racial and racial economic aniumus in this nation.