Thursday, December 3, 2015

Zoning and inequality

I am always pleased when economists normally thought of on different ends of the political spectrum come to the same conclusions. So it is with zoning laws; traditionally a target of free-market and libertarian thinkers. Now joined by Jason Furman, Obama administration CEA chair. From a recent speech,
..excessive or unnecessary land use or zoning regulations... impede mobility and thus contribute to rising inequality and declining productivity growth.
...zoning regulations and other local barriers to housing development allow a small number of individuals to capture the economic benefits of living in a community, thus limiting diversity and mobility. ...
Zoning and other land use regulations, by restricting the supply of housing and so increasing its cost, may make it difficult for individuals to move to areas with better-paying jobs and higher-quality schools. Barriers to geographic mobility reduce the productive use of our resources and entrench economic inequality.
and later
High-productivity cities—like Boston and San Francisco—have higher-income jobs relative to low-productivity cities. Normally, these higher wages would encourage workers to move to these high-productivity cities—a dynamic that brings more resources to productive areas of the country, allows workers in low-productivity areas to earn more, improves job matches and competes away any above-market wages (another type of economic rents) in the high-productivity cities. But when zoning restricts the supply of housing and renders housing more expensive—even relative to the higher wages in the high productivity cities—then workers are less able to move, particularly those who are low income to begin with and who would benefit most from moving. As a result, existing income inequality across cities remains entrenched and may even be exacerbated, while productivity does not grow as fast it normally would.

zoning restrictions are not distributed randomly but instead tend to be more prevalent in high-income communities... This fact, coupled with the income gains for the rich over the past four decades, have worked toward pricing middle- and lower-income families out of the communities with the best schools.
The speech reviews a good deal of academic evidence. For example:
An indirect way to gauge the impact of land use restrictions and other supply constraints for buildable land, including the local topography, is to compare the sales price of houses to the cost of materials and labor to build the structure. ... As Figure 1 from Gyourko and Molloy (2015) shows, the gap between real house prices and construction costs has grown over time,

The differences across places are large and growing:
Gyourko et al. (2013) shows how the real home price distribution has widened over the last several decades, coinciding with increased variation in land use restrictions....
The answer to lots of people who want to live in the same space, especially urban environments, is to build up. Indeed,
A variety of changes...have led to growing demand for multifamily, rental, shared occupancy, and home modifications.
but alas,
multi-family housing units are ... most often the target of regulation...
Another limit: In most places the ironclad rule is one family per lot, meaning one structure per lot. No granny flats. Then granny has to move in to a nursing home, paid for by medicare or medicaid.
As the Baby Boomer generation ages into retirement, many more elderly Americans will require modifications to the homes they currently live in or may opt for shared occupancy with another family, often their own. Both of these practices would benefit from changes in zoning policies in some areas of the country so as to make home modification and shared occupancy feasible for a larger number of seniors
"The consequences of zoning are much broader and include:"
• Greater environmental damage: when strict zoning policies cap a city’s density, they ensure that the city’s residents must on average occupy more land than they otherwise would and travel greater distances to and from work as well, both of which increase carbon production, all else equal (Glaeser, 2011)
To say nothing of horrible traffic, need for more roads, and all the other pollutants as well as carbon, plus pointless waste of time.

All of this is familiar where I live in Palo Alto. Like most places in the bay area, my city council is agonizingly green, progressive, and  anti-inequality Yet it presides over a rigid zoning system that produces exactly the opposite result: poor people are excluded, young techies who want to live in apartments commute from San Francisco.  Granny flats are forbidden. Horrible traffic flows by single family houses on large lots, costing two to three million dollars and more just for the land.

The speech was nice until the "solutions" part, for example,
First, the Department of Housing and Urban Development (HUD) instituted substantially greater transparency through its Affirmatively Furthering Fair Housing (AFFH) rule,...
I didn't make that one up. Daffy Duck should apply to head this initiative.
The Fair Housing Act of 1968 required any group receiving federal housing funds, as well as federal agencies overseeing such programs, to actively work toward increasing fair housing and equal opportunity. ...the new HUD rule, finalized this year, will give communities new tools to quantify the remaining inequities in local housing markets and achieve greater clarity in setting goals for the future. As a central part of this initiative, HUD will provide publicly open data and mapping tools to community members and local leaders, so that they can assess conditions in their housing markets.
I'm not holding my breath.  Palo Alto's strict zoning did not occur  because nobody has zillow and google maps and so can't figure out what's going on. And they have a slew of programs that are "actively" "working toward" "increasing fair housing."

Oh and of course more cheap credit. Hmm, how can that go wrong
The Multifamily Risk-Sharing Mortgage program, a partnership between HUD and the Treasury,...
This is not a criticism of Jason. He is, after all, CEA chair, so his job is to finish speeches with what great stuff the Administration is doing. That the result is almost a parody of ineffective nanny-state bureaucratic paper shuffling is not his fault.

And his silence on "affordable housing" mandates is doubly praiseworthy. One might have expected an Administration speech on this topic to cheer that morass. Silence is, sometimes, golden.

So let's cheer the common ground: Free markets have strong forces that reduce inequality.  Much inequality is the result of restrictions -- many state and local, and many undertaken by the most well-meaning people, unfortunately unburdened by a sense of the proper limitations of government action and the value of property rights.

Markets also have forces to get around heavy restrictions. The golden goose can leave; to LA or to Austin TX.


  1. Having observed the sausage being made as a former minion at CEA, I think it's likely that the "solutions" section was heavily influenced by the vetting process, which typically includes review by both policy and political advisers inside the White House.

  2. John lives in/near the ultimate example of market pricing in action where single family zoning meets 100+ P to E's for Internet companies, Palo Alto. The house in Palo Alto where i BlackJack'd the roof, 1200 sf, is going for 2 million on Zillow now.

  3. If only the goose could go to LA! Unfortunately, LA's housing restrictions are severe, too. It is really only Southern and Southwestern cities where the housing supply is allowed to grow: Houston, Albuquerque, Atlanta, and so on. See Glaeser and Tobio (08?) for more details on this.

    1. Plenty of nice houses available in Cleveland, Detroit, Milwaukee ... cheap.

    2. Not really -- at least not within the city of Detroit. House selling prices are low because the living really *isn't* cheap. Most of the 'cheap' houses are not in good condition, but instead in need of significant repairs/upgrades. Property taxes and auto insurance are insanely high, and mortgages for purchases in the city are generally unavailable, so you'd likely be paying cash.

  4. I believe in free enterprise and no zoning---highest and best use! But my nieghborhood is....well, special. Not here.

    By the way, the cities with the most restrictive real estate development policies that I know of are the City of Newport Beach and the City of San Clemente, both in Orange County. Both are right-wing bastions.

    In truth, is there a single-family detached neighborhood anywhere in America that would welcome high-rise condos with ground floor retail?

  5. "• Greater environmental damage: when strict zoning policies cap a city’s density, they ensure that the city’s residents must on average occupy more land than they otherwise would and travel greater distances to and from work as well, both of which increase carbon production, all else equal".

    Seems to me that this "environmental damage" is as much a product of "lax zoning laws" as it is "strict zoning laws".

    US urban sprawl is not just a product of stricter zoning within certain boundaries; it is also the result of lax zoning by reclassifying other uses (e.g., agricultural) to residential.

  6. And, another thing. It is certainly true that many people would like to live in San Francisco, Palo Alto, Manhattan or wherever, "if only they could afford it". Why are they attracted to such places in the first place? One might be work convenience, to be sure. But, another is that they like these places *the way they are now*.

    It is a sad irony, lost mostly to economists, but not to many, say, classic poets, that by loving something too much you end up destroying it. You see this played out in numerous tourist destinations that were, once upon a time, in the minds of most idyllic and desirable places to visit. They end up being transformed into something no longer desirable. The rich and creative types will then move on to other pastures, until they, too, are discovered and overrun. It's an interesting game.

    The parallels between the implications of zoning and immigration policy are also pretty striking.

    1. The only constant is change, something that many poets and philosophers seem to understand much better than you. Why you put down people striving to better there existence is beyond me. Not surprised at the undercurrents of racism in your post though.

  7. Im about to rent an apartment in Sf. Its just taken for granted by most people that SF is expensive because of demand and only demand.

  8. I am amused by libertarians. The Bay Area will never allow mass house building. Neither will Seattle. Neither will Boston. And these are the cities that need it the most. But liberatarians, it isn't going to happen. So please avoid getting easy money lending restarted in these cities? RE will just go up artificially.


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