Your Landlord Is a Drag on Growth
After many decades of essentially ignoring the role of land, economists are starting to reconsider. Some are worried that landlords are hurting growth by making it too expensive to live in highly productive cities. Now, some are starting to think about how land figures in the rise in inequality.
The basic idea is that landlords use their local political power to stack the deck. Using their money and connections to sway local elections, they can influence politicians to enact land-use regulations that keep out other people and businesses. That gives them a so-called first mover advantage that shuts out the competition. At first, people who want to move to for work or to start a business can move to other, newer cities where local landlords are not as politically entrenched and regulation not yet as onerous. But eventually the country fills up with powerful landowners, and the options for cheap relocation become limited. Stuck in dying cities or far away from job opportunities, potential employees languish in poverty.
That unpleasant narrative might now be playing out in the U.S. Jason Furman, the chairman of the Council of Economic Advisers, gave a recent speech to the Urban Institute in which he painted just such a picture. He noted that Americans are moving much less than they used to, and are also switching jobs less frequently.
According to Furman, some of the change may be due to more zoning. Since the late 1970s, land-use regulation has skyrocketed in the U.S. That has caused housing prices to go up at a much faster rate than construction costs -- something sure to please existing homeowners, but which locks potential homeowners out of the market. The more zoned a city is, the less affordable it tends to be. Bloomberg View’s Justin Fox recently reported on how many fewer apartments are built these days. Undoubtedly, much of that is due to stricter land-use regulation.
Lack of affordability doesn’t just create inequality among individuals, it creates inequality across regions. Furman shows that states with more constrained housing supply have seen much slower income convergence between different cities. That strongly implies that land-use restrictions are effectively keeping people penned up in bad locations.
Of course, this is in addition to the other problems that zoning causes, such as the environmental costs of sprawl, the potential exacerbation of housing bubbles, and the productivity drag from reduced density.
The new spotlight on zoning is causing even traditional proponents of government intervention to call for regulatory reform. Paul Krugman notes that the recent influx of wealthy people into big cities means that we need to deregulate land use and increase the stock of housing:
[T]his is an issue on which you don’t have to be a conservative to believe that we have too much regulation. ... New York City can’t do much if anything about soaring inequality of incomes, but it could do a lot to increase the supply of housing, and thereby ensure that the inward migration of the elite doesn’t drive out everyone else.
Unfortunately, calls for relaxing zoning regulations are likely to go nowhere. The reason is obvious, and political. Existing landlords have lots of power in local politics, while potential landlords and tenants, because they are still living elsewhere, have zero.
Of course, local renters, including businesses, have a stake in lifting zoning restrictions, in order to encourage more outsiders to move in, boost a city’s economy, and increase its income level. But this is a diffuse, disunited constituency, while landlords are organized and motivated. As the political economist Mancur Olson pointed out, vested interests are often committed and concentrated enough to buck the needs of the inattentive majority. In the end, Olson argued, the whole nation declines, its economic lifeblood sucked out by entrenched special interests.
Some economists have theorized that competition between regions would be enough to prevent such a dystopian outcome. But in the real world, politics may cause regions to do things that are not in their long-term self-interest -- like strangling their economies with land-use restrictions.
If it turns out that zoning really is a major drain on the U.S. economy, it opens the possibility of a bipartisan coalition. Conservatives are interested in limiting regulation overall, while liberals would like to reduce inequality. Since this is one of the clearest cases where regulation is increasing inequality, politicians on both sides of the ideological divide should figure out a way to come together to work out reforms.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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