How Local Government Accelerates Income Inequality and Reduces Economic Output

By. Neil Williamson, President

During last night’s joint Albemarle County/ City of Charlottesville Planning Commission meeting, I wondered if these bodies truly understand the economic impact of the regulations the propagate and enforce.  Considering this community’s interest in “income inequality” [Remember Occupy Cville?] it is curious that there has not been significant attention to local government actions that may be accelerating the so called  1% getting richer.

Please let me explain.

For years, some in the environmental community have asked that an ecological impact statement be considered for any new rezoning or amendment to the comprehensive plan.  Now it seems like we may be nearing a time when localities might be able to calculate the aggregate production impact of development restrictions.  Interestingly, many of those same folks who advocate for increased regulatory red tape also advocate for affordable housing.  Recent research supports the Free Enterprise Forum position that regulation inflates housing costs.

Thanks to our old friend,  Michael Harvey, this year’s summer reading list includes two papers released this Spring that use economic calculus to determine the impacts of regulatory restrictions on housing supply, housing affordability and Gross Domestic Product.

The first paper, Deciphering the fall and rise in the net capital share, is written by Matthew Rognile, a 26 year old MIT graduate student.  Presented to the Brookings Papers on Economic Activity conference, the paper argues counter to the prevailing economic theory that rich capitalists have an upper hand in generating new wealth based on their ability to invest rather than labor, instead Rognile links the “recent trends in both capital wealth and income are driven almost entirely by housing”.

His paper is filled with mind numbing calculations supporting his thesis but it is one of his charts that brings the meaning into much clearer focus:

rognile chart

In reviewing Rognlie’s work, The Economist suggests this new analysis suggests we rethink how we deal with income inequity:

But if housing wealth is the biggest source of rising wealth then a more focused approach is called for. Policy-makers should deal with the planning regulations and NIMBYism that inhibit housebuilding and which allow homeowners to capture super-normal returns on their investments.

Writing on Zerohedge.com blog, Daniel Drew highlights his hometown as a poster child for the regulatory red tape that can create inflated housing prices to the point that it becomes unsustainable.

Take a look at San Francisco’s zoning map, and ask yourself if that is what a free market looks like.

San Francisco Zoning Map

And if you were wondering what all those yellow squares were, this explains it:

Single Unit Zoning

As you can see, the entire city has been designated as a perpetual single-unit metropolis, and with water on three sides, the sprawl potential is limited. After seeing this, it’s no surprise that houses from the 19th century cost $1 million.

Greg Ferenstein, writing on The Ferenstein Wire, takes us back to the Joint Planning Commission meeting last night as he writes:

Local housing boards have made it damn-near impossible to build new condos. After much infighting, San Francisco plans on building up to 50,000 more units. But, San Francisco’s chief economist, Ted Egan, estimates that that the city would need at least 100,000 new units to stem increasing costs, let alone bring prices down to something more affordable.

If Rognlie is correct and we really care about inequality, it might be wiser to redirect anger towards those who get in the way of new housing, rather than rely on taxes to solve our problems. emphasis added – nw

While we have been providing anecdotal evidence of Rognlie’s point for well over a dozen years, it is very helpful to have an economic analysis, even if it is mathematically over our head, to support our position.

Perhaps even more impactful, is the April 2015 paper Why Do Cities Matter? Local Growth and Aggregate Growth by Chang-Tai Hsieh (University of Chicago) and Enrico Moretti (University of California, Berkley). This paper quantifies the impact of restrictive land regulations.

In economic theory, total-factor productivity (TFP), measures the efficiency of all inputs to a production process.  TFP  is a variable which accounts for effects in total output not caused by traditionally measured inputs of labor and capital. If all inputs are accounted for, then total factor productivity (TFP) can be taken as a measure of an economy’s long-term technological change or technological dynamism.

According to the paper:

We estimate that holding constant land but lowering land use regulations in New York, San Francisco and San Jose to the level of the median city would increase U.S. output by 9.7% In essence more housing supply would allow more American workers to access the high productivity of these high TFP cities.  We also estimate that increasing the regulations in the South would be costly for aggregate output.  In particular, we estimate that increasing land use regulations in the South to the level of New York, San Francisco and San Jose would lower U.S. output by 3%.

Interestingly, the paper concludes with two very different options for public policy, the first calling for the Federal government to constrain U.S. municipalities ability to set land use standards.  The second, seeks to link labor and jobs absent housing:

An alternative is the development of public transportation that link local labor markets characterized by high productivity and high nominal wages to local labor markets characterized by low nominal wages.

The Free Enterprise Forum appreciates the suggestion of the public infrastructure but anecdotally has seen the private sector stepping into this space in several ways including company sponsored van pools, telecommuting as well as remote office locations.

Back to our little part of the world, I have to wonder if given empirical data regarding the economic harm extensive land use restrictions create combined with the income inequalities that are accelerated by their imposition and the measured ecological benefit, might the discussions be more focused on the facts rather than feeling good about limiting private property rights.

Considering the discussions at the Joint Planning Commission meeting last night, I tend to think it wouldn’t make a hill of beans of difference; and that’s a shame.

Respectfully Submitted,

Neil Williamson, President

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20070731williamson Neil Williamson is the President of The Free Enterprise Forum, a public policy organization covering the City of Charlottesville as well as Albemarle, Greene, Fluvanna, Louisa  and Nelson County.  For more information visit the website www.freeenterpriseforum.org

 

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