Economy & Business

Restrictive Zoning Laws and the Problem with Local Government

(Reuters: Brian Snyder)
Burdensome regulations have made it harder to live in America’s urban economic powerhouses.

What’s the most pressing economic problem facing the United States today? Some would say it’s stagnating productivity; others would identify the looming threat of automation, which has the potential to disrupt the very nature of our labor force; still others, mainly on the Left, might argue that it’s income inequality.

A separate, related question: What is the appropriate level of governance? Which political entity should be responsible for the lion’s share of policymaking? Progressives tend to favor the federal government; federalists and many conservatives would rather that powers be devolved to the states.

Now let’s talk about zoning regulations.

Though we don’t notice it in our everyday lives — it’s hard to see construction not happening, after all — the rise in regulations governing land use in our nation’s largest cities has had an enormous impact not only on the economic and physical geography of the United States. Were American cities less rife with regulation, they would be larger, more vibrant, and more productive — economic powerhouses ideally equipped to engage in the ruthless international competition that characterizes the modern economy. Wages would be higher, housing prices would be lower, and the patterns of American life across the country would look very different.

Those are the conclusions of a recent paper exploring the economic consequences of the rise in zoning regulations since 1980. The main problem with excessive zoning is that it imposes barriers to entry in particularly productive economic markets, prohibiting an efficient distribution of people across urban areas. This hurts both city-dwellers who pay inordinately high rents and those Americans who are unable to move to the city in the first place. In the language of economics, they cannot take advantage of the “agglomeration effects” that occur in areas of human concentration, in which each additional person contributes to a whole greater than the sum of its parts.

It’s hard to overstate just how different America would look if zoning regulation had remained fixed at its 1980 level. It’s not that overall output would be enormously improved — the paper’s author, Andrii Parkhomenko, estimates that total output in 2007 would have been roughly 2.1 percent higher, with wages raised by roughly the same amount. Rather, it’s that the distribution of output, and with it the geographic distribution of people, would differ markedly. The populations of New York, Los Angeles, and Chicago would have been, respectively, 61 percent, 43 percent, and 73 percent larger in 2007 as the present misallocation of labor corrected itself. Small cities would have become smaller, while the booming southern metropolises of Texas, which already boast light zoning regulations, would have remained much the same size.

The seriousness of all these findings should remove the question of zoning from the political back burner to which it has been relegated and place it somewhere closer to the front row. That should force us to inquire into the thorny question of the ideal level of government on which policymaking should occur — and cause federalists and localists alike to reconsider and analyze their predisposition to local solutions.

Were American cities less rife with regulation, they would be larger, more vibrant, and more productive.

Zoning regulation is a relatively unique issue in American politics in that virtually none of it occurs on the federal level and very little of it is decided in state capitals. Instead, it has long been the near-exclusive purview of municipalities themselves. From a purely localist perspective, this makes a good deal of sense — land use is among the most vital determinants of a community’s fate and it arouses local passions like few other issues. Perhaps local voices should be privileged over those of non-residents.

But this doesn’t account for the existence of negative externalities, which are, in this case, very sizable. A municipality’s decision to impose strict limits on the density of housing, for instance, doesn’t impose much of a cost on the current residents of the municipality, but it does impose a society-wide cost not directly borne by them. Many suffer from the decisions of a few; and, more importantly, the many exert little say in the decision-making process of the few.

Nor does it account for the complex nature of the interconnected economy, in which the actual unit of economic organization is not the individual municipality but the broader region — the New York agglomeration, the Bay Area, the Dallas–Fort Worth metro area, or Boston and its environs. A teacher lives in San Jose and commutes to work in Palo Alto; a consultant lives in Stamford and commutes to midtown Manhattan; a designer treks from Dorchester to Cambridge each morning. They would all like to live closer to their workplaces, but persistent pro-zoning forces have kept rents high and stymied that possibility. And those are only the visible victims: Thousands more wait in the wings, unable to move to the metro area to begin with.

These are not trivial economic issues. They affect not only young professionals who wish they could live in a slightly trendier neighborhood, with better bars and nightclubs. They affect the composition of our economic life and the character of our national economy; they get at the question of whether our cities can be veritable universes unto themselves, home to citizens of all social classes, engines of mobility for all who seek it. By imposing strict zoning laws on many — though not all — of our economic powerhouses, we have vastly restricted millions’ access to the opportunities they desperately need, stunted our economic growth, and prevented our country from reaching its true potential.

What makes this issue difficult for adherents to a localist doctrine — and I would, by and large, describe myself as one of them — is that nearly all of these restrictive regulations were decided on at the local level. Thousands of individual municipalities, working in an uncoordinated fashion, managed to do what would likely have been impossible at the federal level: They made it extremely difficult for people to move to major cities.

Indeed, it at times seems as if municipalities themselves are constitutionally incapable of producing policies to grow the housing stock. At the local level, after all, local voices are amplified; NIMBYist movements advocating for a cessation of high-density building in a certain neighborhood are far louder locally than they would be regionally or statewide. And by seeking to restrict supply, property owners are in fact following the incentives built into the existing system — in this case, to ensure that the value of their own property remains high.

In short, if we are to generate countrywide economic growth, a process that cannot occur without adequate housing stocks in the country’s booming cities, we might need to rethink our model of local government. This will be a difficult task, as enamored with the locality as America is. But it is one crucial to the future economic vibrancy of the country, and it can’t wait any longer.

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