Economy & Business

The New Corn Laws: Why Housing Costs Are So High

Residential neighborhood in San Francisco, Calif. (Pixabay)
Make it affordable for the middle class by relaxing constraints on supply. Movements toward that end are underway in California.

David Ricardo noted that when an economy grows but depends on an input with a fixed supply, most of the gains will accrue to the owners of that limited input. During the Industrial Revolution in Britain, those were the owners of crop land. Normally a rising demand for food would lead to imports, but in 1815 the British Parliament passed prohibitive tariffs, called the Corn Laws, to prevent a collapse in the price of grain after the Napoleonic Wars. Given that the British food supply was based on a fixed quantity of land, this meant that if capitalists increased pay to workers, the workers could afford to pay more for food, and tenant farmers could pay higher rent to landowners.

In the early 19th century, Britain’s economic growth had less benefit than one would naïvely expect for the capitalists and workers who created wealth through the technological marvels of steel, steam engines, railroads, and power looms. Rather, much of the gain was captured by landowners, who did little more than raise agricultural rent in tandem with the price of grain. We have seen a similar dynamic with America’s most productive cities. Today the limiting resource whose owners capture the benefits of growth is not agricultural land but housing, and just as during the era of the Corn Laws, what appears to be a natural limit of geography is really an arbitrary imposition of bad policy.

Land is of course inherently finite, and land in a particular labor market is not only finite but may be scarce. However, that there is only so much land in a metropolitan area does not determine how many people can live on it. A given plot of land can be occupied by a large apartment building, a small apartment building, or a single-family home, or it can remain just a vacant lot holding nothing but weeds and trash. Which usage the land is put to is political, and in the sense not just that it is decided by the state but that it follows a partisan divide.

In an analysis of California cities, the environmental economist Matthew Kahn found that among the strongest predictors of minimal housing growth was the combined share of the vote going to Democrats and minor parties to their left. Even aside from zoning, neighbors can use environmental-impact review, historical-preservation laws, and other regulations to tie up new construction in the courts, thereby raising its costs. Zoning, however, is the starting point, and in many cities only single-family homes are allowed. One of the surprising things about Silicon Valley is that it looks like the sprawling outer suburb it was in the mid 20th century, not the center of a booming economy that it is today, with headquarters of Apple, Google, and Facebook.

The result is exactly what David Ricardo would have predicted. When you compare metropolitan areas, you find that the annual change in rent is almost perfectly correlated with the annual change in the income of renters. The correlation appears to be achieved in part by landlords’ raising rent to capture rising incomes and in part by churn, with the working and middle classes fleeing expensive areas and high earners being drawn to expensive areas with growing economies. For instance, California is losing its native-born working and middle classes, with net positive domestic migration only among those earning over $90,000. Likewise, the only educational group with net domestic migration into California are Americans with graduate degrees. The biggest recipient state is Texas, followed by Arizona and Nevada — states with lower wages than California but even lower rents. When a state with high wages and a Mediterranean climate is losing its college-educated middle class to states with lower wages and miserable heat, something is profoundly wrong.

Housing in cities with growing economies has been rising at an increasing rate and is now in many cities unaffordable even for middle-class households. The federal government’s rule of thumb for household budgets is that total housing costs should be no more than 30 percent of income. For the median U.S. household, that means a housing budget a bit under $1,400 a month. That places a two-bedroom apartment out of reach of the typical American household in Boston, Chicago, Los Angeles, Miami, New York, Philadelphia, San Francisco, Seattle, and Washington, D.C. Even Riverside, a city whose main attraction is that it is only two and a half hours of soul-killing traffic from Los Angeles, is unaffordable to the average American.

For the median U.S. household to rent a two-bedroom apartment in San Francisco would take almost its entire income. Put another way, it takes a household income at the 93rd percentile to responsibly rent a two-bedroom apartment in San Francisco. Los Angeles is plebeian by comparison, being affordable for the top quartile of national households. Of course neither area is actually limited to the rich, through the simple expedient that many working-class and middle-class people spend more than 30 percent of their income on housing. In the San Francisco Bay Area and Silicon Valley, about a quarter of renters pay over half their income in rent. In the Los Angeles area, the figure is 31 percent. Fortunately, California’s restrictive zoning has not led to a humanitarian crisis on the scale of the Irish potato famine, although the state is experiencing an explosion of the homeless population, which has such secondary impacts as a hepatitis-A outbreak across the southern half of the state and a massive wildfire, which began with campfire at an encampment of homeless people in the middle of Los Angeles.

In 1838, the Anti–Corn Law League launched with the enthusiastic support of the capitalist middle class. Part of the motive was humanitarian, as the League had special support from religious dissenters with experience in the anti-slavery movement, and it was in response to the Irish potato famine that Robert Peel pushed repeal through Parliament in 1846. However, just as important for the League’s support was that the price of grain put upward pressure on wages, at the expense of profit: Capitalists and workers had a shared interest in allowing the import of cheap grain. Interestingly, Karl Marx was enthusiastic about free trade and concurred with Ricardo that the Corn Laws benefited landowners at the expense of both capitalists and workers, though of course he thought the community of interest stopped there.

We now see a Yes In My Back Yard (YIMBY) movement organized by renters pushing for an expansion of housing supply in ways big and small.

Similarly, housing costs create a major problem for growing industries today. The expense of buying four houses to tear down for the site of Mark Zuckerberg’s mansion is nothing compared with paying Facebook’s tens of thousands of employees enough to bid, against Apple and Google employees, for a finite supply of mid-20th-century ranch houses. Housing costs are gradually pushing tech out of Northern California to comparatively affordable but still pricey Seattle, which in turn is losing an Amazon expansion to a cheaper city to be decided.

Whereas the Anti–Corn Law League began with the employers of industrial labor reacting to the domination of landowners, we now see a Yes In My Back Yard (YIMBY) movement organized by renters themselves pushing for an expansion of housing supply in ways big and small. For instance, when neighbors blocked a small Berkeley developer from building three small legally zoned houses, the San Francisco Bay Area Renters’ Federation successfully sued the zoning board. A much more ambitious approach is being taken by California state senator Scott Wiener, a San Francisco Democrat. Wiener has introduced Senate Bill 827, which would override local zoning ordinances throughout large parts of the state’s urban areas.

In effect, any residential lot within easy walking distance of a train station or a major bus stop would now be zoned for apartment buildings between four and eight stories tall. For instance, my Los Angeles neighborhood has a light-rail stop and several bus lines, so SB 827 would allow my neighborhood’s current mix of single-family homes and two- to three-story apartment buildings to be replaced with eight-story apartment buildings. SB 827 would not be as radical as the repeal of the Corn Laws, since, while a developer would theoretically have the right to replace a single-family home with a dozen apartment units, neighbors concerned about traffic, noise, or shadows cast on their tomato gardens (yes, really) would still be able to file nuisance lawsuits alleging that building multi-family housing destroys historically significant ranch-house architecture or the habitat of the Western speckled mulch maggot.

Nonetheless, SB 827 is a significant step toward fixing a broken system and making it possible at least in principle to make housing affordable in the only way that counts: by relaxing constraints on supply. Although Kahn’s analysis showed that sluggish housing growth comes from the left, his data predate the YIMBY movement to expand housing. This new movement mostly comes out of the same left-wing politics as do restrictions on housing, but to their credit, the YIMBYs recognize that making it impossible to build in places like California is not only regressive in its impact but bad for the environment, with dense urban living in moderate climates being far better for the Earth than long commutes and high energy usage for heating and cooling. Just as the Corn Laws were repealed through a coalition representing both industry and labor against the privilege of landowners, relaxing zoning restrictions would be both favorable to the working and middle classes and pro-business in the best possible way, by being pro-market. If David Ricardo and Karl Marx could agree on repeal of the Corn Laws in the 19th century, conservatives can cheer on Senator Wiener’s efforts to relax laws that increase the cost of living today.


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