Something seems wrong with the American economy, despite strong headline numbers. Nine years into the expansion, GDP and productivity growth remain below their long-term trends. According to a working paper published by the National Bureau of Economic Research, restrictive land-use regulations in California and New York are a major reason why. The paper, by Kyle F. Herkenhoff, Lee E. Ohanian, and Edward C. Prescott, argues that “these restrictions have depressed macroeconomic activity since 2000.”
The basic idea is that land-use regulations artificially constrain the supply of land, driving up prices for housing and commercial rent — and that these regulations are the most restrictive in places where productive opportunities are plentiful. Take the Golden and Empire States, where, compared with the rest of the country, jobs abound and productivity is high. These states have extraordinarily restrictive zoning and development laws that drive up the price of land. Someone considering a move to San Francisco or Manhattan might find the cost of moving to be prohibitive and decide to continue living in a place with comparatively fewer job opportunities. Hence, the authors say, land-use regulations “raise land prices, slow interstate migration, and depress output and productivity relative to historical trends.”
That’s not a novel insight. Harvard economists Peter Ganong and Daniel Shoag, for instance, found a similar result in 2012. But these authors contribute to the literature by developing a general-equilibrium model that evaluates what the economic effects would be if restrictions on land use were eased.
And they would be significant. According to the model, “U.S. labor productivity would be 12.4 percent higher and consumption would be 11.9 percent higher if all states moved halfway from their current land-use regulation levels to the current Texas level.” Even if California and New York deregulated back to their 1980 levels, the authors find, “aggregate productivity” would rise “by as much as 7 percent and consumption by as much as 5 percent.”
Of course, this is an inexact exercise. Not everyone would pack up and move to San Francisco if it became a cheaper place to live. People have sentimental attachments to their homes and communities that no model can capture. But there are certainly people who would make the move, and these regulations benefit a small class of homeowners at their expense. Easing land-use restrictions would open up opportunities for ordinary Americans. According to this paper, it would also give a major boost to the U.S. economy.