The Agenda

The High Cost of Housing and the Minimum Wage Debate

I’ve just filed a piece for National Review on Donald Sterling, local land-use regulations, and the minimum wage debate. My basic point is that Sterling, a notorious slumlord, has profited enormously from the tendency of liberal cities in California to limit housing permits. These limits help constrain the supply of low-rent housing, which in turn forces low-income renters to spend a high (and rising) proportion of their incomes on rent.

Moreover, the liberal cities that done the most to restrict housing development have been at the forefront of the movement for living wage ordinances and local minimum wage laws designed to better the lives of low-wage workers. One of the chief arguments in favor of minimum wage hikes is that full-time low-wage workers scarcely earn enough to afford rent in much of the United States. This line of argument is somewhat misleading, as low-wage workers tend to receive benefits designed to supplement their market incomes, including the earned-income tax credit and housing vouchers. But if we accept that the lack of housing that is affordable for low-income households is a problem, as I do, it’s not obvious that a higher wage floor is the first step we ought to take.

Even if you believe that a higher wage floor will have absolutely no impact on employment levels or on net job growth, it seems sensible to first focus on limits on housing supply. If you believe that a higher wage floor might lead to the exclusion of some non-trivial number of less-skilled workers from the formal labor market, the case for focusing on limits on housing supply is even stronger, as it’s not at all clear that relaxing these limits will hurt anyone at all. Yes, relaxing these limits and allowing for greater density in cities like Santa Monica and Los Angeles, where many of Sterling’s rental properties are located, might increase congestion. But there are all kinds of ingenious strategies for reducing congestion through the use of congestion pricing. Some homeowners might have to sacrifice spectacular views as they are surrounded by new housing developments. Yet this hardly seems like a compelling reason to force low-income households to pay much higher rents to be within easy commuting distance of employment opportunities. It turns out that for affluent liberal voters living in picturesque cities, it is cheap to back minimum wage hikes that might reduce employment levels for the less-skilled or raise prices for the kind of people who frequent quick-service restaurants and other establishments that employ low-wage workers while it is very dear to back policies that will increase housing supply. One might nevertheless conclude that these affluent liberal voters are admirable for supporting minimum wage increases. Their hearts are, after all, in the right place. Unfortunately, limits on housing permits mean that those who own and control the existing low-rent housing stock — the Donald Sterlings of the world — will capture some share of the resulting increase in market incomes, as low-wage workers in the service sector have to live somewhere. 

The George Mason University economist Bryan Caplan has provocatively argued that democracy is tolerable because, in his words, “democracies listen to the relatively libertarian rich far more than they listen to the absolutely statist non-rich.” In the case of local land-use regulations, however, the preferences of affluent liberal voters have created an intolerable situation for low-income families hoping to climb the economic ladder. When families are obligated to spend a high share of their incomes on rental housing, they find it harder to accumulate wealth; when they are forced into longer commutes, they have no choice but to reduce work hours or to limit the time they spend investing in the human capital of their children. The effects of these decisions are cumulative. Limits on housing supply become limits on life chances — limits that, again, profit the likes of Sterling. 

It is very hard to get people to care about limits on housing supply as a national political issue, despite the fact that it might be the one of the most important. Liberals are suspicious of applying supply and demand thinking to urban housing markets, though writers like Stephen Smith of The Next City (see his recent article on housing in the Bay Area), Matt Yglesias of Vox, and Ryan Avent of The Economist have done valuable work on this front. Conservatives, meanwhile, are inclined to be sympathetic to the interests of homeowners and property owners more broadly, who benefit from local land-use restrictions that constrain the housing supply in desirable markets and thus drive up house prices and rents. Real estate interests are generally uninterested in broad upzoning cities, as the most successful real estate enterprises are incumbents that have learned to navigate the political and institutional constraints on housing supply. Broad upzoning threatens to undermine their privileged position.

There are two ways forward if our goal is to increase housing supply in high-cost cities. One can imagine a coalition of egalitarian liberals and environmentalists uniting with organized labor, including public sector workers, against affluent liberal homeowners in favor of broad upzoning in cities like New York and Los Angeles. Broad upzoning means more construction, which means more (unionized) construction jobs and more tax revenue, which means more or better paid (unionized) public sector jobs. This strategy would yield a clear benefit to the left-of-center coalition, though it would alienated affluent, and vocal, NIMBYs.

Another way forward is, to put it bluntly, for a conservative coalition to force a broad upzoning on urban centers in conservative states. Liberals often insist that metropolitan areas need a system of metropolitan governance — new authorities like Portland, Oregon’s elected Metro Council, which presides over the metropolitan region’s urban growth boundary, among other things. But municipalities are creatures of state government, and state governments have the power to act, in effect, as metropolitan governments. While it would be better if suburban jurisdictions as well as urban jurisdictions embraced upzoning, low- and middle-income households would still benefit if upzoning were limited to large central cities, and if were imposed on these cities by conservative-dominated state legislatures. The problem with this strategy is that there would be no direct political benefit for conservatives. Rather, the benefit would be indirect: families would benefit from more affordable housing, yet these benefits would be diffuse and they would accrue over the course of many years, thus diluting any political gains. If conservative state lawmakers were to pursue such a strategy, they’d need to find a way to connect broad upzoning to their larger political objectives. Like the aforementioned liberal coalition, the right could seek to claim credit for an increase in construction employment, or they could insist that the increase in tax revenue that would flow from upzoning should be shared with taxpayers in the form of tax cuts. There is also an ideological case, namely that tackling the sources of middle-class squeeze, in this case cost growth in housing, is both more effective and more liberal (in the market-oriented sense) than, say, raising the wage floor or increasing transfers to account for housing scarcity. Furthermore, broad upzoning would tend to reduce the need for housing vouchers in particular and cash transfers in general.

I couldn’t tell you which of these strategies is more likely to succeed. Liberals are so skeptical of a market-oriented approach to housing that a conservative embrace of such an approach might alienate them, much as pro-density sentiments on the left have alienated many conservatives to the case for a freer market in housing. But I do believe that the high cost of housing is absolutely essential to understanding the challenges facing low- and middle-income American families, and that tackling this problem is a crucial test for our political movements. 


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