Land Use Restrictions and Other Barriers to Growth

Primary Idea: Eliminating Local Land Use Powers

America has wildly different productivity levels across space. Per capita GDP in the San Jose Metropolitan Area is over $100,000. Per capita GDP in the McAllen Metropolitan Area in Texas is under $20,000. How can these remarkable differences in productivity persist?

One reason is that the human capital and physical capital levels differ significantly across these places. But even controlling for human capital, wage differences across the U.S. are enormous. If we accept neoclassical theory, this implies that the marginal product of labor is vastly higher in some parts of the U.S. than others. This heterogeneity offers real possibilities for growth. If the rest of the U.S. saw its per capita productivity levels rise to those seen in New York, then national income would grow by over 40 percent.

Indeed, it is also possible that the shift of labor from less productive to more productive places would have growth, as well as level, effects. Silicon Valley is a churning cauldron of talent that consistently produces new ideas. Would it produce even more new ideas if Silicon Valley was much larger? 

During the 19th century, Americans regularly moved from less productive places to more productive places. Farmers left the rocky soil of New England to go to the Ohio River Valley and Illinois. Immigrants crowded into cities, like New York and Chicago, and became part of a great economic machine. The free migration of labor ensured that new activities would find new workers.

But something has changed in the U.S. In the 19th century, high manufacturing wages strongly predicted faster population growth. Since 1980, population growth has often been slower in wealthier areas. This slowdown is most notable in coastal California, where the wages are high and the climate is superb and yet population growth is distinctly sluggish.

Why have the most productive parts of America stopped adding population? There is no lack of demand for these areas. We see this in the extremely high housing prices in the high income, coastal areas of the United States. The problem is supply. Whereas California built extensively in the 1960s, as New York built extensively during the 1920s, both of these areas are far less prone to permit new construction today.

In some cases, construction can be limited by natural characteristics. Water and hills make building difficult, as Albert Saiz’s work illustrates. Yet these are not insurmountable obstacles. The Back Bay, one of Boston’s toniest neighborhoods, was reclaimed from the water — as was much of the Netherlands. Moreover, there is no lack of land in much of high wage America. Middlesex County, Massachusetts, which contains Harvard and M.I.T., is substantially less dense than Harris County, Texas, which contains Houston. Yet Harris County still builds more than Middlesex County. Even the most cursory look around Silicon Valley will make the point that by global urban standards, the area is remarkably low density.

Housing supply in desirable areas is being prevented by regulatory, not natural, barriers. Over the past half century, the U.S. has gone through a property rights revolution. In the 1960s, developers found it easy to do business in much of the country, often taking advantage of public support through eminent domain. In the past 25 years, construction has come to face enormous challenges from any local opposition. In some areas it feels as if every neighbor has veto rights over every project. To make matters worse, the legal system frowns on side payments so that it is difficult for developers to adequately compensate neighbors for their support.
Without such compensation, there is little reason to think that the local opponents of growth internalize any of the benefits of new construction. To most residents, a new project is nothing but a bother. They don’t care about the welfare received by the new resident, or the benefits earned by the builders or by the employers who have to pay lower wages when housing costs are lower. Moreover, unaffordable housing isn’t a problem to most homeowners — it represents an increase in the value of their biggest asset.

Diagnosing the problem of excessive local land use restrictions is easy. Producing a remedy is hard. At the local level, it is easy to imagine a system that replaces uncertainty with clarity and delays with fees. Ideally, developers should be able to build as long as they cover the social costs of their building, which can be covered by writing a check. The check writing could even be structured so that communities that delay projects longer get smaller checks.

But most localities don’t want building and they have little interest in wholesale change. Indeed, the problem of excessive regulation is far more extreme in suburbs which have become homeowners’ enclaves than in big cities where mayors internalize a wide range of interests. Change is most likely to come from states, which have the option to overrule local land use controls.

I think that the most natural solution is to give developers a get‐​out‐​of‐​jail‐​free card from local regulation, based loosely on Massachusetts’ Chapter 40B. The state could write its own code for building which might include impact fees. Localities can make it easier to build than the state code, but not harder. Essentially, we would just write localities out of the land use process.
This proposal has no chance whatsoever of being passed and indeed, progress in reducing land use regulation is quite difficult. Typically, any progress that occurs is incremental, usually within a single jurisdiction led by someone who wants change. Still, I’m sticking with my proposal so that America’s dysfunctional housing market gets a bit of attention.

As an epilogue, let me mention three other salutary housing market reforms. First, Henry George was right and we should tax land rather than structures. Moving to a land tax from a structure tax would reduce the incentives to build less housing.

Second, we should end the Low Income Housing Tax Credit. The LIHTC subsidizes new building in places where it is needed (San Francisco — because of local land use restrictions) and where it is not (Texas and Detroit). America’s housing markets are so diverse that it makes little sense to have any countrywide policy.

Third, we should rethink the various homeownership policies that distort individual buying and borrowing decisions. A consumption tax would be vastly more sensible than an income tax with a deduction for home borrowing. Importantly, though, David Albouy reminds us that the deduction does tend to reduce the tendency of the tax code to distort the decision of whether to move to low or high housing cost areas. Fannie Mae and Freddie Mac remain a disaster that should be completely overhauled. 

Secondary Idea #1: Reform and Shrink Disability

I start with the view that America’s most pressing social problem is extreme joblessness. Figure 1 shows the terrible decline in the employment to population ratio that has occurred in the United States since the late 1960s. Today, more than 17 percent of prime age men do not work. The basic pattern is that joblessness leaps during recessions but never fully recovers during booms. The fact that even during booms joblessness is still much higher than during 1960s belies the notion that stimulus is the right fix for joblessness. Not only is society losing the value of their talents, but the underemployed themselves are paying an awful price.

Disability policies relate closely to joblessness. Figure 2 shows the rise in disability recipients. This rise occurs despite the fact that Americans are healthier and work in less dangerous jobs. Disability is particularly powerful in discouraging work, because it offers payments conditional upon not working and feeling sick. Reforming disability is politically tricky, but Mark Duggan has been particularly thoughtful in producing new ideas. The right answer surely involves tougher restrictions on disability and more intermediate options, where individuals can receive some aid even if they continue working. The key is to reduce the incentives to remain jobless that are created by public programs.

Secondary Idea #2: Eliminate the Payroll Tax for Poorer Americans

A similar idea is to reduce the payroll tax for poorer and younger Americans. These taxes, paid by both employers and employees, create a distortion against work, at least as long as workers don’t value the benefits of social security highly. Eliminating these taxes for workers at the low end of the wage distribution, and perhaps for young workers altogether, would seem to increase the incentives for firms to hire and for young people to find jobs. Reduced payroll taxes will be felt by workers as a boost, similar to boosting the minimum wage, but they won’t have the adverse effect of deterring new job creation.

Secondary Idea #3: Reform and Shrink Federal Infrastructure Spending

Increasing spending on infrastructure is an extremely popular idea on the left, yet there is little evidence to suggest that the federal government’s contribution to infrastructure spending is particularly effective. Indeed, the structure of the Senate means that federal transportation aid goes disproportionately towards highways in low density states. Federal transportation aid has been particularly associated with some of the great follies of American public spending, such as Detroit’s People Mover monorail.

Most infrastructure runs within states and localities, and there is little reason for the federal government to fund that. Moreover, in many cases, infrastructure would be better funded by user fees. There is no reason why taxpayers should be subsidizing the generally prosperous users of airplanes. In many cases, private provision — whether of airports or roads — is particularly attractive. Eduardo Engel’s work on public‐​private partnerships is particularly enlightening and it reminds us that when a private enterprise has invested in a highway, then it will have strong incentives to maintain that highway if its revenues come from tolls.

Secondary Idea #4: Move Failing School Districts to All Charter Systems

The connection between education and growth is one of the best established facts in cross‐​country growth empirics. There is also a well‐​established link between schooling attainment and urban success. Yet many of America’s school districts, particularly those in poorer cities, have fared poorly. Reforming those systems has proved to be quite difficult, although the work of Joshua Angrist and others has shown that many charter schools have achieved remarkable results.

One implication of this work is that a particularly troubled system should essentially move to an all charter model. Gradually shrinking the public school system of Detroit and replacing it with a complete charter system seems like a reasonable course. However, as we move along that course, we must evaluate the charters regularly and close the charters that are performing more poorly than the public schools. If the public schools can improve and compete with the charters, then they may certainly have a place in a more competitive educational ecosystem.

A more radical idea is to move to a global charter/​voucher system. In this system, parents of children in cities can take their kids out of school and go to any provider, anywhere in the country. The city will then pay the share of schooling equal to the average cost of a child in the public system. This would enable an even more competitive system and would make it more attractive for many parents to live in cities, because they could use the payments from the public school system to fund their children being educated in private or parochial schools. This would act against the terrible incentive that we have created for parents to move out of cities to get access to better performing school districts.

Secondary Idea #5: Move to One‐​Stop Permitting for Small Business Formation

A fifth idea involves reforming the regulations that can stymie local business formation. In the primary idea, I addressed the point that localities should only regulate if benefits exceed costs. This point is as true for business regulation as for land use regulation. One positive step would be for states and municipalities to apply cost‐​benefit analysis to all of their regulations. Another step forward is to embrace one‐​stop permitting. There are effectively two variants on this idea. One variant, the Devens model (named after Devens, MA, which has successfully used this approach for years), involves a public official who is literally empowered to license any new business. The second involves a public interface who then connects with myriad regulators. The first option is far more powerful, since the official can be held accountable for permitting times. One approach that I have suggested is to begin with one‐​stop permitting within an entrepreneurship zone in a higher poverty area. This should make this more politically palatable. Then, ideally, if the system proves a success, it can be expanded city‐ or statewide.

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on reviving economic growth.