Could zoning be what’s holding the economy back?

December, 2017

I’ve heard a diverse group of reasons for the slow growth rate of our GDP and the stagnation of wages. Many Democrats want to increase GDP growth by raising the minimum wage and investing heavily in infrastructure, while most Republicans have been arguing that we need to reduce tax rates (again) and severely restrain regulation.

Some people attribute the problem to globalization (which includes high levels of immigration). Others blame automation and wonder if robots won’t replace us all someday.

Now, I have come across another theory. In research to be published in the February issue of the Journal of Monetary Economics,
Lee Ohanian, a senior fellow at the conservative Hoover Institution and the associate director of the Center for the Advanced Study of Economic Efficiency at Arizona State University; and Edward Prescott, the Center’s director and recipient of the 2004 Nobel Prize in economics, argue that “as much as 40% of the slowdown may be due to increasingly severe land regulations.”

Restrictions on the use of land, they say ”… impede the flow of workers and capital from regions with poor job opportunities to places with good ones.” They point out that interstate migration rates used to be high until about 1980, but have slowed considerably since then.

They use California as their example. After World War II, permissive zoning and heavy investment in schools, roads and infrastructure, helped create opportunity for millions. “Between 1950 and 1980, California’s population increased from a little over 10 million to nearly 24 million, and its share of the national population rose from about 7% to 10%.”

Despite this rapid growth, “…housing remained relatively affordable. In 1970 California’s home prices were about 36% higher than the national average.”

But all that changed as land regulations got more and more restrictive, and expenditures on infrastructure dwindled, starting around 1980. By 1990 California housing was 147% more expensive than the nation overall. These “Stratospheric home prices have redirected millions of workers away from the Golden State’s highly productive industries to states with more permissive land regulations and lower housing costs, but also with fewer high-paying jobs.”

You can certainly see the effect of heavy restrictions on land use here on Cape Cod. Housing prices, though still far below those of coastal California, are out of whack with median family income. Meanwhile low supply has made rentals unaffordable for many. But just try to get permission to build something. We have gone beyond NIMBY (Not In My Back Yard) to BANANA (Build Absolutely Nothing Anywhere Near Anything).

If we want to keep house prices and rentals affordable for our kids, and their kids – if we want to have a good supply of jobs available for the generations to come — we have to invest in our infrastructure and loosen residential zoning restrictions. First we need some sort of sewer system to protect our single-source aquifer. New technology may keep the cost within reason, but whatever it costs we need it. We also need to stop fighting every multi-family housing proposal that comes along. With new sewers we can have many units per acre.

And we can help our retirees stay in their homes by allowing accessory apartments in many single-family houses. I used to live in Newton where there are thousands of houses with two units, many of them illegal (the battle over legalizing them has been going on for at least 40 years). There doesn’t appear to be any negative effect on property values.

These actions, and others like them, will not only help the Cape, but might help improve the nation’s economy. The Ohanian and Prescott report claims that “If every state rolled back land regulations to 1980 levels, GDP could rise by as much as $1.8 trillion.”

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