Yes, land-use restrictions make cities unaffordable. But they also keep inequality between regions from becoming even worse.
It’s become perhaps the most widely accepted truism in urban development and economic policy circles: NIMBY zoning and overly restrictive land-use policies and building codes keep housing prices high, making superstar cities like New York and San Francisco less affordable. Plus, they take a huge bite out of the U.S. economy as a whole.
Remedying this has won wide support from urban economists and city builders on both sides of the political aisle. In the February 2016 Economic Report of the President and in a follow-up report that advocated for a new housing policy toolkit, the Obama administration indicted unduly strict land-use rules as leading to damaging rents and holding back American innovation and economic progress.
But what pundits and experts talk about much less is that these same land-use restrictions function to keep America’s deepening spatial inequality from becoming even worse. Believe it or not, a growing number of studies find that the widening gap between thriving coastal superstar cities and tech hubs and the rest of the country could be even bigger, if not for these restrictions.
A recent study co-authored by Nobel Prize–winning economist Edward Prescott, Kyle Herkenhoff of the University of Minnesota, and Lee Ohanian of the University of California, Los Angeles, shows that although land-use restrictions can and do stifle overall economic productivity, they have also kept geographic inequality between states from growing worse.
The study looks at the effects of land-use policy on the 48 contiguous U.S. states over the six-plus decades between 1950 and 2014. It compares the effects of tight land-use restrictions in California and New York to Texas, the state with the most relaxed restrictions of those studied, as well as five other broad groups of states: the South; the Rust Belt; the Northeast/Mid-Atlantic region; the Midwest region; and the Pacific/Mountain region.
The study finds that tighter land-use restrictions in California and New York have created a vast spatial misallocation of resources. The authors’ analysis reveals that reverting urban land regulations from 2014 levels back to 1980s levels would vastly improve productivity. If all U.S. states moved just halfway from their current regulation levels to the current Texas level, both productivity and economic output nationwide would be roughly 12 percent higher.
However—and this is important—such deregulation would bring substantial geographic consequences. While it would make the superstar economies of California and New York, as well as that of the Northeast/Mid-Atlantic region, even stronger, it would also draw people and jobs away from the Rust Belt, worsening the already bad economic situation of those states. And it would potentially draw people and jobs away from the Sunbelt, as well as draining the already dwindling economic activity in that area.
The table below, adapted from the study, shows what would happen if land-use regulations in California and New York were loosened to 1980s and 2000s levels. While employment and productivity in these states would grow, all of the other measured regions would suffer as a result of the shift of people, jobs, and economic activity to New York and California and their clusters of superstar cities.
This is reinforced by the table below, also adapted from the study, which shows what would happen if land-use regulations in all states were deregulated to 1980s and 2000s levels. Employment and productivity in California, New York, and the Northeastern/Mid-Atlantic would grow, but all of the other measured regions would see negative impacts.
The study found that even modest land-use deregulation has a noticeable effect. If all states loosened their land-use regulations halfway to Texas’ current level, there would be substantial reallocation of population across the states, with California’s employment growing substantially.
And that’s the rub: Deregulating land use would make the most productive metros and states even more productive, adding to U.S. productivity and increasing the wages and earning power of more Americans. The country as a whole would be more productive and richer; California and New York would be much better off, and have many more people and a greater share of economic output. But the gap between these few places and the rest of the country would be even wider than it already is.
Let me be clear: I am not advocating for keeping these onerous land-use restrictions. Overly restrictive land-use laws not only drive NIMBYism, but also contribute to an economically damaging form of New Urban Luddism. This makes housing less affordable and holds back the very clustering that drives innovation, productivity, and growth. However, it is crucially important to understand the geographic implications of our land-use policies.
This basic conundrum should also caution those who believe we can somehow overcome these divides by breaking up the liberal city or encouraging the “rise of the rest.” The basic clustering force that drives the U.S. and other advanced economies is very powerful. If anything, a growing body of research shows that big American cities are in fact smaller than they would be in the absence of these regulatory limits. If winner-take-all urbanism is bad today, imagine how bad it would be without these land-use restrictions, which are perhaps the most effective restraint on spatial inequality we currently have.