Market Urbanism Is Underrated

Workers are seen at a condo development in the Liberty Villiage area in Toronto. (Photo by Kevin Van Paassen/The Globe and Mail)

Michael Hamilton and I coauthored this post.

Tyler Cowen has two new, self-recommending posts questioning whether or not market urbanist arguments are internally consistent. He argues that if land-use regulations are analogous to a tax on land, then either the benefits of deregulation would go to landowners or the costs of regulation are greatly overstated. The problem with this argument is that zoning is not a Georgist tax in which landowners are taxed in proportion to their land’s value; rather, zoning hugely decreases the value of the country’s most valuable land, while it props up the value of land that would be less desirable absent zoning.

This is because zoning only acts as a tax on land to the extent that regulations are actually binding. A 250-foot height limit would create zero costs for the vast majority of the country, but would be devastating in Manhattan. Likewise, the large variation in land-use regulations across localities means that the costs of land-use regulation are imposed unevenly, even though there may be some correlation between land value and the tax imposed by zoning. Their repeal would have complicated and mixed effects.

Tyler’s post focuses on desirable neighborhoods within the nation’s most highly-demanded cities because it assumes large increases in Ricardian rents from liberalization, i.e. those places where zoning is often the most binding. A broader view would also consider what would happen outside hip neighborhoods, especially exurban commuter suburbs that mostly exist because workers are excluded from areas closer to city centers. These suburbs could see land values plummet under broad liberalization. Whether these price changes are good or bad is a value judgement, but Tyler’s theoretical distributional concerns should also take potential decreases in land value into account.

Empirically, cities with more liberal land-use regimes are more affordable, so the premise of zoning being analogous to a land value tax may not be accurate. Toronto, Houston, Chicago, and Washington, DC all demonstrate that permitting construction makes housing more affordable relative to more restrictive cities. DC, the least liberal of these cities, has experienced so much upzoning through planned unit developments that rental rates have grown at about half the rate of inflation over the past year, even with two percent population growth. Many of the benefits of DC’s new construction have gone to landowners and to high-productivity workers who have moved into the city. But as the city’s flat rental rates demonstrate, the construction has allowed the city to accommodate population growth without seeing a spike in housing prices. Absent this new construction in DC, relatively affordable Maryland suburbs would have seen greater housing price increases. Cities don’t need to be market-urbanist utopias for the benefits of development to be shared widely.

Allowing more people to live in cities has important benefits for workers, even if landowners get rich along the way. With an innovative panel dataset on land-use regulation and cross-state income convergence, Peter Ganong and Daniel Shoag test whether or not this anecdotal evidence is supported with demographic trends. They find that a surge in land-use restrictions since 1980 has slowed the rate of hourly wage convergence across states. Given that regulation has reduced income mobility, there’s good reason to believe that deregulation would increase income mobility by making high-productivity places more accessible.

Zoning itself has additional negative distributional aspects because rich people have resources to devote to NIMBYism. Stephen and Adam have pointed out that it’s easiest for developers to build new construction within the low-income neighborhoods of expensive cities. When people are illegally living in abandoned industrial properties or aged housing, rezoning those properties as high-rise residential will make the city more expensive, not less. It’s a tragedy of urban politics that high-income neighborhoods often have enough political clout to block all new construction, leading to an increase in housing prices when new building is pushed into neighborhoods with low-cost housing. Incumbent landowners often block new housing, not to increase the value of their landholdings, but to exclude undesirable social groups, to keep low-income children out of public schools, and to engage in status-seeking. This is why many market urbanists have devoted so much time to advocating for reforms that move land-use decisions to higher levels of government where parochial interests carry less weight.

It is theoretically possible for development to make low-income people worse off at a hyper-local level if the new construction attracts high-income people to the city faster than new stock is built. How much deregulation is needed to benefit low-income people is an empirical question, but Tyler (barely) concedes:

Maybe — maybe, maybe, maybe — if you remove so many building restrictions, land won’t be the scarce factor any more and the gains from the tax reduction will be distributed in many directions.

Perhaps the political realities of the Bay Area are such that feasible reforms will only increase rents by attracting more high-productivity workers. But at the regional level, the data demonstrates a clear correlation between the level of regulation and housing affordability. Tyler is right that eliminating land-use regulations in very desirable locations will benefit land owners financially, but his distributional concerns should be eased by the fact that these same landlords will be earning rents by engaging in consensual, positive-sum transactions rather than social exclusion.