Why White House Economists Worry About Land-Use Regulations

The Wall Street Journal
By Nick Timiraos
Nov. 20, 2015

San Francisco is among the cities that makes housing affordability worse through zoning and other land-use restrictions, Jason Furman said.SEAN GALLUP/GETTY IMAGES

White House economic advisers have produced a steady diet of white papers this year to spotlight the puzzle of sluggish productivity, which economists want a better handle on because it helps explain why incomes for the broad middle class aren’t rising. Their latest target: land-use restrictions.

Housing is growing less affordable because there’s more demand for rental and, increasingly, owner-occupied housing, but little new supply. This hasn’t been a problem until recently—there’s been a considerable backlog of foreclosures and other vacant homes following last decade’s property bust. Throughout the housing slump, policy makers have focused on boosting demand by keeping mortgage rates low and expanding access to credit.

Now, there’s growing attention on what’s happening on the supply side. Some cities face supply constraints beyond their control. Coastal cities often see much pricier housing—and considerable price volatility—because there aren’t too many places left to build.

But other cities make things worse with zoning and other land-use restrictions that discourage production, said Jason Furman, chairman of the White House Council of Economic Advisers, in a speech Friday at a housing conference co-hosted by CoreLogic, a data company, and the Urban Institute, a think tank.

“Artificial constraints” on housing supply hinders mobility, and increasing mobility “is going to be an important part of the solution of increasing incomes and increasing incomes across generations,” Mr. Furman said. Zoning rules, of course, aren’t distributed randomly across the country, which means they’re “actually correlated with those places that have higher inequality,” he said.

This feeds a cycle in which cities that have more restrictions on land use have higher inequality, which further constrains mobility, which further exacerbates inequality, and so on.

Mr. Furman drew attention to two papers that tie declining geographic mobility to land-use regulations. The first, by Federal Reserve economist Raven Molloy, shows how an increase in labor demand in cities with greater land-use restrictions results in less new housing construction, higher home prices, and lower long-run employment.

“If you’re not pricing people out of the market, you’re able to attract more people and increase employment more,” Mr. Furman said.

The second paper, by Peter Ganong and Daniel Shoag of Harvard University, examines the slowdown in income convergence—that is, the rate at which incomes in places with lower incomes catch up with those in places with higher incomes. The paper found that income convergence was more common in states during the 1960s and 1970s regardless of constraints on housing supply. By the 1990s, states with more constrained housing supplies saw far less income convergence than those with less constrained housing supplies.

One reason for the breakdown in convergence, said Mr. Furman, is that only high-income workers can afford to relocate to those high-productivity cities that have tighter land-use regulations.

Of course, there are limits to what federal policy makers can do on an issue that’s largely handled by states and localities, a point readily acknowledged by Mr. Furman. In that sense, the latest policy discussion reflects an attempt to nudge cities and states to be more thoughtful in designing restrictions, just as an earlier push by White House economists this year has spotlighted the hazards of occupational licensing in hindering mobility.

The land-use and affordability issue isn’t just some idle worry of economists, Mr. Furman added.

“It’s something the president is personally concerned about,” he said.

Link to article: http://blogs.wsj.com/economics/2015/11/20/why-white-house-economists-worry-about-land-use-regulations/