Market urbanism and tax incidence

by on April 19, 2016 at 1:58 am in Economics, Law, Uncategorized | Permalink

I put some of my worries about market urbanism being overrated by its proponents in an earlier post, and I thought I would clarify a bit.  I fully agree that we should deregulate building in major cities such as San Francisco, and just as importantly (or more so) stop rising cities such as Atlanta or Houston from going down that same route.  That said, I’m still not happy with how market urbanists handle the distributional implications of their proposals.  Let’s try putting the argument in terms of tax incidence.

If urban land currently reaps monopoly rents, a new tax on building largely will fall on the value of land.  Both Ricardo and Henry George understood that.

Similarly — and here is the important point — the gains from removing taxes/restrictions on building largely will be captured by landowners for exactly the same reason.  More stuff will be built, urban output will expand, land still will be the scarce factor, and by the end of the process rents still will be high.

In other words, if we deregulate building, landowners will capture a big chunk of the benefits.  I’m fine with that, it is a Pareto improvement and I am not a capuchin monkey.  But as I read market urbanists, many are more prone to talk about making various major cities affordable again as part of a broader reformicon program.  I’m not convinced that will happen, or if so the case has not yet been made.

Just think of urban space as “a license to produce in a high MP of labor area.”  As long as the city is not hitting diminishing returns, issuing more licenses probably will not lower their marginal value and thus will not lower rents.

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.  Alternatively, you may have a less simple model of tax incidence than the “first order effect” I laid out above (try this pdf too).  Great, let’s try to figure that out, but then building restrictions may not much raise rents!…let’s be consistent.

In any case, I think the above is the basic dilemma facing market urbanists.  It can do much to enhance efficiency and productivity, with attendant trickle-down benefits, yet without much solving the distributional problem in any direct way, as it is sometimes advertised as doing.


By the way, have I mentioned that I love landowners?  My school, George Mason University, is a significant landowner.  So were the people who built up the northern Virginia area, such as Til Hazel.  Great stuff, great efforts, great people.  Landowners, love ’em or leave ’em.

p.s. I also love trickle-down benefits.  Most benefits are trickle-down benefits.

1 Steve Sailer April 19, 2016 at 2:25 am

The big problem with being poor in modern America is not that you can’t buy enough stuff but that you can’t afford to move away from other poor people.

2 AIG April 19, 2016 at 2:30 am

Poverty in America is a poverty of the mind. A poverty of culture.

Although I would disagree with you. Compared to virtually anywhere else in the world, it is a lot easier for the “poor” to move in the US. They concentrate, however, where the welfare faucets are located and where they can get favors from politicians. They don’t live in the ghetto because they don’t have 10,000 other alternatives, cheaper and better places to live in pretty much any rural community. They live in the ghetto because there’s no Section 8 in the rural communities. They got to work to live there.

3 Moreno Klaus April 19, 2016 at 4:01 am

loool, you guys never been poor, so you dont actually know what you are talking about… To say that there is no poverty in US is just absurd.

4 Keith April 19, 2016 at 8:35 am

They didn’t say there were no poor people in the US

5 AIG April 19, 2016 at 5:48 pm

“loool, you guys never been poor, so you dont actually know what you are talking about”

I’ve grown up in a “ghetto”, gone to schools that were so poor they were taken over by the city to be closed down, lived in a family that worked at minimum wage for a while, and was also on welfare for a while.

So go f*** yourself.

6 Mike April 20, 2016 at 12:23 am

Growing up poor sucks … Been there, done that.

Only difference from your situation is that we were in a rural area. As a kid I thought living in the country was pretty awesome. It wasn’t until later that I realized not having a doctor, dentist, grocery store, computer, library, college education, etc. wasn’t normal, our schools sucked, meat didn’t normally come in cans labeled “Beef with juices, distributed by USDA,” drunks were sad, not alternately funny and scary, not everyone lived in trailers, some jobs are permanent, 8-5, inside and didn’t involve potentially life-threatening situations, what white trash meant and non-Caucasian people didn’t appreciate being call n*ggers, sp*cs, pickaninny, etc.

I survived and got out, but I’m an exception. I have a hard time recommending it to anyone as a good alternative to anything.

7 Floccina April 19, 2016 at 11:21 pm

What is your definition of poor?

Do the folks in Kiryas Joel qualify? How about Amish and Mennonites? are many of them poor?

8 Jan April 19, 2016 at 5:40 am

The huge welfare faucets spread across rural, southern America, where many of the poorest live? Ha.

9 enoriverbend April 19, 2016 at 10:14 am

“rural, southern America, where many of the poorest live”

Only if your version of the south includes Maine, the states bordering Mexico, and great chunks of the West Coast.

10 Jan April 19, 2016 at 10:31 am

Are there some very poor places in the US outside the South? Sure, but the South, including a lot of Red Appalachia, is by far the largest swath with the highest number of and most concentrated poor people in this country. No other region comes close.

11 Jan April 19, 2016 at 10:34 am

The map you linked to bears my point out, but so does this listing of poorest states and poverty rates. There is a theme…

12 JWatts April 19, 2016 at 12:18 pm

Ah Jan, you are such a bigot.

13 Jan April 20, 2016 at 9:23 am

I’m not going to be “politically correct” to tickle your conservabrain nerves, JWatts. Sorry!

14 dsgntd_plyr April 19, 2016 at 10:51 am


most blacks live in the old confederacy. blacks are the poorest race. there’s your correlation.

15 Jan April 19, 2016 at 10:52 am

They live in red states. Welfare faucet states, right?

16 BFB April 19, 2016 at 3:50 pm

It’s also much cheaper to live in the rural, southern US, so one would expect a “one-size-fits-all” poverty line to show the greatest concentration of poverty in the region(s) where living is the cheapest.

17 AIG April 19, 2016 at 6:03 pm

Exactly. And that’s why Jan is such a dimwit. He doesn’t understand that by definition, someone living in a rural area is very likely “poor”, materially, given the average of the country.

Which was the whole POINT of my comment: the urban poor living in the ghetto can surely afford to move pretty much anywhere else they want…so that they are not stuck living in a ghetto. “Poverty”, materially, isn’t the problem.

It’s having to go to schools inhabited by other ghetto dwellers that’s the problem. But the urban poor congregate inside cities because that’s where Section 8 is. So they send their feral children to prison schools…not because they can’t move to a rural area and send their kids to somewhat decent schools (also inhabited by other poor people). No. They just stay in the ghetto cause that’s what their plantation owners need them to do.

If you dispersed the ghetto vote across the country, how would Dems win elections in cities? They’d never win a city ever again.

It’s always amazing to map city election results with both income level and race: you can guess who votes for whom very easily.

And then you can guess the political interests in keeping the “poor” congregated in ghettos.

18 Nathan W April 19, 2016 at 8:09 am

Yeah, the guy who talks about $30,000 as “peanuts”. His opinions about poverty should be attended to very carefully.

I’m not sure what you mean by “poverty of the mind”. Care to expand on this notion?

19 AIG April 19, 2016 at 5:47 pm

Yes. You, for example, are poor of the mind.

20 Nathan W April 20, 2016 at 1:55 am

The rich of mind, of course, go around insulting anyone they disagree with.And that’s how they got to be “rich of mind”.

21 Floccina April 19, 2016 at 5:03 pm

@AIG wrote: They live in the ghetto because there’s no Section 8 in the rural communities. They got to work to live there.

A reason to replace most welfare programs with a Basic Income Guarantee or some type of wage subsidy. Folks can then move to a low cost area.

22 AIG April 19, 2016 at 6:04 pm

Of course. Alas, the Dem Party figured out quite quickly that that would destroy their voting base.

23 Roman April 19, 2016 at 6:12 pm

There is actually a lot of subsidized housing in rural areas. HUD has Section 515 devoted to rural housing. Further, anyone can use Housing Choice Vouchers in trailer parks or any other kind of rental housing. However, the reason why subsidized housing is more prevalent in cities is because LAND is more expensive in cities, which makes housing more expensive there. To get a decent apartment in New York, even in a subpar area, would set one back at least $1,500 a month, while one can probably rent three houses in rural West Virginia with the same amount.

24 Steve Sailer April 19, 2016 at 8:15 pm

The government of Chicago has been demolishing public housing projects close to high paying jobs, such as the once vast Cabrini-Green apartments only a 20 minute stroll from the Magnificent Mile, and encouraging the residents to take their Section 8 vouchers some place cheaper, such as Dubuque, Iowa. The Obama Administration is helpfully suing Dubuque for not being as bureaucratically accommodating as possible toward displaced Chicago ex-residents of housing projects.

25 anon April 23, 2016 at 9:38 pm

“There is actually a lot of subsidized housing in rural areas. ”

Wait lists are generally a lot shorter and the quality of neighborhood that they’re located in is generally a lot better as well, compared to large cities.

26 Axa April 19, 2016 at 6:09 am

Yes, but poor people is affected by regulations.

If you’re poor a car is not a priority, anyway housing regulations say there’s a minimum of parking places per housing unit. Landlords comply with the regulation but the cost of parking is passed to the tenants, poor tenants without a car. Paying for a “car bedroom” should be optional.

So far, parking regulations have been relaxed only in a few urban areas in the last years, but no widespread adoption of the practice.

Ps. the anecdote…….talking with an American on a long flight: it’s fine to pay $2000+ for rent, but it’s outrageous to pay $200-300 for a private parking spot. Interesting culture.

27 anon April 19, 2016 at 6:59 am

Remember that much of the US is low density and a car is how you get to work. No-car is true poverty there, rather than merely poor.

The rich go carless in a few cities, but very rare.

28 MOFO April 19, 2016 at 9:41 am

Correct. If your poor, its better to own a car and have no where to live than the reverse. Worst case, you can live out of your car, but you cant drive your apartment to work.

29 A Definite Beta Guy April 19, 2016 at 9:42 am

Right, cars are an essential asset in most parts of the nation. That’s why the minimum parking regulations are there.

30 JWatts April 19, 2016 at 12:20 pm

And even the poor can afford cars in this country. You can afford a car even working minimum wage.

31 cowboydroid April 19, 2016 at 3:06 pm

Que the Soviets showing the Grapes of Wrath to prove that capitalism is inferior to communism, until the population noticed that even poor people in the US drive cars.

32 (Not That) Bill O'Reilly April 19, 2016 at 2:56 pm

It’s not at all uncommon for people to sub-rent their parking spaces in dense urban areas like Manhattan or Boston, and I’ve never seen anyone take exception to the concept.

33 Brian Donohue April 19, 2016 at 8:59 am

And this is different from options poor people had in ‘pre-modern’ America? Someone should have told my dad- the guy grew up surrounded by other poor people.

Cripes Steve, there are hundreds of millions of people in this country who aren’t trying to bust into Malibu.

34 JWatts April 19, 2016 at 12:22 pm

“Cripes Steve, there are hundreds of millions of people in this country who aren’t trying to bust into Malibu.”

I would assume he’s talking about busting into the suburbs.

35 msgkings April 19, 2016 at 12:39 pm

Isn’t this (one of) the big problem with being poor anywhere?

36 Steve Sailer April 19, 2016 at 8:17 pm

In most of the world for most of history, the big problem for the poor has been not being able to afford enough stuff, such as food, clothes, shelter, and medical care.

37 Pshrnk April 19, 2016 at 2:53 pm

So sadly true. I would live in a much more modest home, except they are hard to find in nighborhoods where it is safe to go out and take a walk.

38 AIG April 19, 2016 at 2:26 am

Everything is a scarce factor. The question is the relative scarcity. The argument is in making more land available for any given use. I.e. Houston keeps expanding, physically, because land is relatively plentiful. Dallas/FTW, San Antonio/Austin are joint cities or becoming joint cities now because they all expand physically, and the limits of this physical expansion are actually, not all that limiting.

Of course, living in a state where money is invested in roads and highways instead of unicorn-fart-powered light rail, makes land even more plentiful. Land is not scarce when you can drive 30-40 miles in any direction.

Second, as I understand it, it’s also a question of where to locate, even if the amount of land were fixed. If I want to build an office building and I am restricted to one area of town, but now I can build anywhere, all of a sudden land become much less scarce, even if the fixed area remains the same.

Either way, I disagree with these “market urbanists” on one thing: let San Fran commit suicide. What do I care? We need them to provide the economic refugees to escape out of California.

39 Jan April 19, 2016 at 7:14 am

About half as many people moved from Texas to California each year as move from California to Texas during CA’s economic low of 2007-2009. A net outmigration of 35,000. In 2012, the net exodus was down to 19,000, and that was before oil started to tank.

How do you explain this trend? Is California just getting better? Is Texas making poor policy decisions? Are people realizing the downside of living in Texas (you have to live in Texas)? California’s population growth continues. Is that committing suicide?

40 AIG April 19, 2016 at 5:50 pm

Or, you know, Californians move to many other states besides Texas. Like…Arizona or Nevada.

Or, maybe you’re just too dimwitted to figure this out.

41 Jan April 20, 2016 at 9:24 am

That info is for Texans moving to CA specifically, fool.

42 Nathan W April 19, 2016 at 8:14 am

Very easy to take as credible someone who refers to light rail as powered by “unicorn farts”. Perhaps you consider that light bulbs are also powered by “unicorn farts”?

Hey, do you know about the history of how all that light rail (trolley) right of way was bought up and paved over to promote car driving? How does that fit with your theory that they are less efficient at the societal level?

43 MOFO April 19, 2016 at 9:47 am

Id say the full history of the trolleys in America paints a decidedly mixed picture. Still, im listening, what do you think that history proves?

44 Nathan W April 20, 2016 at 5:48 am

That companies in America are allowed to do lots of things that many other democracies would not allow them to do.

45 AIG April 19, 2016 at 5:53 pm

No I know light bulbs are powered by coal and gas.

Light rail on the other hand, is powered by taxpayer dollars. Since it burns that at exceptionally high quantities.

46 Nathan W April 20, 2016 at 5:55 am

Aka, how we think about things when we pretend that externalities don’t exist.

Any opinions on congestion or pollution in urban centres? At least the coal and gas are burnt far away from our lungs.

Also, there are many other sources of electricity contributing to the grid.

47 Nathan W April 19, 2016 at 8:17 am

I don’t understand how someone who claims to be a PhD student can so reliably demonstrate such poor understanding of both sides of an argument. You live in a world of black and white. I cannot imagine how you could possibly do any research other than the lowest grade and most biased possible sort of research with such an attitude.

48 JWatts April 19, 2016 at 12:24 pm

This comment strikes me as faintly ironic.

49 cowboydroid April 19, 2016 at 3:09 pm


50 Nathan W April 20, 2016 at 5:59 am

Right, because I’m one of those people that reliably paints people into black and white positions. Or who refuses to acknowledge legitimacy of AT LEAST two sides of an argument.

Perhaps you should refer to your dictionary. It seems your understanding of the word “ironic” is fairly out of line with its accepted usage.

How is it ironic that I would expect low grade research from someone who demonstrates extremely strong bias in nearly every word he says, and is highly offensive against those who deign to question him?

51 Ethan Bernard April 19, 2016 at 4:08 pm

How many PhD students have you met?

52 AIG April 19, 2016 at 5:51 pm

So in other words, you can’t even fathom what sort of argument you would make.

53 Nathan W April 20, 2016 at 6:09 am

I’m mostly responding to your discussion of “unicorn farts” letting San Fran “commit suicide” in relation to “economic refugees”.

I do not believe that someone who thinks in such terms is capable of producing any research worth paying attention to. Your discussion of economics concepts are not off base at first, but the nature of the discussion it leads you to suggests that you are only capable of accepting certain kinds of conclusions no matter which opposed nuance someone might introduce into the discussion.

You know, one of those kinds of researchers where the findings are basically pre-determined as a function of the subject. Why waste time reading such research?

54 Steve Sailer April 19, 2016 at 2:37 am

I cousins who are real estate developers in San Francisco. It’s a business for the very patient. They’ll buy a property and then spend ten or more years trying to get all the permits approved. Every so often they get all their ducks in a row and then they make a lot of money.

55 Jason Bayz April 19, 2016 at 2:48 am

If you are a newly created tech company, where’s a good place to locate? Silicon valley, that’s where a lot of tech workers are. And if you are a tech worker, where’s a good place to go? Silicon valley, there’s a lot of tech companies there.

56 AIG April 19, 2016 at 3:00 am

And your insight being?

57 Steve Sailer April 19, 2016 at 3:05 am

But Real Soon Now, the coming Information Superhighway will mean you can live anywhere and be treated like a player in the high tech business.

Or at least that’s what I read in the newspaper in 1993.

58 Ray Lopez April 19, 2016 at 3:17 am

So you’re for crony capitalism, branding, and personal connections counting more than merit? Somehow, you being a racist, that doesn’t surprise me, SS SS.

59 Steve Sailer April 19, 2016 at 4:15 am

Brilliant reply!

60 anon April 19, 2016 at 5:15 am

Like it or not, Silicon Valley/Bay Area is where a lot of _venture capital_ is. Personal connections and branding matter a lot more for raising investment funds than for actually working on tech. Similar to how Hollywood functions in the movie industry, I guess – even when the movies aren’t filmed there, it’s where the production deals are arranged.

61 Steve Sailer April 19, 2016 at 5:47 am

It’s almost as if in Silicon Valley, it’s not what you know, it’s who you know.

62 Doug April 19, 2016 at 11:55 am


Have you read any of Michael O. Church’s blog posts? (Think he took his biog down, but they’re probably archived). He gets pretty repetitive, and I definitely don’t agree with everything he says. Still he has a pretty good perspective on the more corrupt and venal parts of Valley culture and business. Definitely a good counterpoint to the fawning press the tech industry usually gets.

63 Slocum April 19, 2016 at 10:35 am

Be treated like a ‘player’ in the great VC/startup game? Maybe not. But earn a high income while enjoying a much better quality of life than in Silicon Valley? There are dozens of places in the US where tech workers do that quite easily.

64 The Original D April 19, 2016 at 2:33 pm

Well… you kind of can. A true once-in-a-generation company like Google is less likely in say, Wichita, but successful web and mobile companies are scattered all over the world.

Back in 1978 no one ever thought a Microsoft or Amazon would come out of Seattle. And in any case Microsoft’s biggest threats were not in Silicon Valley. They were in White Plains (IBM) and Boston (Digital).

65 Steve Sailer April 19, 2016 at 8:22 pm

Back in 1981, Silicon Valley and Route 128 were usually grouped together in journalistic cliches. But about the time Information Superhighway started to become a reality, Silicon Valley ascended to unquestioned pre-eminence in where you had to be if you had ambitions in tech.

That’s an explicit theme in the movie “The Social Network:” Sean Parker keeps nagging Mark Zuckerberg that he’s wasting his life hanging around with the losers in Cambridge, MA when he should move to Palo Alto (which Zuck does, and his dreams come true).

66 Arbor Landon April 19, 2016 at 3:06 am

This post seems willfully ignorant of the Land Value Tax. Bully to you.

67 Aye Jay April 19, 2016 at 9:24 am

“Henry George”

68 Arbor Landon April 19, 2016 at 2:47 pm

Just very odd– “If urban land currently reaps monopoly rents, a new tax on building largely will fall on the value of land. Both Ricardo and Henry George understood that.”

And then, while exploring solutions, no mention of the canonical response by Henry George.

69 Ray Lopez April 19, 2016 at 3:09 am

TC: “By the way, have I mentioned that I love landowners?” – TC loves Fee Simple Absolute, but I bet he doesn’t like strong IP laws (said laws being fairer than what we have now, and possibly including not only a better Patent Office, but things like a limited “independent creation” defense for shops that practice Not Invented Here).

70 anon April 19, 2016 at 6:14 am

If one is truly not a Capuchin monkey one must love perpetual IP.

71 Ray Lopez April 19, 2016 at 8:03 am

Perpetual bonds were the rage about 500 years ago,and as long as your growth rate is greater than the interest rate (Paging Dr. T. Piketty) it’s not a problem. Think about it: if there’s a patent in perpetuity, how much would you, as licensee, pay? How much would the consumer suffer, given most patents have workarounds? Not to mention my “independent creation” defense, which is used all the time in copyright (Google “Clean Room Defense Copyrights”). I don’t see the BIOS makers like AMD etc complaining too much about copyright law, which has a much higher term of protection than patents.

72 anon April 19, 2016 at 3:11 am

Addressing the broad point of the post, a big part of Market Urbanism is letting developers build more _land-efficient_ structures. So yes, landowners will gain overall and average folks will still be land-constrained, but most people will still reap gains in productivity. Also, another important point made by market urbanists, at least in CA, is that we should try to get rid of the horrible monstrosity that’s known as Prop 13. Sorry landowners, but guess what – you should be putting your land to good use, and paying your fair share of “rent”.

73 anon April 19, 2016 at 6:16 am

+1, and also I think Tyler’s comment that it has to happen everywhere is important. If we don’t free up zoning in the sprawl doing it downtown will have little effect.

74 Arun April 19, 2016 at 3:15 am

Wait, couldn’t you prevent the benefits from deregulating land use from being captured by land owners through a heavy *Henry George* land value tax?

75 Steve Sailer April 19, 2016 at 4:22 am

Look at it from the point of view of a current San Francisco homeowner. The more restrictions there are on development:

– The lower the supply of housing and thus the higher the value of his home.

– A more subtle effect is: the higher the cost of moving to San Francisco, the higher the quality of neighbors you will have. Your slummier neighbors will be driven out of town and your new neighbors will be Stanford grads.

We see exactly the same incentives at work with elite colleges. While Arizona State and Florida International have added capacity for tens of thousands of undergrads, Stanford, Harvard, Yale, etc., have barely added any undergrad capacity even as demand soars. This NIMBYism drives up the value of S, H, Y degrees, and drives up the test scores of their undergraduates.

76 Hazel Meade April 19, 2016 at 11:51 am

I wonder to what extent rising inequality is due to the inability of the relatively poor to purchase a first home.
Combined with the rising cost of college, a young person from a relatively poor family not only has to pay off a student loan, but takes years to be able to afford a down payment on a home near decent paying professional employment. Meanwhile, the people from richer families get their parents to help with the down payment, so they can move into those desirable neighborhoods near the good jobs.
In other words, it inhibits social mobility by preventing the poor from accumulating equity.

77 JWatts April 19, 2016 at 12:36 pm

“Combined with the rising cost of college, a young person from a relatively poor family not only has to pay off a student loan, but takes years to be able to afford a down payment on a home near decent paying professional employment. ”

That’s just not true. At least it’s not true out of the high cost coastal areas. Assume two young college graduate (23 years old) making a combined $80K per year with a combined $56K in student loan debt (the 2014 graduate average). Assume they are rapidly paying down their loan debt ($6K per year) and they are saving $3K per year for down payment on a house. Within 5 years, they’ve paid off half their student loan debt and have saved up $15K for a 10% down payment on a $150,000 house.

By 28, they are homeowners and they can use their former rent payments and the $3K per year they were saving to cover their house payments. In the mean time, their salaries have probably gone up drastically. Generally speaking, average professionals working in the private sector are going to get fairly large bumps in their pay in the first 5 years.

78 A Definite Beta Guy April 19, 2016 at 2:38 pm

“$150,000 house”
What’s that? A shack?

79 JWatts April 19, 2016 at 3:14 pm

Well, the wife an I bought our first house in 2001 for $117K. It was new construction, we picked the plan and modifications to suit. It was merely 1,450 square feet on a 1/4 acre lawn with a two car garage and nice deck, but it seemed adequate for the two of us.

80 A Definite Beta Guy April 19, 2016 at 3:27 pm

I looked at some neighborhoods that might have something similar. I found Round Lake, IL, an exurb community that’s becoming increasingly “diverse.” Here’s the school:
What’s the point of a college degree if you send your kids to schools like this? How are your schools?

81 JWatts April 19, 2016 at 4:21 pm

“What’s the point of a college degree if you send your kids to schools like this? How are your schools? “”

Like this:

Granted, my family moved to the Franklin area and my mom still lives there. It’s more expensive, but the schools are better:

We’re considering moving there as are kids hit school age.

82 A Definite Beta Guy April 19, 2016 at 4:43 pm

There’s almost nothing in Mount Juliet at the 130k-170k price range. There’s quite a few in the greater Nashville area, many of which are foreclosures. I don’t know much about the Nashville area specifically, but this suggests having a 150k house means living next to the kind of people Steve Sailer warns us about.

83 JWatts April 19, 2016 at 5:17 pm

Apparently the median prices in the Mount Juliet area have jumped up significantly in last 10 years. The median price is now $250K. However, the median price for homes in Gallatin (just north of Mount Juliet) is $180K and for Smyrna (where my office is located) is $170K and for Murfreesboro (which is a medium sized city; pop.115K) is $180K.

I strictly meant the $150K to be a starter home for a young couple. And maybe a more realistic figure would be $175K. You can find plenty of homes like that in the area.

84 A Definite Beta Guy April 19, 2016 at 8:02 pm

Starter homes around here tend to be 2 bed/1 bath affairs. Honestly, with the closing costs, I would stay in an apartment until I could afford a real house.

I don’t mean to pooh-pooh your ideas and say they are impossible. My Wife and I are millennial homeowners at 28, and at a decent house in a decent neighborhood at that. However, I think your scenario is somewhat idyllic in ways that do not reflect normal couples. Median marriage age is 28, so the couples aren’t even formally together until that point. And you can get pay increases in your early years, provided you jump jobs. This might be specific to my industry, but there’s little pay increase internally. Big bumps come from shifting companies.

85 Doug April 19, 2016 at 11:52 am

Rapid and extensive developement in Hong Kong show that this deadlock can broken. Property developers and the municipal governmnet tend to work together much closer to find mutually beneficial arrangements. Developers and zoning boards don’t have such an adversarial relationship. For example, unlike nearly every major American city, the Hong Kong subway is an income source rather than sink for the government. That’s because they auction off the exact location of metro exits. Developers pay big to get stops right next to their buildings.

Neighbor quality may be an issue at some level, but it’s extremely rare that poor people are moving to new construction. Based on the cost of low-quality new construction, affording to live in a new apartment requires $32,000 a year in household income. You’re not talking about ghetto people at those prices. Most poor people live in old-stock housing, the price of which is pushed down by new construction. But having new construction probably raises, not lowers, the income of a zip code. (But to be fair, may likely lower the income of a metro).

86 Kevin Erdmann April 19, 2016 at 4:41 am

How much of the higher wages are due to productivity and how much are, themselves, economic rents because limited housing creates limited access to the high skilled labor network?

87 Doug April 19, 2016 at 11:41 am

The evidence is pretty solid that economic productivity increases linearly (~10%) for every doubling of a metro’s population. A lot of improvements in economic output are driven by learning-by-doing and copying small innovations from your neighbors. Silicon Valley’s a great example, you have a ton of tech companies all in close proximity. People hop jobs all the time, because it often means little more than just changing what exit you get off on your commute. Even if not, people have friends and colleagues that they talk network with all the time. When one firm figures out a better way to do X, it’s not a long time until that quickly disburses through the entire culture.

This also suggests that metros with a strong industry focus will be more productive, because innovations are more likely to spillover across related firms. This helps explain why New York (finance), San Francisco (tech), LA (media) and Houston (energy) are wealthier than Chicago, Philadelphia, Phoenix and Atlanta.

88 Kevin Erdmann April 19, 2016 at 11:05 pm

That’s the tragedy of the cities that won’t build houses. Manhattan has less residents than it had a century ago. Today those cities are wealthy because they aren’t growing. I think today incomes in those cities are inflated by 20-30% because housing is limiting competition in their major industries. I’d love to see them double in size. They would lose 20-30% in inflated incomes and gain back 10% in productive incomes. And home prices would be cut in half.

89 Steve Sailer April 19, 2016 at 4:43 am

A big question on people’s minds is whether increased construction can drive down the quality of their neighbors.

Think back to what San Francisco was like in the late 1960s and early 1970s when it was not terribly expensive. San Francisco used to have black riots; it had a lot of gay bashing by black youths from Hunter’s Point; it even had an organized Black Muslim mass murder ring, the Zebra killers, who murdered at least 15 and perhaps over 60 whites in the 1970s. In 1970, Tom Wolfe wrote a hilarious short book, “Mau-Mauing the Flak Catchers,” about the Great Society anti-poverty programs in the San Francisco ghetto.

That’s pretty much all ancient history today, though, in large part due to restrictions on development that have made San Francisco real estate exorbitant. From the 1970 Census, just as environmental restrictions on development became fashionable, to the 2010 Census, San Francisco cut the black share of its population from 13% to 6%.

In contrast, there was a lot of development in places that San Francisco blacks moved to, such as Vallejo and Stockton, both of which went bankrupt.

Tyler’s suggestion is that San Francisco couldn’t possibly build enough new development to lower the quality of its population. Instead, there will just be increasing marginal returns.

Perhaps. But that idea may apply to only a few ultradesirable places like San Francisco.

But what we saw in the Housing Bubble in less geographically blessed exurbs like Vallejo and Stockton was that massive new development combined with the government encouraging overly optimistic lenders to cut downpayment and documentation requirements in the name of closing the racial gap in minority homeownership, well, …

It turned out that you could run out pretty fast of people who could afford and would want to pay off a big mortgage to live in a new McMansion in a neighborhood filling up with people who couldn’t really afford to live there.

90 anon April 19, 2016 at 5:01 am

> A big question on people’s minds is whether increased construction can drive down the quality of their neighbors.

The only way this could happen is as a result of having _more_ neighbors around – increased density. And if this is an issue for people, they’ll be free to move to a lower-density, suburban or exurban area and buy as much cheap land as they want. But other than that, there will always be a quality scale – and people who want to live in an “exclusive” neighborhood will have to pay for the privilege, same as they always did.

91 Steve Sailer April 19, 2016 at 5:29 am

“The only way this could happen is as a result of having _more_ neighbors around – increased density.”

Tyler is asserting that building more housing will make a home in San Francisco even more desirable due to increasing marginal returns. Maybe that’s true for San Francisco — it’s a pretty unique place.

In contrast, however, the massive construction a decade ago in the exurbs of San Francisco and Los Angeles brought in a lot of pit bull owners, which drove down housing prices severely, driving some of these municipalities into bankruptcy.

Here’s the short story I wrote in 2008 about how the Housing Bubble worked in the high desert north of Los Angeles:

92 anon April 19, 2016 at 6:20 am

Different anon here, but traditionally the desert attracts people looking for low cost and less human interaction. Obviously that will filter.

Now of course the near desert is sprawl, with Bed Bath Beyond, Best Buy, Target clusters.

93 anon April 19, 2016 at 6:30 am

> In contrast, however, the massive construction a decade ago in the exurbs of San Francisco and Los Angeles brought in a lot of pit bull owners

That kind of thing has very little to do with Market Urbanism itself and a lot to do with the usual sort of suburban/exurban sprawl. I guess pit bull owners need to live somewhere, too.

94 Steve Sailer April 19, 2016 at 7:32 am

But you see question, I hope?

Tyler asserts that San Francisco would enjoy increasing returns from adding housing stock.

Yet, the history of the housing bubble in San Francisco exurbs like Stockton and in loser cities like Detroit is of massively diminishing marginal returns in terms of quality of homebuyers.

Perhaps Tyler’s theory would be true for San Francisco. But where is the tipping point where more construction lowers the quality of resident so much that it becomes a negative, like we saw during the Housing Bubble?

95 Louis April 19, 2016 at 1:01 pm

Steve you are pretty similar to the stereotype of an online social justice warrior: mutilating the most distant topics to uncover that, deep down, it’s all about race. San Francisco homeowners and activists are concerned that gangs of marauding black youths will take out the gays. Sure thing. Even though meetings are packed with people shrieking hysterically about their parking, shadows, views and architecture. To the extent that we cannot know what is in someone’s heart-of-hearts, I guess we cannot reject your hypothesis. It may also be that they are concerned one of the new arrivals will, in the service of a decades-long nation of islam conspiracy, set off a nuclear bomb. We have to consider all the racially-connected possibilities, and neither absence of evidence nor total sufficiency of an alternative explanation may be used to excuse the critical, though temporarily submerged, racial factors that really drive NIMBYism. Likewise, racial fears drive NIMBYism in Wyoming

Vallejo went bankrupt because too many people blacks and hispanics moved there? I thought it was because they make exorbitant pension promises. Their firefighters earned doctor salaries. Jefferson County Alabama went bankrupt, too. It may look like they borrowed huge sums to dig a failed sewer line and financed it with financial tricks. But when we really get down to the gritty details, it’s because Jefferson County has too many black people. Race explains it of course.

96 msgkings April 19, 2016 at 1:11 pm

+40 acres and a mule

97 The Original D April 19, 2016 at 2:40 pm

In his book on Obama Sailer writes that Obama is “obsessed with race,” and repeats it for emphasis. Projection much?

98 Steve Sailer April 19, 2016 at 8:35 pm

Vallejo, CA is a town that was famous for its racial diversity as far back as when the great mixed race band Sly and the Family Stone emerged from Vallejo. Vallejo has a more equal distribution of the four major races than just about any other city in America: it’s 25 percent Asian (mostly Filipino), 23 percent Hispanic, 22 percent black, 33 percent white, and eight percent multiracial.

But one problem with diversity, as documented by Harvard’s Robert D. Putnam to his own horror, is that it undermines the social and political virtues of citizenship: people “hunker down.” As I pointed out in an analysis of Michael Lewis’s article on how the firemen and policemen fiscally raped Vallejo:

the public safety unions were the only islands of esprit de corps in diverse Vallejo:

“Lewis’s reporting on how Vallejo’s fire department is an island of cohesion in a sea of anomie is excellent. Vallejo`s fire chief Paige Meyer recalls that when he was a young lifeguard: “He started talking to firefighters and found that ‘they all absolutely loved what they did. You get to go and live and create a second family. How can you not like that?’”

“Moreover, because the vibrant residents of Vallejo tend to set their houses on fire more frequently than the duller residents of less diverse Northern Californian communities, the Vallejo FD attracted some of the most gung-ho firefighters from all over the region.”

“Not surprisingly, the Vallejo fire department—a rare institution in Vallejo with a high degree of what Putnam calls “social capital,” or esprit de corps among its employees—managed to outmaneuver the divided and listless citizenry in grabbing a slice of the pie bigger than could be afforded by the populace’s mediocre ability to generate wealth.”

99 Ryan Reynolds April 19, 2016 at 4:49 am

“In other words, if we deregulate building, landowners will capture a big chunk of the benefits.”

In my experience, urban planners are loathe to deregulate any existing restrictions on currently restrictively zoned land for exactly this reason – and they’re not okay with simply handing over value to an incumbent landowner who they perceive to be gaming the system trying to do exactly that. (Despite the fact that this might overall lead to a better outcome for all.)

The broader (and unstated) question is that if building were deregulated and then common goods which are currently protected, perhaps beyond their fundamental current value, like access to light, lower traffic noise, or limiting the number of people using a public park at a given time, then how would people feel about this? I think planners spend much of their time agonising about capping densities to manage demand on constrained public goods – without regard for the damage that capping densities might be causing. But those constraints on those public goods are still real: more density will provide more space for dwellings, but it won’t make more sunlight to fill them.

Arguments around urban planning are often arguments about those constrained public goods. Ultimately, I’d prefer a world where I don’t have to share my beach with anybody else, and sometimes I might prefer a planning system which will protect that right. So long as I already enjoy that right of course.

100 anon April 19, 2016 at 5:10 am

> common goods which are currently protected, perhaps beyond their fundamental current value, like access to light, lower traffic noise, or limiting the number of people using a public park at a given time, then how would people feel about this?

These issues should be solved on a case-by-case basis. Charge a modest fee for access to the park (or if this is not feasible, expand parkland until it’s no longer appreciably constrained) – and use congestion- and parking charges to manage city traffic and parking space.

101 Jonatan April 19, 2016 at 5:07 am

I think Tyler overlooks the distributional effects to people *moving to the city from the outside*. More buildings may not make the rent cheaper, but it makes life better for the people who otherwise couldn’t even move to the city. It is also better for all citizens, since more people living in cities means more innovation, less pollution, etc.

102 Andrew M April 19, 2016 at 9:16 am

I can assure you that when a condo tower is built on your street, the increased number of cars (and Amazon delivery trucks) means more pollution, not less.

103 Stuart April 19, 2016 at 11:17 am

How does increased density increase pollution in your scenario? If your hypothetical condo tower wasn’t built, and instead people moved to homes in the suburbs, they would still have cars and Amazon deliveries. The only difference is those cars and trucks would travel further, and emit more carbon, not less.

104 Stephen April 19, 2016 at 11:55 am

But it’s more distributed. The pollution an individual experiences in cities is higher than in the suburbs.

105 Stuart April 19, 2016 at 12:44 pm

True, same for things like loud noises (which I consider a form of pollution). But obviously a lot of people don’t mind concentrated pollution, and that’s good news for those want less pollution overall.

Also, pollution doesn’t all stay local. So suburb pollution might not be bothering the locals, but its aggregate effects can be crossing borders and harming others in less obvious ways.

106 JWatts April 19, 2016 at 12:41 pm

On the plus side, city commuter cars and Amazon delivery trucks will probably tend to electrify faster than cars in general. So, exhaust pollution will drop.

107 Jody April 19, 2016 at 5:11 am

Coase: low-transaction cost markets lead to Pareto efficient outcomes from arbitrary initial property rights.
Cowen: Yes, but the wrong people may benefit in the transition more than the right people.

108 Steve Sailer April 19, 2016 at 5:38 am

From talking to my cousins, the San Francisco real estate developers, the way it works is like this:

Everybody would like to build a high rise in San Francisco. If the million and one government agencies gave everybody permission to build at once, the traffic would be overwhelming. So, they are only going to let a limited number of developers build.

But that means the ones who do get permission to build will make big profits. So, there is endless politicking by interested parties (neighbors, government bodies, current tenants, historical preservation societies, civil rights organizations, gay rights organizations, you name it) to get a cut of their profits in some fashion. This takes time to work out.

109 anon April 19, 2016 at 6:33 am

> If the million and one government agencies gave everybody permission to build at once, the traffic would be overwhelming

Auction off the permits?

110 Steve Sailer April 19, 2016 at 7:25 am

But transparency wouldn’t be in the interests of the activists who are currently doing well off an occluded process.

111 rayward April 19, 2016 at 6:38 am

As is his practice, Cowen looks at a single factor and unpacks it. I suppose that’s why this blog is called “marginal” revolution. Urbanism is about more than rising up and density; indeed, it’s about the opposite. Not a single urban center like one big ant hill, but a region that works together to achieve a shared vision, shared goals, and, yes, a shared transportation network. Of course, sharing is monkey business to Cowen. But just like Palo Alto doesn’t exist and prosper alone, neither does Atlanta or Pittsburgh or Dallas. They operate within a region, with shared strengths and shared expertise. What if the parts of the region worked together to make the region a better functioning whole, rather than working separately, and often against each other. Our political structure, with separate and autonomous cities, counties, and states, all but guarantee regional dysfunction: duplication and wasting of resources, transportation networks that belong in the 19th century, not the 21st. So while Cowen obsesses about ant hills, those with vision see a better functioning whole. Economists call it efficiency.

112 Stephen April 19, 2016 at 11:59 am

Good point, you’re probably the first person to ever explain efficiency to Tyler Cowen.

113 derek April 19, 2016 at 6:46 am

To put it in English, you take a place with a geographically constrained area of land, not uncommon at all in most cities. The value of the land is currently constrained by the number of dwellings you can build on it. If you deregulate the four story townhouses with eight dwellings on a lot, limiting the productive value of the land to eight times something. That gets torn down and a 30 story condo development gets built, the same land is far more valuable now having 60 dwellings on it. The guy owning the land is much wealthier.

But the suite condo owners have seven times the supply to bid on, moderating the price.

3/4 stay empty as they exist as a destination of offshored Chinese money. When you invoice for some shipment of stuff to China you discretely include a deed for a condo in the transaction.

114 JWatts April 19, 2016 at 12:45 pm

“3/4 stay empty as they exist as a destination of offshored Chinese money.

My guess is that the amount of unoccupied Chinese condos in the US is a small fraction of 1%.

115 anon April 19, 2016 at 7:29 am

As an aside, Costa Mesa in California has always been a free and open town with respect to zoning, at least in regional terms. They’ve backtracked:

Costa Mesa reaches deal to close dozens of sober-living facilities

If you let them build it, they will come?

116 Steve Sailer April 19, 2016 at 7:35 am

In contrast to laissez-faire Costa Mesa’s problems with filling up with alcoholics, restrictive San Francisco’s problem is it’s filling up with Stanford MBAs

117 Cameron April 19, 2016 at 7:33 am

I think Tyler is basically right here. Most gains will go to landowners, and very little to the renters and future homebuyers from deregulating building. People don’t understand just how little the price effect of even very large increases in the rate of new housing construction will have. I have an example here
where I estimate that in Australia, if we have built 10% more new homes each year for 20 years, than the effect on the housing market rents would be about 3%, or about a year’s rental price growth. That’s a tiny effect for such a sustained home-construction boom.

118 anon April 19, 2016 at 7:58 am

I don’t see a path for a national change to policy in the US, and so the best to hope for is incremental local change. That certainly can’t push national home-building rates or national rental costs.

We should do it for a better 22nd century.

119 derek April 19, 2016 at 8:30 am

As opposed to a 4-10 times price increase?

Base price is essentially what the target market can borrow. In a supply constrained yet high demand market it essentially goes upmarket as the buyers who can borrow more bid up the prices. In a unconstrained supply market the prices will reflect incomes and borrowing environment.

Higher prices would be area concentrated as the supply of up market buyers is limited as well.

120 Sean Brown April 19, 2016 at 7:52 am

Why the narrow focus on rents? Even at the same or higher rent, if quality of life is better, then “price-adjusted quality of life” should be higher, no?

I am a strong believer – and there is some literature on this, though only survey-based – that walking and biking commutes are more pleasant than car commutes and make you happier and healthier. And transit commutes are surely more pleasant – can read a book, watch TV – as long as the transit is not overcrowded.

And even with self-driving cars, the people moved per sqaure foot of space occupies as well as throughput per hour past a certain point will still be way higher on good subways or bus lines in dense cities vs self driving cars on city streets.

I am also a strong believer that walkable communities, like those in Korea and Japan, foster a LOT more personal daily contact, bumping into friends/acquaintances, and make friendships easier to maintain (less of a hassle physically or psychologically to meet). In addition, average distance to the nearest park, subway station, bus station, community/senior are all lower than in sprawl environments. This is all a godsend, most of all for those too young, old, or disabled to drive. Walking also gives you exercise which leads to lower bodyfat and longer lifespans.

Unlike Kotkin I think there are exogenous reasons for the low birth rates in these countries – inadequate public schooling due to strong teachers unions, extremely weak job markets for people in their 20s (until quite recently in Japan but Korea still weak), cultural expectations that the male and his family need lots of cash or real estate or a great job in order to be marriageable, extremely actual work hours for those who are fulltime employed, Korea’s nearly-2-year mandatory military service (effectively delay college by 4 full semesters or 2 years), grandparents used to take care of the babies but increasingly the grandparents are working until well past the old retirement age of 51-60, grandparents increasingly live in a different city while the kids live in Seoul/Tokyo metro because of macroeconomic, regulatory and job-market failures (basically long-term economic mismanagement) – even if grandparents actually live in a small town, in a better macro environment the kids would just move to a nearby regional city. Finally I do believe what you write above is true – even dense megacities like Seoul (condo footprint ratio, buildable area ratio, setbacks, big greenbelt like London) and Tokyo (height limits) have tough zoning restrictions themselves which do act to put a limit on density (albeit above almost all American cities).

Also I think this analysis misses what Chuck Marohn of Strong Towns likes to point out: sprawl/low-density building patterns have hidden/semi-hidden costs, in that public utilities (electricity, water, gas), public services (fire, police, ambulance, transit), broadband, public infrastructure (sidewalks, parks, bike lanes, roads) on a same-quality, per-person basis are ceteris paribus much more expensive to supply over a 100-year period in a sprawl city vs dense city.

Also I see land taxes as having hugely different effects than building restrictions. Land (as opposed to property) taxes often incentivize dense/high construction faster and sooner; the cost of carry to speculate on raw land is higher. On the other hand, buildable-area/floor/minimum-parking restrictions all make building density very expensive or impossible.

121 Steve Sailer April 19, 2016 at 7:54 am

What’s the Total Fertility Rate in San Francisco?

122 Sean Brown April 19, 2016 at 8:35 am

Low, but what we don’t know is:

– What would it be if SF actually cared about creating a kid-friendly city? You know, lots of neighborhood parks with playgrounds, crackdown on street people (or somehow get them off neighborhood streets), better schools (urban public schools in the US are mostly terrible but are decent or good in most other developed countries), etc?

– What would it be if SF allowed a lot more tall condos built, thus massively increasing the housing supply (theoretically fewer people would move to the surrlunding counties before having babies)?

– What would it be without the silly rent control that gives tenants an incentive to continue occupying the same unit as he/she ages, limiting housing turnover?

123 Steve Sailer April 19, 2016 at 9:15 am

Maybe they’re not into family values in San Francisco because they don’t have families?

124 Hazel Meade April 19, 2016 at 11:35 am

Maybe they’re not into family values in San Francisco because they don’t have families?

This. Once people have kids they tend to want to live in a place where they can have a basement and/or backyard for the kids to play in.
Big, dense, crowded, cities are mot places where a lot of people want to raise children.
This is a fact always lost on the young and hip, who assume everyone else wants to live close to dining and entertainment venues, in the equivalent of a college party town. When you’re a parent, you don’t want loud, potentially dangerous, drunk people nearby. You want your kids far away from traffic, and far away from perverts and creepy homeless people, with lots of open green space. In other words, suburbs.
Dense urban settings are just never going to be places where people want to raise kids.

125 Alex Armlovich April 19, 2016 at 11:57 am

It’s definitely about culture. When Brooklyn was built, it was all families. Same goes for Queens. Modern urbanites don’t have families, but they used to.

126 Sean Brown April 19, 2016 at 8:45 am

Also we don’t know what the SF birth rate would be if more of the good economic cities allowed for more tall/dense construction (Seattle, Austin, Boston, Dallas, NY outside Manhattan, DC area, etc) and thus took some pressure off SF housing/land prices by absorbing more migrants.

127 Steve Sailer April 19, 2016 at 9:16 am

Okay, but why are “good economic cities” consistently ones that aren’t good for fertility?

128 Sean Brown April 19, 2016 at 10:28 am

In these cities, wages are quite high; thus the opportunity cost for the 2nd spouse/partner to be unemployed/homemaker is high. But at the same time, due to housing shortage in general + the long commutes faced by the low/mid-skilled who do live in the metro area (in areas where housing is cheaper), the supply/demand of mid/low-skilled labor is ESPECIALLY tight; thus daycare, babysitter, nanny wages are all very high (and usually there are heavy regulations on daycares making them more expensive). So not only is there a high $ opportunity cost to staying home to raise a family, but also a high actual $ cost if both parents decide to work.

Add to this that public schools within the city limits of most (but not all) of these cities are bad. Plus not enough family-friendly amenities within the city limits as cited above. All the family-friendly amenities are in the suburban areas thus facilitating self-sorting, even of families with kids/wanting kids that would otherwise prefer the city limits. The city limits gov’t doesn’t provide these family-friendly amenities for various reasons, e.g. too much welfare spending going on at city level (including cities trying to directly subsidize housing which is a disaster), trying to accomodate and build around homeless/street populations, not maximizing tax revenues (would be possible through raising the property tax base, making parking market-priced), huge amounts of spending on maintaining/widening pseudo-highways, and frankly high amounts of frivolous/wasteful spending.

129 That Dude April 19, 2016 at 3:20 pm

Because having lots of kids is bad for your career, and the type of people you need to create “good economic cities” care more about their career than creating a family?

130 Hazel Meade April 19, 2016 at 11:37 am

The birth rate is low because people who have/want kids choose not to live there. Because they can’t afford the kind of housing people want if they have kids (i.e. single family homes on quarter acre lots).

131 Keith April 19, 2016 at 8:51 am

To be fair, San Francisco is allowing building to happen. For example they tore down candlestick park and allowed this:

Treasure island is getting this:

But yes, it takes a long time to get to this point.

132 Sean Brown April 19, 2016 at 10:35 am

SF has gotten marginally better. But its housing stock grew at 0.9%/year from 2000-2010, the same rate (actually slightly under) as overall U.S. population growth!

While the mayor’s target seems “aggressive,” it’s still well under 2%/year growth IIRC.

And the study/permitting/lawsuit process takes WAY too long; as Steve Sailer has written, there is time-value + uncertainty/project-blocked risk premium value added onto these projects that makes newbuilds very expensive if you capitalize those premia/values.

133 JWatts April 19, 2016 at 12:54 pm

“To be fair, San Francisco is allowing building to happen.”

Neither of those look like they are particularly high density. The first appears to be 3 story condos with large amounts of green space. That’s going to amount to a bit more more luxury housing stock on the market.

134 benj April 19, 2016 at 9:04 am

High land values are the result of the efficient exploitation of agglomeration effects and a preference for locational amenity over spending on goods and services.

As, such aggregate land values is a better economic indicator that GDP. High land values are good. They only go bad when they are capitalised into rental income/selling prices as this is a pure transfer payment (ransom fee), which lowers discretionary incomes for one group (making housing among other things less affordable) while raising it for others.

This transfer not only is the cause of excessive inequality, the true cause of housing issues, but inefficiency when owner occupiers can impute their rent.

A 100% tax on the rental value of land not only ends any net transfer of wealth, it also allows the market to allocate land at optimal efficiency, ending vacancy, under occupation, land banking and sprawl.

It also aligns the incentives of the State with those of it’s citizens because in order to maximise their revenues, a government would have to balance encouraging agglomeration effects (building and development for example) with providing and protecting the spacial environment (locational amenity).

As usual, a Land Value Tax sorts it out, because it’s only the taxation of produced factors and the unequal distribution of the value derived from natural resources that distort incentives, create deadweight losses and cause excessive inequalities.

135 Lawrence D'Anna April 19, 2016 at 10:14 am

But politically aren’t the landowners nimby and the renters urbanist?. Do they not know their own interests?

136 John Thacker April 19, 2016 at 10:41 am

In cities with rent control (and, yes, including rent stabilization at rents under the market rent in NYC), current renters who enjoy rent control are generally NIMBY.

137 John Thacker April 19, 2016 at 10:39 am

More stuff will be built, urban output will expand, land still will be the scarce factor, and by the end of the process rents still will be high.

There’s enough of a difference between rents (and home prices) in cities that build a lot and those that don’t that I’m really not sure that we’d reach equilibrium any time soon, especially if height limits are increased, as that effectively increases the amount of square footage available.

138 Alex Armlovich April 19, 2016 at 11:12 am

Tyler’s right at current margins–landowners get the benefit of an upzoning at current margins, minus any impact fees or other “exactions” like mandatory affordable units.

But as he said, at some distant margin eventually it has to start to close the gap between the marginal cost of construction vs. the sales price of a unit. If it doesn’t, it presents a money-pump problem.

For example, transferable development rights (TDRs) on the Upper East Side sell for $400 per buildable square foot. You can trade 1 square foot of your unused zoning envelope to a neighbor for $400 each. Thing is, this is an artificial scarcity imposed by the zoning code–the city can create new TDRs, the legal right to build a square foot of floor area, at the stroke of a pen. So if the city started to sell unlimited TDRs at, say, $100/buildable square foot, there’d be a construction boom until the point that condo prices fall to the marginal cost of construction (including the $100/bsf fee to the city). If they don’t, it’s a money pump paradox! It would mean NYC can print and sell TDRs ad infinitum at $100/bsf! Surely it’s not possible to sell an infinite amount of zoning floor area without eventually bringing down prices.

139 Hazel Meade April 19, 2016 at 11:15 am

In other words, if we deregulate building, landowners will capture a big chunk of the benefits.

An evil dictator might come up with a plan to ensure that the land ownership gets distributed more widely to relatively poor people before lifting the building restrictions.

Perhaps they should be lifted in Oakland first?

140 Lewis April 19, 2016 at 11:34 am

Who cares about *land*owners, per se? There are monopoly profits on the bundle of services that is housing. Who cares what share belongs to the capital element and what share to the land element?
“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.”
Oh come on! The point is that the rents homeowners and landlords are obtaining from all sources will be re-distributed to tenants and outside buyers. This is obviously the motive.

141 Soho April 19, 2016 at 12:03 pm

1) Best case, taxes are a second order effect. The primary consequence of allowing density is reduced rents due to increased competition amongst landlords. This swamps any tax effects. The conclusion that “and by the end of the process rents still will be high” only holds to the extent that we have a global shortage of high quality cities. Unfortunately, we do have at least a national shortage in America.
2) Density restrictions are most relevant when we’re talking about single family housing or similar. Those owners only benefit monetarily from increased density if they move, which they may well not want to.

142 Brian Donohue April 19, 2016 at 12:06 pm

That 2007 post was great. Very clever.

143 Slocum April 19, 2016 at 12:13 pm

Just think of urban space as “a license to produce in a high MP of labor area.”

Does ‘urban space’ mean the entire metro region including suburbs and exurbs? Because metro areas have been where people have been moving — but not to core cities. With that expanded definition, there’s no real pressing need to solve the intractable political problems of development in the city of San Francisco (which, let’s face it, is probably NOT going to happen). In fact, hasn’t the desire to escape the intractable political problems of central cities been a main driver of suburbanization? And isn’t it reasonable to expect MP to be higher where restrictions, regulations, rent-seeking, congestion, and corruption take a lighter toll? So why not three cheers for the power of ‘exit’ *within* the overall urban space?

144 Brendan April 19, 2016 at 1:55 pm

I’m a little bit confused here. Is Tyler saying that adding housing in high-rent areas won’t put downward pressure on rents? If so is this due to increased productivity induced by higher density?

I get the feeling that I may be confusing Economic Rent (ER) with rent in the vernacular sense (I’m not sure what to call this so I’m going to call it Market Rent – MR). I could see making the argument that a landowner could collect more ER for a given parcel of land if allowed to upzone, but that this could still result in lower MR for renters since the ER would be spread over more payers. In this sense, landowners would reap higher rents (ERs) with MRs staying unchanged or even moving up or down. Is this what Tyler is saying?

As someone who lives in a high MR area I’m very interested in the potential for upzoning to provide relief from high rents. Is there no hope to be found in building more densely?

145 Nathan W April 20, 2016 at 6:19 am

It’s hard to imagine that the productivity/networking gains of more people in the same area would outweigh the first order effect of lower rent due to more units. It would involve some rather unlikely elasticities, and in the long run this could only happen if it was associated with significant productivity gains. Of course, looking at long-run statistics, you might get a false positive that more units led to higher prices per unit, but I think you could only draw such a narrative if ignoring basically what you’re talking about.

146 Adam April 19, 2016 at 2:21 pm

Okay, but using that line of thinking, the value of a plot of land should reflect the income that would be generated from what could be there regardless of what is. So, for example, a plot of land that could contain 300 apartments should have a value reflecting that fact even if it presently contains two single family homes. Which would mean those single family homes should be mighty expensive to rent, such that the change from two housing units to 300 housing units could significantly reduce the average cost of a housing unit, each of which represents a smaller fraction of the overall land value (gross simplification, obviously).

Of course, that’s not really how it works, as we can tell from the existence of the business of real estate development. There are obvious cost and risks in converting from two units to 300, which need to be accounted for too.

Further, I think it’s important to ask, “relative to what” and think it should be pretty obvious that adding housing units will reduce the cost of housing relative to no doing so. It may not be true that building a lot more units will reduce prices from their current levels (although I do think sorting is thing that actually happens), but surely it reduces them from where they could wind up if you don’t (see SF).

147 Bob April 19, 2016 at 2:51 pm

Landowners, love ’em or leave ’em.

Or kill them. All land titles ultimately go back to some initial forceful seizure of the land. You’re forgetting this option, which has been the much more prominent one throughout history, as the myriad wars, uprisings, rebellions, and revolutions attest. Screaming at an angry landless mob or army that property rights are sacrosanct because Ayn Rand said so won’t help you much when you get a pitchfork up your ass or get strung up.

148 JWatts April 19, 2016 at 3:16 pm

“Screaming at an angry landless mob or army that property rights are sacrosanct because Ayn Rand said so won’t help you much when you get a pitchfork up your ass or get strung up.”

So, is this meant to be an Appeal to the Mob?

149 Rafael April 19, 2016 at 3:35 pm

I’m one of many activists in SF working to liberalize land use.

Tyler, you’re framing the problem as “land is the scarce factor”, but land is cities is a bundle: the dirt plus the airspace rights. In SF, the dirt isn’t the scarce factor, the airspace rights are.

You’re right that if we succeed, the dirt would be the scarce factor. The solution to that is either technological (trains, self-driving car, VR) or geoengineering (fill the Hudson!). If those solutions aren’t politically or technically feasible, we can at least socialize the scarcity value with a land-value tax.

I’m working on zoning instead of LVT because the politics is much more favorable. The path to LVT in CA might look something like:
1) legalize more mid-rise apartments and condos in LA + SFBA
2) people choose mid-rise apartments in the cities over single-family homes in the exburbs
2) those residents favor Prop 13 reform
3) they get organized
4) they pass LVT
Step 1 hasn’t happened yet. This will take decades.

150 JWatts April 19, 2016 at 5:22 pm

So, the summary would be, a) convince people to become renters, then b) use their votes to stick it to the remaining homeowners.

151 Rafael April 19, 2016 at 7:13 pm

I would describe California land use – Prop 13, suburban exclusionary zoning, high sales/income tax, CEQA, the mortgage interest deduction and local control of land use – as a cartel of past and current homeowners sticking it to future homeowners and renters.

But, yes I agree that incumbent homeowners would be much less well-off in a future where a coalition of prospective homeowners and renters broke the CA land-use cartel. That future doesn’t seem that likely, though.

152 Nathan W April 20, 2016 at 6:22 am

Would that situation involve freer options for those house owners? I don’t understand how that could be “sticking it” to them.

153 Chris April 19, 2016 at 5:41 pm

Tyler is wrong because he’s confusing the supply of land (inelastic/fixed) with the supply of housing units. Thanks to technologies such as concrete, steel and elevators, the latter is quite elastic over a two-to-three year time frame, or would be but for land use regulations. In the absence of land use regulations, property owners would keep adding units to their property until the price received (rent) for the marginal unit equals its cost of construction. Rents, in other words, should be driven by the long-run cost of construction. Manhattan will always be more expensive than Houston because it costs much more to construct an extra housing unit in Manhattan than in Houston, even ignoring land costs.

Land is just one input in the production of housing. We are conditioned by land use regulations to believe that it is more or less the principal input but that’s not true without land-use restrictions. Thus, even in a desirable city severely constrained by land use regulations, land costs may be 80% of the cost of a single-family home, 50% of the cost of a mid-rise, and only 25% of the cost of a high rise. That these percentages vary directly contradicts Tyler’s thesis.

Complicating any analysis of land use restrictions is the fact that they have very powerful spillovers/secondary effects. As Sailer notes above, tight land use restrictions in highly desirable places perform a sort of “sorting” function. When it’s the poor or people of color being “sorted out,” we call it gentrification. But there’s less obvious sorting by skill level — tight housing supply in Silicon Valley no doubt culls lower-skilled programmers from the labor pool and surely increases the average quality of the labor pool. This sorting of population caused by restrictive land use regulations will tend to increase the demand for housing in the city, at least by those who value the attributes being sorted for.

On the other hand, there are well-known agglomeration benefits from growth: increased labor market specialization, economies of scale, deeper dating markets, more differentiated retail markets, etc. Restrictive land use regulations obstruct these agglomeration benefits, and so tend to make cities less desirable. If land use restrictions held Silicon Valley’s population to 500,000 rather than ~ 2 million, would it be as desirable as it is?

Sorting and agglomeration are in tension. Sorting for specific attributes might make the city more desirable for those who desire those attributes, at the cost of agglomeration benefits. Allowing untrammeled growth will produce agglomeration benefits at the cost of sorting effects. It’s very, very hard to sort out these secondary effects and predict what effect they’ll have on the demand for housing.

But the supply function will look exactly the same regardless of these secondary effects. Or it would but for land use regulations.

154 benj April 20, 2016 at 5:18 am

Even if it were possible for existing property owners to “add a floor” ad infinitum, we’d simply end up with vertical sprawl, just like we have horizontal sprawl. Only the capital and welfare costs would be even higher. That’s not what people want.

Planning regulations are just another service that people demand. When we compare cities like Houston vs SF that’s what the market is telling us.

There’s nothing stopping individuals and firms voting with their feet, the US is a free country I believe.

Land values reflect the totality of all the positive and negative externalities in the economic and spacial environment. For the market to work efficiently those externalities can only be fully internalised when people pay rent/land tax.

If some people enjoy the value they get from zoning, a land tax allows those excluded from enjoying that value to be compensated via a market based mechanism.

But hey, for me when I look around the World, and compare places with very high land values and compare them to places where they are low, I know where I’d rather live. It’s only our economic system that distributes that value unfairly that’s the problem.

155 Adam April 20, 2016 at 10:46 am

Density is not sprawl.

156 Benj April 20, 2016 at 1:03 pm

Why would building upwards be any more dense than building on the ground unless there are added costs(including welfare costs) for doing so?

In which case the “just add a floor” argument doesn’t stack up. If you pardon the pun.

157 Potential SF Resident April 19, 2016 at 7:40 pm

I think this is a really interesting post.

It’s not entirely clear to me *why* it is desirable to “make major cities affordable again,” although it sounds appealing. Is it about fairness, that people with lower-paying jobs should be able to afford living in what are currently such expensive cities? Is it aesthetic, that an economically diverse city is a “better” place?

Anyway, I read this post as saying that more building leads to both more housing, but also more demand for housing due to an increase in high-paying jobs. Because of this, the net effect on housing prices from eliminating building restrictions is ambiguous, and potentially positive.

If the goal is to make the price of the average housing unit fall, for whatever reason, one solution would seem to be to increase residential building more than commercial building. In principle, it’s simple enough to be selective about which restrictions are eased. (Alternatively, a city could engineer a local recession one way or another.)

I guess this is “planned urbanism” rather than “market urbanism.” It highlights the potential trade-off between an affordable city and a faster growing city. I’d love to hear some comments on what the objective function should be, whose utility should be maximized. Who are we trying to keep cities affordable for? Should there be greater weight on the utility of longtime residents?

158 Nathan W April 20, 2016 at 6:29 am

“Who are we trying to keep cities affordable for?”

Hair dressers, hotel and restaurant workers, construction workers, housekeepers, etc. Then again, if this is a particular concern, then you can just adopt a local minimum wage, which several cities have done.

159 Potential SF Resident April 20, 2016 at 1:28 pm

Reasonable list. Suggests who but not why. It sounds like there’s a social justice concern, but what exactly is the issue?

Maybe it’s an idea about unfairness in consumption — we think everyone should have a chance to live in desirable cities. I didn’t grow up with a lot of money, so I can sympathize with not being able to buy everything we want, but I don’t find it persuasive from a public policy perspective. (Also, if these services are demanded by city residents, it’s not clear to me why hairdresser wages wouldn’t increase, making the city affordable.)

Or maybe it’s something about social mobility. Maybe there is an economic benefit to growing up in a big, dynamic city, even if you do so within a poorer household. If lower income folks get priced out, society just becomes more and more stratified in the future. (And then, you know, the revolution. Unmet demands for equity turn into political conflict.)

In either case, I wrestle with how we would determine the “optimal” population mix.

160 A Definite Beta Guy April 20, 2016 at 9:41 am

ONE: Good question, with several possible answers. For a reader of this blog: cities are dense networks that augment economic productivity. However, in many high-productivity cities, the cost of living entirely eats up the marginal wage. This causes flight from the dense networks and towards less productive regions of the nation. This makes us all poorer. We shouldn’t FORCE people to live in cities, and we cannot probably not make cities have a equivalent COL to rural North Carolina, but we can certainly make cities MORE affordable.
TWO: For our “Average is Over” future proponents, cheap housing is the same as cheap beans. Cheap stuff to clothe, house, and feed the masses so I can enjoy my international vacations and leisure-“job.”
THREE: For most Urbanists, sprawl is the enemy because people it’s environmentally unfriendly, and because the sprawl represents White Flight and everything bad about America. ESPECIALLY Republicans.
FOUR: I like semi-dense, walkable neighborhoods. Lots of people like them, actually, so they tend to be very expensive. It’s good practice for urban planners to know how to make communities like this. Then we can make more! Then I don’t have to pay so much to live in one! Should everyone live in a walkable neighborhood? No. My Dad wants to live in the middle of nowhere. But it seems many urban planners simply go to “sprawl” and don’t make nicer neighborhoods.

161 A Definite Beta Guy April 20, 2016 at 9:43 am

Damn formatting.

162 Potential SF Resident April 20, 2016 at 2:23 pm

Thanks for the comments. Your 3rd and 4th points are well-taken, but your 1st and 2nd point focus more on the distributional issues that I’m thinking about, so I’ll respond to those.

ONE: The idea is that from the perspective of aggregate production, relative to the status quo, it’s socially but not privately optimal if more lower-income people move to big cities, rather than moving to smaller cities or suburbs? If that’s true, the only question is what is the best way to subsidize lower-income folks to move to cities (or, the question is which building restrictions should be eliminated). Depends on this claim about gains in aggregate production from more low-income workers, but maybe.

TWO: We want more low-income people in big cities so that particular services will be cheap? Why not let scarcity drive up their wages to make the city affordable for the particular services that are desired? The idea must be that the kinds of services provided by lower wage workers are more distorted?

163 Econchic April 20, 2016 at 10:49 pm

Seriously, nobody talked about the capuchin link! That was amazing! Amazing when TC posted it the other day, and amazing to use it as a reference from here own whenever is necessary.

As an aside I must say that personally, I agree with the capuchin’s principle…

164 Sean Brown April 25, 2016 at 7:20 pm

Tyler, wrote this good response to your posts:

I think it deserves at least a read and if you have time, would love to see a response.

“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.”

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