Another estimate of the gains from deregulating building

by on September 13, 2017 at 12:54 am in Economics, Law | Permalink

Here is the abstract:

Counterfactual experiments show that deregulating existing urban land from 2014 regulation levels back to 1980 levels would have increased US GDP and productivity roughly to their current trend levels. California, New York, and the Mid-Atlantic region expand the most in these counterfactuals, drawing population out of the South and the Rustbelt. General equilibrium effects, particularly the reallocation of capital across states, accounts for much of these gains.

Alternatively, note from the paper that:

…deregulating all of the regions to 1980 levels would raise labor productivity by about 10 percent, and consumption by about 9 percent in the neoclassical economy, and would raise labor productivity by about 16 percent, and consumption by about 11 percent in the economy with the externality.

That is from Herkenhoff, Ohanian, and Prescott.  I’d like to make two broader points about the paper:

1. This is yet another example of real business cycle theory methods proving useful.  There are genuine problems with these approaches, but at least most of the blogosphere critics don’t understand them, and their uses, very well.

2. Sometimes you hear Texas described as a “low-wage” economy, perhaps contrasted with the high wages of California.  But there are some subtle wage effects from the Texas approach that often go unnoticed.  By drawing people out of high-rent areas, Texas keeps the lid on land rents elsewhere, thereby boosting real wages in say San Francisco.  Furthermore, San Francisco employers must pay their workers more, the more attractive is the “move to Texas” option.  So the full positive effect of the Texas model on wages is considerably higher than you can see by looking at Texas wages alone.  Once again, the distinction between the seen and the unseen turns out to be relevant.

1 Nicholas Glenn September 13, 2017 at 1:31 am

Great point, it’s so infuriating some of the things that California does. It has so many positives, but politicians there are really trying their hardest to ruin it. I never really thought of people moving to Texas acting as an economic check on some of the more excessive policies of places like California.

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2 Andre September 13, 2017 at 2:47 am

It probably doesn’t occur to you cause it doesn’t really happen. The only people I know moving to Texas are only going if they keep their San Francisco salaries. The heat, politics, and guns are all a big turn off.

I’d say the opposite affect of high rents keeping people out of the bay area is much more important then the pull from the Bay to Texas. Plenty of cheap housing in the rest of California by the way.

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3 yamahog September 13, 2017 at 5:13 pm

You have to believe that there’s compensating / equivalent variation for all the drawbacks of some areas. Texas functioning as a ‘pressure release valve’ for the Bay Area can be a complex (read non-direct) mechanism. I currently work in a high tax state – a recruiter with a company in the Bay Area approached me and I explored moving out there. However, the (offered and not negotiated) salary bump wasn’t even high enough to offset the difference in housing / commute. In fact, to retain my current commute I’d take a post-housing cost salary hit of ~$18k/yr. An optimal bay area configuration for me would probably be something like 30-40 minutes of additional commuting per day and an extra 6k/yr in housing expenses.

So what happened? I decided not to move out to the bay area. Obviously it’s worth it for some people but it’s not worth it for me. In fact, I’m talking to a company in Texas about moving out there and I’m optimistic about it, I might be able to retain my current housing expenses and purchase a house with a nice kitchen and a two-door garage (which is well worth the obligation of mortgage).

Texas doesn’t have to pull existing people out of the bay area to release the pressure, it just has to be an alternative to some people to cost San Francisco growth at the margin.

While we’re on the subject, I’d wager that the median voter could find a place in Texas that’s more politically compatible than the Bay Area.

So what about California? Well, I could live in a cheap place in California but the municipal / state pension issues are somewhat worrisome for those who are interested in real estate and the price of housing in California reflects its proximity to jobs that can pay for the house. Many houses are cheap because they would give you an expensive commute to a good job. And if you could work remotely, you could probably find some place that’s a better value – that’s your pressure release.

It’s a shame, I’d like to live in the Bay Area before I have children but the costs (direct and indirect) are too high. It seems to work great for billionaires though.

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4 mulp September 13, 2017 at 4:26 am

In Texas there are no property rights and you can just squat in or build on other people’s property or land?

California allows building in stupid places, just like Texas. Plenty of houses slidee off cliffs after heavy rain or get burned up in wildfires in drought, much like houses get flooded in river overflow flats in Texas.

Plenty of open land exists in California, but you can’t build transit or highways with tax cuts. Can’t provide water and sewer with tax cuts. And land developers don’t build trolley lines to open up land for develop like they used to. And we haven’t had the massive highway building of 1920 to 1970 for a while.

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5 aMichael September 13, 2017 at 12:00 pm

RE: your first question. No, instead, there aren’t restrictive regulations on what you can do with your land, so if you and your neighbors want to sell your houses in an urban area for a huge profit so that someone can build a high rise there, you’re more likely to be able to do it than in the Bay Area, which should look more like Manhattan in many parts, but doesn’t because of rules restricting high density housing.

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6 Steve Sailer September 13, 2017 at 2:04 am

California is less of a high wage state than a low standard of living state when you compare incomes to the cost of living.

But the weather is nice!

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7 Andre September 13, 2017 at 3:55 am

yes 38 million people live there case the standards of living are so low.

“Nobody goes there anymore, it’s too crowded” – Yogi

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8 Chuck September 13, 2017 at 4:36 am

India must be paradise.

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9 The Engineer September 13, 2017 at 8:57 am

One word: Modesto. The inland cities are hell on earth. Hot, poor, no hope.

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10 This September 13, 2017 at 10:31 am

As an ex-resident of California who fled to NYC for the low cost of living (Yes, I’m serious), this.

There’s about ~1000 square miles of good land with gloriously fantastic weather (that isn’t a cliff ala Big Sur), another 1000 with tolerable, and then everything else goes over 100 degrees for half the damn summer.

And by this point, you can’t afford the places with the good weather, so enjoy your $300 A/C bill!

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11 IVV September 13, 2017 at 3:31 pm

I’m from Modesto originally (well, Turlock, which is actually quite a bit better), and yes, that’s totally the case. If you want to understand the hows and whys of the concept that California is dirt-poor, don’t look at the coasts, look at the San Joaquin Valley and the Inland Empire. Aggressively rural, but still with the lowest air quality. Foreclosure Central in the two years before the financial meltdown. People happy to put up with 2+ hour commutes each way just to keep their Bay Area job. (Just think about being gone for an extra 4 hours a day does to the kids. Where there’s nothing to do.)

And yeah, when we got an offer to move to NYC suburbia in New Jersey, we did the cost analysis and realized we could pay similarly for something more stable.

Now, personally, I didn’t mind the heat, but I knew how to deal with temps over 100 regularly. Although when there was a heat wave, driving the temps up to 114 during the day and cooling off to the mid 90s at night, not even your air conditioning could save you.

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12 JWatts September 13, 2017 at 11:34 am

“yes 38 million people live there case the standards of living are so low.”

From the US Census Bureau: “TRUE: California has the nation’s highest poverty rate, when factoring in cost-of-living”

http://www.politifact.com/california/statements/2017/jan/20/chad-mayes/true-california-has-nations-highest-poverty-rate-w/

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13 spencer September 13, 2017 at 1:11 pm

If you use the BEA data on state income adjusted for the BEA estimate of regional cost of living, California comes in only slightly below average.

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14 Hazel Meade September 13, 2017 at 2:31 pm

Nice weather makes up for a lot.

How many hours of freezing your ass off and/or sweltering heat are you willing to endure for an extra 500 square feet of living space?

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15 Matthew Powell September 13, 2017 at 4:02 pm

How can you really apply cost adjusted income to the entire state of CA, though? You really need to compare income/cost in the expensive regions and then again in the interior. The averages have to come out the same, sure, but there is some pretty important missing information there. I don’t know what you do with people commuting from the interior. I guess assign their income/costs to where they live.

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16 prior_test3 September 13, 2017 at 3:15 am

‘the more attractive is the “move to Texas” option’

Yep, Houston has a lot of extremely attractively priced real estate, in significant part due to the lack of the sort of 1980s zoning that would have contributed so much to higher land prices there in the past, not to be mention the current bargain prices.

But what comes around goes around – SF will undoubtedly have its urban removal moment at some point, followed by renewal if 1906 is any guide.

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17 mulp September 13, 2017 at 4:39 am

In Texas you need a car to survive. To stimulate the economy, roads are used for storm water overflow. Works much better than cash for clunkers in forcing new car sales. It also keeps out the blind and disabled.

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18 yamahog September 13, 2017 at 5:33 pm

The dependency on cars is hardly unique to Texas. In fact, it’s the status quo for most of America. Also, the difference in rent for a two bedroom in the bay area vs houston could pay for a decent car in one/two months.

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19 mulp September 13, 2017 at 5:07 am

Note, California passed prop 13 in 1978, so it distorted land use from 1980 on. In much the same way New Hampshire tax policy distorts land use, starting about 1980 when there were booms in NH border towns of Massachusetts and Maine.

In California, prop 13 led to schools being funded primarily by the legislature from income taxes. In NH property tax is the dominate school funding. Land use determines who is in the schools. Build low income housing in dense apartment building and the schools change from serving middle class to low income students. In NH this determines the tax rate on single family and business property, so large lots excludes the low income, keeping rates lower. In California, you keep the single family house even if dense bungalows from pre WWII.

From growing up in the boom of building schools for boomers like me, businesses were willing to pay for schools, but after 1980, businesses increasing wanted to have no burden for education, based on government taking full responsibility for delivering workers cheap. Immigrants are cheap workers, and Texas gets lots of immigrants from the north, northeast, west US as well as mexico.

New Hampshire has land use policies that bring in immigrants age age 40 with high incomes doing consulting. Educated in another state, raised their kids in a high tax state, then move to NH to reduce taxes paid.

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20 yamahog September 13, 2017 at 6:01 pm

Your comment implies that states are entitled to the labor of people they educate. That’s not the case, I currently reside in the state I grew up in and they’re certainly making their money back on me however school participation is coerced, I certainly don’t respect any claim that I owe my state consideration for something they more or less forced me into doing (going to school).

If Texas creates an environment that offers me a better deal, I’m moving there y’all. If I have kids of my own and the schools stink, then the process will repeat. But competition is healthy, jurisdictions that can use tax dollars effectively stand to be more successful than those that do not.

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21 Roger Barris September 13, 2017 at 5:20 am

The comments about Texas are particularly appropriate. Krugman, and others, have used this argument, which is largely spurious, to denigrate the economic success of Texas’ relatively free-market approach. Here is a blog piece I wrote pointing out Krugman’s fallacies: http://www.economicmanblog.com/wrong-way-krugman/

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22 Just Another MR Conmentor September 13, 2017 at 8:07 am

Texas is for poors.

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23 mobile September 13, 2017 at 11:51 am

Texas is for the middle class that wants to feel middle class.

https://www.theatlantic.com/magazine/archive/2007/11/a-tale-of-two-town-houses/306334/

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24 Just Another MR Commentor September 13, 2017 at 11:55 am

Those are the poors. Average is OVER. Get it?

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25 Khürt L. Williams September 13, 2017 at 7:23 am

> Counterfactual experiments show that deregulating existing urban land from 2014 regulation levels back to 1980 levels would have increased US GDP and productivity roughly to their current trend levels.

I did not read the paper so I am not sure if it considered long term consequences of doing this or what that might do other things — quality of life, etc. from loss of parks and other spaces people like about where they live — in the long term.

The apparent dislike of progressive ideals may likely turns off many people from relocating to the South. Also, the loss of access to a great late night pizza delivery and a good cheesesteak. 🙂

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26 Bill September 13, 2017 at 8:08 am

+1 Yeah, funny how people talk about costs and seem to omit benefits.

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27 Ray Lopez September 13, 2017 at 10:30 am

Paper is gated, but “counterfactual experiments” sounds to me a lot like a model that predicts whatever the model builders want it to predict, based on their priors.

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28 Payam September 14, 2017 at 5:35 pm

They also have a welfare measure which takes into account the amenities and is affected by congestion. See equations (11) and (14). The results are robust; about a 7% increase in aggregate welfare from going back to 1980 levels and 10% from deregulating halfway to the Texas level.

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29 Bill September 13, 2017 at 8:07 am

Another gain from having no regulation is that you get flooded and someone else pays for the clean up.

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30 The Engineer September 13, 2017 at 8:58 am

I hope your home gets hit with 30 inches of rain at some point, see how well your regulation works for you, asshole.

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31 Anonymous September 13, 2017 at 9:20 am

My city (really the LA-OC sprawl) has massive flood plains groomed and banked as flood control. We keep them empty even when they are dry 20 years running.

We don’t build houses IN the flood control basins.

http://articles.latimes.com/1989-07-30/books/bk-690_1_john-mcphee

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32 Anonymous September 13, 2017 at 9:28 am

Depending on which study you believe, LA has been 900 and 3000 homes at risk in a 100 year flood. I consider that low.

https://www.theeastsiderla.com/2016/10/feds-expand-flood-risk-zone-in-atwater-village-and-elysian-valley/

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33 The Engineer September 13, 2017 at 11:54 am

This wasn’t a 100 year flood, dumb ass. Get a 500 year flood and see how those basins work.

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34 Just Another MR Commentor September 13, 2017 at 11:58 am

Texas is for poors anyway so who cares?

35 Anonymous September 13, 2017 at 1:02 pm

Does Houston pass the 100 year test? I think not, which made the 500 that much worse.

36 Anonymous September 13, 2017 at 1:04 pm

Basically all the worst case places to live are in hurricane country, with bad risks every year, not just every 500:

http://stories.weather.com/worstplacestoownhome

37 Anonymous September 13, 2017 at 1:30 pm

How many towns have an ongoing organization called “Citizens Against Flooding?” A 2016 story:

https://www.upi.com/Boom-town-flood-town-How-Houstons-development-increases-flood-risk/9161481127606/

38 Bill September 13, 2017 at 1:49 pm

Engineer,

Good news. If it is such a rare event this won’t ever happen again and you won’t have to build those storm sewers, can continue paving over wetlands, and doing whatever you want.

Houston must have angered the Gods because it has experienced three 500 year floods in the last three years. https://www.washingtonpost.com/news/wonk/wp/2017/08/29/houston-is-experiencing-its-third-500-year-flood-in-3-years-how-is-that-possible/?utm_term=.64bb2d69d573

Start praying.

Maybe Mike Pence can lead the prayers.

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39 Floccina September 14, 2017 at 3:33 pm

You can rebuild it on stilts in Houston for the San Fransisco and still lots on $ left over.

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40 Anonymous September 13, 2017 at 8:19 am

I think the most insightful thing I read was an old MR comment, which said one of two things happen for California university graduates: their family helps them buy a home, or they leave.

I think it is becoming consensus that this needs to change. While there are plenty of rich families buying kids starter homes, a lot more economic growth is being pushed out.

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41 Bill September 13, 2017 at 8:33 am

Prop 13 is the problem. Old folks stay where they are because their property taxes are artificially low; young person who buys a house at market value pays really high property taxes.

If you want to talk about how regulation messes up a real estate market, and intergenerational property transfers, talk about the Prop 13 “regulation”

Of course, no one considers a tax policy “regulation” I suppose so long as it reduces one groups taxes.

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42 The Engineer September 13, 2017 at 9:01 am

Get over Prop 13. It’s two generations old. It doesn’t explain anything anymore.

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43 Just Another MR Commentor September 13, 2017 at 12:08 pm

I love how the guy whose handle basically proclaims his low achievement is lecturing anyone on anything.

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44 Anonymous September 13, 2017 at 1:05 pm

Can’t be a real engineer, sucks at math.

45 Just Another MR Commentor September 13, 2017 at 1:48 pm

You don’t need any math to BE an engineer, you only need it in so far as getting a degree in it which I have.

46 Anonymous September 13, 2017 at 2:05 pm

Geez, one job in our shop required a six dimensional curve fit. We gave to to a girl on our team, who could handle it. I was more an mx + b man, myself.

47 Just Another MR Commentor September 13, 2017 at 2:39 pm

There’s lots of software packages that do curve fitting and mx + b is like Grade 8 stuff.

48 Anonymous September 13, 2017 at 6:29 pm

Not in the days of 6MHz Z8000 processors there weren’t.

49 Anonymous September 13, 2017 at 9:09 am

Prop 13 is definitely part of it, but when a widow’s fifty thousand dollar house goes for two million I am not sure that is the full explanation.

I see a lot of foreign money (out of state and international) driving those prices.

Perhaps without Proper 13 she would move to a condo, but would the price be that much lower? I think no.

More on the new consensus:

http://www.latimes.com/politics/la-pol-sac-california-high-housing-prices-20160414-story.html

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50 Anonymous September 13, 2017 at 9:12 am
51 Anonymous September 13, 2017 at 9:14 am

“Foreign buyers in California purchased $35 billion worth of properties, up from $27 billion a year earlier.”

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52 Wage Differences explain everything September 13, 2017 at 10:47 am

Median wage in the Detroit MSA is $50,000/year, and hasn’t increased in nominal terms since about 1995. Median wage in the SF MSA (which includes Brentwood, 2 mountain ranges and a Bay from SF proper) is about $90,000/year. What’s $40,000/year worth?

Well, about $25,000 after taxes. And that’s why average yearly rent in Detroit is about $15,000 (up from $12,000 at the end of the last recession) and average rent in SF is about $40,000.

Except that houses are future-proof. They can’t raise your rent (And with Prop 13, they can’t raise your taxes all that much either). And that $40,000 wage spread is going up $2,000/year.

So what’s that house worth to you in increased wages in 15-20 years? Well, about $30-40,000 after taxes. (Indeed, 2017 rents prove that 2004-5 prices were, if anything, a touch *low*, so it might not take 20 years). Plus the mortgage deduction and the whole Prop 13 thing working in your favor in another 20 years. Add on the $15,000 from Detroit, and yeah, you can justify a $5,000/month mortgage.

Which is a million dollar house, right in line with the MSA median.

/Because I’ve lived in the places with the $2 Million cottages and they’re well above median in terms of niceness/weather/commute.

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53 Anonymous September 13, 2017 at 11:19 am

But isn’t there a common claim that “median income in this zip code cannot afford the median house in this zip code?”

” .. The study found that in 99 of San Diego’s 106 ZIP codes, or 93.3 percent, fewer than half of the households could afford the median priced home because they couldn’t qualify for a loan. That made for the highest ratio of any city in the study.”

It seems to me that you have to make that up with outside money.

54 The wage guy again September 13, 2017 at 11:45 am

Well yes.

If you’re only making $90,000/year, you can’t afford a $5,000/month mortgage plus property taxes plus maintenance. (Even under CA definitions of “afford”, much less actual loan standards).

Which is why that house/condo *rents* for $3,500 today (including taxes and maintenance). Home prices are building in gentrification. The present residents aren’t supposed to stick around, they’re supposed to get replaced with good high-income crime-free types in 20 years and move to Vegas.

And what you’re *really* paying for is the ability to stick around.

/In a very real example of this, the white house at the corner of Bush and Villa Streets in Mountain View sold for $1.6 Million and rented for $5,000/month a couple years back.

//And of course, like me, you can think that an $80,000/year wage spread is completely unsustainable and the Rust/Sun Belts are going to start looking *fine* in about 5-10 more years of this.

55 JWatts September 13, 2017 at 2:33 pm

“And of course, like me, you can think that an $80,000/year wage spread is completely unsustainable ”

I’d question how many jobs actually have an $80K/year wage spread among regions? Or were you talking about skill levels?

56 Same wage guy September 13, 2017 at 5:57 pm

@JWatts:

Well yes, that’s the point.

Though those software engineering jobs… Count total comp and retroactively apply the EV of those stock options, and $80K is probably below average. I made a quarter million before Memorial Day.

SF has a median wage around $90K, Detroit has a median wage around $50K. Take that $40K/year, subtract taxes, and that gets you SF (Metro Area, which at this point includes Stockton) rents give or take a couple hundred bucks a month.

However, the only way you can justify the current home prices is if you think (nominal) rents will double AGAIN like they did from 2003 to 2017.

And the only way that you can justify *that* is if you think that:
* America is about to have a lot of inflation (probably the best result).
* That wage spread is about to double again (which I don’t think will happen)
* Your median house is about to become a much, much above-median house and the jobs-housing mismatches get much, much worse. Which would mean that those poor people on 2-hour commutes become poor people on 4-hour commutes, and the software engineers go from 1 to 2 hours. (At which point I think the Bay Area would implode and die because Cleveland starts looking really good at that point).

So in practice… I don’t think it’ll last. Or at least, I’m terrified of what that world looks like.

57 Lord September 13, 2017 at 9:31 am

The irony is greater development in megalopolises requires greater investment in public transportation which is generally opposed by the same figures that support less regulation. You can’t have it both ways. Flat and unconstrained land lessens the need for this.

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58 Anonymous September 13, 2017 at 9:42 am

Uber-jitneys!

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59 Axa September 13, 2017 at 1:46 pm

The articles says that it makes sense to deregulate California and New York because if more people move there, they can produce more and consume more.

Regulations slow down economic activity. However if there’s no preexisting economic activity, getting rid of regulations will not make economic activity appear out of the blue.

So, low rent Texas will not cause economic growth. Low rent is just a consequence of lower activity…….and higher rental vacancy rate.

Texas has twice the rental vacancy rate of California, it seems builders build to much for their own good. http://eyeonhousing.org/2015/03/vacancy-and-homeownership-rates-by-state-2014/

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60 Hazel Meade September 13, 2017 at 2:12 pm

Maybe Texas’s rental vacancy rate is just right, and California’s is way too low.

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61 Farter O. Puffs September 13, 2017 at 2:19 pm

Maybe your tongue belongs up my butthole.

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62 Art Deco September 13, 2017 at 3:00 pm

hey leave us cucks alone! you go away!

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63 Axa September 13, 2017 at 2:31 pm

As landlord, I don’t like the idea of 10% rental vacancy rate 🙂

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64 Evans_KY September 13, 2017 at 8:26 pm

Counterfactuals aside, Kentucky and Tennessee are grateful for tighter regulations in California, New York, and the Mid-Atlantic states.

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