The new Hsieh and Moretti paper on land use restrictions and economic growth

We quantify the amount of spatial misallocation of labor across US cities and its aggregate costs. Misallocation arises because high productivity cities like New York and the San Francisco Bay Area have adopted stringent restrictions to new housing supply, effectively limiting the number of workers who have access to such high productivity. Using a spatial equilibrium model and data from 220 metropolitan areas we find that these constraints lowered aggregate US growth by more than 50% from 1964 to 2009.

Here is the pdf, via the excellent LondonYIMBY.  Here is a related estimate from two days ago.


Are NYC and the Bay area high productivity cities? Or do they register as high productivity because they produce so much income? Equating income with productivity may be misleading. It's certainly true that we currently value what they do in NYC and the Bay area, finance on the one hand and so-called "tech" on the other, but what if finance and so-called "tech' went out of favor and, instead, farming (for example) were highly valued. Would someone write a paper on how all that land zoned for farming lowers aggregate US growth.

Considering estimates that finance may take in a few percent of GDP more than its actual productivity (maybe worth it anyways as a part of a total market system with very numerous other allocational benefits) ... then this could be hugely relevant.

Are they taking pie or making pie?

It seems they are very useful in helping others to make pie, but then some trillion or so additional dollars per year end up in their pockets beyond the economic value - financial resources that might have been put to better use if a greater share of that surplus remained in the hands of pie makers instead of those who facilitate access to pie making ingredients.

I usually find your comments pretty good, but this one is a notable exception. Finance and tech produce income because people in general find their outputs valuable. One can quibble about the details, but all that quibbling happens on a computer or smart phone made by a company that raised capital to do so. If you're going to hand wave away free markets and price discovery, there's not much basis for a reasonable discussion.

If I made the argument on a device produced by a company that uses financial markets, therefore all concerns raised are invalid for the fact of any loose notional connection whatsoever?

What world do you live in?

It's like saying that if you bought a car, it is invalid to suggest improvements to that car for the fact of being in it. Which is pretty much the opposite of what would seem sensible ..

I was just making an off-hand reference to how central technology and finance are to our lives. I didn't intend to imply any positions were invalid as a result.

Financial services firms make money through voluntarily transactions, but also through underwriting public bond measures, where the "repayees", often had no say in the transactions.

And it's increasing % of GDP is from rent seeking regulation rather than innovation. We are beyond the optimal usage.

Lots of folks feel threatened when one questions the value of finance and the so-called "tech" sector, as well they should considering how many folks are heavily invested in both. Maybe it's not a coincidence that this blog post by Cowen was followed by his blog post about God. People believe the strangest things.

I personally don't find it particularly threatening. I just think you should provide some rationale for why you think certain sectors may be worth less than the market indicates.

"Misallocation arises because ... cities... effectively limit the number of workers..."

So government economic interventions negatively distort economic production.

This economic truth was known 150 years ago, but is sharply rejected by most all economists today.

They never learn

I think blaming "government" per se, for local zoning decisions taking by local councils elected by local residents is not the correct view.

Certainly, the economic costs of these decisions should be on the table, so as to facilitate good decision making. But grouping it into generic "government = bad" logic, or even just concerns of whether inefficiencies in government (adjusted conceptually for the fact that government tends to take on harder problems that the market cannot easily resolve on its own) might be higher than in the private sector.

Economic theory is from its foundations based on the premise that people have preferences. When those preferences add up to things which results in fewer dollars and cents, it is entirely possibly that this can be consistent with a better life (higher "utility" or "welfare") of the population.

So ... if that can be sustained after debate on the methods, results, and broader issues, that these zoning issues truly did cut GDP growth in half over a 50 year periods, that's a huge deal, and higher levels of government such as states/provinces, or even at the national level, can consider incentives which promotes shifts towards greater economic productivity. Without forgetting that the economy should serve the people, much more so than the other way around.

Also, if people get the lifestyle they want in NY and SF, thereby enabling these international cities to attract significant global talent, then the methods used are going to represent a maximum bound on the possible effect - because it doesn't consider that some all-start coder in London or New Delhi might be harder to recruit if they cannot get (at any price) a single dwelling home in SF, no matter how ridiculous the zoning laws look on the surface.

People move to Houston if they don't care about the city they live in. People move to SF if they do. The market gives people choices. Not everyone at every level. Nothing can be unhitched from everything else.

Lol! That's exactly what I hear from all of the people who move to the bay "sure it is expensive, but the zoning is terrific".

I think you're being facetious! So what is it they do say, or are they moving there against their will?

Zoning in my town follows deed restrictions. We never had much industry. Where city and county government once played a role was in the protection of open space and water quality.

The "productive" people (in the second sense mentioned by rayward) come here because such legacy constraints - which would not be enacted now that we have "grown up" and adopted a ward system with elected representatives interested only in division of the spoils along ethnic lines - gave it a reputation for being a pleasant, fairly green, outdoorsy city. There seems to be significant overlap between rich people and liking nature. The charms of the landscape around my city are much subtler than the Bay Area and do not withstand being covered with houses. Environmental measures famously didn't retard our growth but at least enable us to swim in a natural swimming hole in the middle of a city of a million people. They prompted the domestic migration of many people who would otherwise have no interest in living in my state at all.

Austin, right? In my visits over the years I find it's become a smaller version of San Francisco. That is, a city trying to choke itself to death in an attempt to petrify its charms, and rapidly succeeding.

Not succeeding in petrifying anything. Our future is not, as the local pro-density urbanists believe, much dependent on whether 8-plexes are allowed here or there, whether transit gets built on the wrong corridor, garage apartments are allowed to proliferate, or space for ground-floor retail that fails to materialize - or - strangely as it does not involve the urban core - their greatest wet dream, the ESA is repealed, associated density restrictions (not even in the urban core) are lifted, and current open space developed.*

Washington, D.C sets our future course. It is entirely dependent on federal immigration policy.

*This stems, near as I can tell, largely from an antipathy - predictable enough, I suppose - of one generation for another. Whatever Boomers like, is bad. Environmentalists, hippies and old people suck. Just die already.

Around these parts "government" gets blamed for most everything that's not right in this world. Compare this essay by Cowen (, in which he criticizes Medicare for being inefficient, with this ( and this (, private insurers bilking Medicare for billions. I suppose one could argue that bilking Medicare is "efficient", or one could give it a good Geraldine imitation ("the devil made me do it") as an excuse for the bilking.

It seems likely that short term zoning protection for "locals" could have a greater but more diffuse negative effect for everyone else. The tragedy compounded because everyone "local" is also an "everyone else."

I for one welcome an anti-NIMBY backlash.

As a layman in economics take my advice as you will. The authors fixed on the period from 1964 to 2009 with little to no mention of the decline of unions, globalization, or the Great Recession. All significant earthquakes to our economy.

I understand many cities have outrageous housing prices and low inventory. In coastal areas with finite space, growth may become undesirable (GW, CC). Why not hedge and focus on investments in high speed rail?

I would caution against an urban city versus rural country approach ("expanding employment in high productivity cities at the expense of low productivity cities"). My rationale is best described by the last election. Consider how a low skill worker in "flyover country" is to compete with the urban or college town engine. We have a bad habit of providing generous tax incentives to companies that play states against one another. If the cities become more attractive to businesses why would they locate in Kentucky?

Growth can be tricky. Tennessee is a perfect example of unfettered expansion in the South. Murfreesboro/Nashville, Farragut/Knoxville, and Cleveland/Chattanooga have exploded with little to no plan on how to keep up with growth. The smaller cities blend into the larger ones. No income tax, moderate to low housing costs, and low unemployment. Everyone drives; public transportation is for poor and liberal people. The downside is that higher skilled transplants have displaced the locals causing a divergence between extreme wealth and poverty coupled with educated and less educated.

Scarcity must be balanced with growth. Both have their downsides. To focus solely on aggregate results seems foolhardy. $0.02

Quibble, how certain is the proposition that generic workers in the contemporary US actually become more productive if they move to SF to NY? I understand the theory that STEM workers or bankers are more productive in SF and NY because of clustering and network effects but what about generic workers, i.e., clerical workers, retail workers, tradesmen, truck drivers, teachers, civil servants, health care workers, etc. Do these workers actually produce more value per input in the metropolis than in the stix? I recognize that they probably make more money in these regions but that's obviously not the same thing as creating more value.

Glad to see treatment of property zoning, probably the largest structural impediment in the US economy today.

Bring up the minimum wage, and orthodox macroeconomists will scale to the very pinnacles of righteous indignation and issue canned sermonettes in streams.

But property zoning…not a topic.

Ask Bryan Caplan.

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Isn't it possible that cause and effect are being reversed here? I accept that zoning in places like SF make it more expensive. I would have concluded that this higher cost of living allows only the most productive to live there -- less productive folks can't afford it. So the high average productivity of these cities might partially be a result of their higher costs, not because the zoning somehow increases productivity, but because the zoning creates a sorting process where only the most productive may enter, which brings up the averages.

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