How an influential economics paper used imaginary environmental overregulation to spur low-density luxury housing

Why Do Cities Matter? Local Growth and Aggregate Growth is a 2015 paper written by University of Chicago and UC Berkeley economists Chang-Tai Hsieh and Enrico Moretti, which purports to show that the reasons cities are so expensive is that bourgeois NIMBYism drives affluent people to raise spurious environmental challenges to new developments, stalling growth.

The paper has been hugely influential, cited by everyone from the Obama White House to Paul Krugman, and has been used to militate for the deconstruction of environmental rules, allowing states to intervene to force cities to accept developments.

But a close examination of the paper's data and arguments, and the aftermath of its popularity, tells a different story. The reality is that environmental challenges to development are a rarity, with only 195 challenges/year in all of California.

But allowing states to clobber city building codes does spur a different kind of development: commercial properties (especially in cash-strapped California cities that are effectively banned from increasing property tax rates and have to rely on sales tax to balance their budgets) and low-density, high-priced luxury housing, often aimed at absentee speculators who buy these places as "safe-deposit boxes in the sky."

"Why Do Cities Matter?" sold itself by making a bunch of eye-popping predictions about the suppressed prosperity that could be unleashed by giving states the power to override cities. On closer examination, these predictions involve insanely optimistic predictions, like 50% of all US workers relocating to a few coastal cities.

The neoliberal orthodoxy says that government should stay out of the affordable housing business, and instead offer incentives like tax breaks and subsidies to private developers. Private developers aren't biting, because the super-rich (what Jane Jacobs called "cataclysmic money") have so much to offer to these developers that they're going to build luxury housing forever. Today, in cities like San Diego, more affordable housing is being knocked down than is being put up and homelessness is balooning to apocalyptic levels.

We get affordable housing when cities build it, period. If we want to make our cities livable places that are engines of economic growth, we need their housing stock to serve as homes for people, not speculative assets for semi-autonomous offshore fortunes.

Hsieh and Moretti don't seem to have read the report very closely. In fact, they don't seem to have read their own report very closely. The increase that they estimated for the San Francisco MSA under the "partial adjustment scenario," a jump of 149.2 percent, refers to growth in employment, not housing units. Corresponding population growth, given their assumed labor share of 0.65, would reach some 230 percent. As for their misreading of Plan Bay Area: its projections span 2010 to 2040, not 2030; those projections refer to either the whole region or to specific cities; nowhere does the plan forecast growth for any MSA; and none of those projections—a 30 percent increase in population, a 33 percent increase in jobs, and a 24 percent increase in housing units for the entire region—come anywhere near an 80 percent increase in population, much less a 149.2 percent increase in employment.

Last April, Glaeser, the superstar dean of neoclassical urban economics, commended Hsieh and Moretti's calculations. "Whether these exact figures are correct," he advised, "they provide a basis for the claim that America's most important, and potentially costly, regulations are land use controls."

Yes, they do: a basis in a free-market fantasia whose speculative prognostications should have no place in the formulation of public policy.

When Affordable Housing Meets Free-Market Fantasy [Zelda Bronstein/Dissent]

(via Naked Capitalism)

(Image: SounderBruce, CC-BY-SA)