How Affordable Housing Policies Backfire

Affordable housing policies have a long history of hurting the very people they are said to help. Past decades’ practices of building Corbusian public housing that concentrates low-income people in environments that support crime or pursuing “slum clearance” to eliminate housing deemed to be substandard have largely been abandoned by housing affordability advocates for the obvious harm that they cause stated beneficiaries. While rent control remains an important feature of the housing market in New York and San Francisco, even Bill de Blasio’s deputy mayor acknowledges the negative consequences of strong rent control policies. In the U.S. and abroad, politicians and pundits are beginning to vocalize the fact that maintaining and improving housing affordability requires housing supply to increase in response to demand increases.

While support for older housing affordability policies has dissipated, the same isn’t true of inclusionary zoning.  From New York to California, housing affordability advocates tout IZ as a cornerstone of successful  housing policy. IZ has emerged as the affordable housing policy of choice because it has the benefit of supporting socioeconomic diversity, and its costs are opaque and dispersed over many people. However, IZ has several key downsides including these hidden costs and a failure to meaningfully address housing affordability for a significant number of people. Shaila Dewan of the New York Times captures the strangeness of IZ’s popularity:

New York needs more than 300,000 units by 2030. By contrast, inclusionary zoning, a celebrated policy solution that requires developers to set aside units for working and low-income families, has created a measly 2,800 affordable apartments in New York since 2005.

DC’s City Center includes 92 affordable units. Image via Foster and Partners.

Montgomery County, a Maryland suburb of DC,  has perhaps the most well-established IZ policy in the country. After 30 years, the program has produced about 13,000 units. Montgomery County is home to over one million people, 20 percent of whom have a household income of less than $43,000 annually. While this is an extraordinarily high income distribution relative to the rest of the country, this makes the county’s median apartment rental of nearly $2,300 out of reach for many more people than even an aggressive IZ policy can serve.

While Montgomery County’s IZ housing does not reach a large percent of its population, it has provided many more units than other cities’ programs have. Washington, DC’s IZ law was passed in 2006, requiring developers to set aside 8-10% of units as affordable in all new projects with more than 10 units. As of the most recent 2012 report, DC’s IZ program has yet to reach a single beneficiary. The IZ units that have made it to market are sitting empty. This is in part because IZ units, priced to be affordable to those making between 50% and 80% of the Area Median Income, are not the most cost effective choice for many people in this income range, potential beneficiaries of owner-occupied IZ units may not be able to qualify for a mortgage. IZ units tend to be one- or two-bedroom apartments. Low- and moderate-income DC residents may be able to find housing that is much more affordable than what IZ provides by living in a larger apartment with a roommate(s), in a group house, or with family. By attaching these affordable units to new, often luxury buildings, IZ siphons affordable housing resources to the type of housing where it will buy the least.

Evidence on the benefits that mixed-income housing provides for low-income people is mixed, but it’s hard to deny that inclusionary zoning beneficiaries win a lottery. They live in new construction in desirable neighborhoods, housing that would cost several times as much at the market rate. However, IZ’s effects are not limited to beneficiaries, and its costs are not fully borne by developers. Because developers will lose money on the IZ units they build, this cost has to be made up in the market rate units in order for the project to go forward. This adds to construction costs and also incentivizes luxury units that can better absorb the cost of the IZ units relative to more affordable construction. While providing affordable housing to a few lucky low-income people, IZ also makes housing less affordable for everyone who doesn’t receive the benefit by reducing housing supply and skewing the market toward luxury housing that can subsidize the affordable units.

IZ appears free to everyone except developers because it’s not paid for out of city budgets. But ultimately housing consumers share in the cost of IZ units through a hidden tax. By making new construction more expensive, IZ also reduces the rate at which the prices of older or less desirable housing filters down to the point that it becomes affordable to low- and middle-income residents. Putting affordable housing in new construction ensures that it will benefit fewer people than the same amount of resources otherwise could. IZ supporters emphasize the importance of neighborhoods that are socioeconomically diverse but ignore the opportunity cost. Low-income people may be well-served by putting resources toward living in a diverse neighborhood, but this competes against many other places their resources could go, including investing in a business, pursuing education, or prioritizing nutritious food.

As economist Ben Powell explains, IZ can be designed not to have an effect on market-rate housing prices if developers are allowed to voluntarily trade the provision of IZ units for density bonuses. In that case the bonuses must be high enough to offset the cost of the below-cost units. However, as Stephen has pointed out, IZ creates an affordable housing lobby that opposes upzoning without affordability requirements. Eliminating IZ would put all housing affordability advocates on the same team. The same amount of resources currently providing for IZ units could be levied as a transparent tax and transferred to low-income people as cash rather than as luxury housing. This would also allow for resources to be distributed based on need, rather than giving a few households a jackpot.

Why the Left and the Right Should Join Forces against Eminent Domain

The destruction of inner cities at the hands of bureaucrats wielding eminent domain has been well documented by urban theorists from Jane Jacobs to Richard Epstein. As Ilya Somin points out, eminent domain has played an important role in destroying property in Detroit, contributing to its population losses. Dating back to the implementation of Title 1 of the Housing Act of 1949, urban policymakers began using federal funds for slum clearance. Unsurprisingly, destruction of housing units correlated with the population decline in Detroit and other cities.

While one would think that the horrors of slum clearance under Title 1 have been adequately demonstrated to prevent planners from pursuing neighborhood destruction as an economic growth strategy, cities across the country continue using eminent domain to clear “blighted” neighborhoods. Last year Denver declared an area of its Five Points neighborhood, including 246 homes, blighted, meaning that now developers interested in building in the area can request the city to use eminent domain to grant them the properties that they want. While the Atlantic Yards project received extensive press coverage, policymakers often employ eminent domain more quietly on behalf of stadium builders, benefiting sports fans at a dear cost to neighborhood residents and business owners. Like urban renewal projects dating back to the 1950s, Forest City Ratner has failed to deliver the promised housing that was part of the Atlantic Yards agreement when the city agreed to condemn the neighborhood.

Perhaps Robert Caro provides the most poignant description of the horrors of eminent domain in The Power Broker, explaining the losses of neighborhood cohesion when the tool is used to demolish private housing to be replaced by public housing or in some cases vacant lots  when promised public works are not delivered. One would think that the well-documented failures of urban renewal would lead policymakers to be very cautious when employing eminent domain for corporatism, or “public benefit.” However, even in the Kelo case in which the Supreme Court established that cities can legally use eminent domain in an attempt to provide public benefit through economic development, the Pfizer project for which homes were condemned fell through. Not only did New London policymakers fail to incite economic development by demolishing houses, they shrunk their tax base and created the blight of vacant lots where there was no blight before.

Today, policymakers in California are leading the charge to use eminent domain in a creative new way: using its power to confiscate underwater mortgages from banks, write them down to current market values, and refinance homeowners’ loans with more favorable terms. While the policy has yet to be implemented, unintended consequences are easy to foresee. Once city policymakers employ this policy, mortgage bankers will be much more reticent to make loans to people there, ultimately limiting the city’s housing supply. Furthermore, this policy will be yet another example of policymakers attempting to raise homeownership rates when its unclear that homeownership is beneficial, especially for those who can’t afford it comfortably. The policy will doubtless have other unintended consequences yet unknown. Eminent domain often results in the opposite of what policymakers say it will; slum clearance creates slums and giving individuals’ property to corporations to create jobs ultimately results in decreased economic growth. In this case, using eminent domain to increase affordability for homeowners will likely lead to lower homeownership rates and more expensive housing in cities that employ this strategy.

Polls demonstrate that a large majority of people oppose eminent domain for economic development. Despite this stated support, all but a handful of states permit eminent domain based on the subjective and easily manipulated designation of “blight.” Despite eminent domain’s long history of being used for racist ends and ongoing use to eliminate low-cost housing, eminent domain fails to spark the widespread liberal outrage it deserves. The liberal bastion of The New York Times editorial page not only stayed silent when its business side used eminent domain to clear away existing businesses for its new headquarters, Matt Welch of Reason points out it was one of few neighborhoods across the country to throw its support behind the Kelo decision. The corporatism inherent in using eminent domain for economic development is an area where those on the left and free marketeers should be able to find plenty of common ground to support state-level reforms. Unlike many areas where public choice incentives make policy reform unlikely, eminent domain has not only concentrated benefits, but also concentrated harms. In turn, this makes it an area of land use policy where reform should be possible.

Homeownership and Financial Well-being

Adam, Stephen, and I have previously written on some of the downsides of homeownership from an urbanist perspective; owner-occupied units are biased toward being single family homes, and when owner-occupied units are condos, they carry many detrimental characteristics for redevelopment. Despite the negative outcomes of homeownership from a market urbanist perspective, the pervasive conventional wisdom remains that an owning a home is a path to financial well-being. Even including the government policies designed to improve homeownership as an investment, from the mortgage interest tax deduction, to subsidized home loans, to the capital gains tax break for homes, owning a home is still not the fool-proof investment that many people seem to believe it is.

A recent Times Dispatch article reveals this commonly held belief. The reporter quotes the CEO of the Richmond Association of Realtors without noting that her profession depends on the buying and selling of owner-occupied homes:

“Homeownership always trumps rental when it comes to the accumulation of equity and wealth over time,” Lafayette said.

Given that interest rates remain near historic lows, a monthly mortgage payment for many households makes more sense than paying rent, she said.

While it is true that paying down mortgage principal is a form of forced saving, this analysis does not take into account the opportunity cost of what else households could be doing with their home equity, such as investing it in the stock market in a tax-advantaged retirement account. For example, this New York Times rent vs. own calculator does not take into account an accurate opportunity cost of making a downpayment. In the default example, the owner pays a $34,400 downpayment, but the calculator does not take into consideration the renter’s potential return on investing $34,400 over the same time period in a tax-advantaged retirement account. While many people believe that putting this money into a home is a prudent and low-risk choice, in fact putting a large chunk of individual net worth into a single asset is much higher-risk than purchasing shares of, say, an index fund. Some homes will appreciate in value more quickly than the stock market, but placing a bet on a single home even appreciating more quickly than the rate of inflation is risky. Homes in cities with tight supply restrictions are in a better position to see rapid appreciation, but a homeowner in any city faces the risk that a regional downturn will impact both his job security and net worth simultaneously.

It is true that homeowners often increase their net worth more rapidly than non-homeowners, but correlation is not causation. Mortgage payments act as forced savings, and it seems that many Americans are not naturally disposed to saving a substantial piece of each paycheck without a commitment to paying a mortgage. However, many people having a propensity to save little does not indicate that “investing” in an owner-occupied home is a smarter move than renting financially. Personal finance writer Jim Collins explains the characteristics of owner-occupied homes that make them a poor investment, including their illiquidity and high transaction costs.

Of course there are many non-financial benefits that some people see in homeownership — caring for outdoor space, freedom to remodel as desired, and psychological benefits of greater community ties — all valid traits that lead people to want to live in owner-occupied homes. The decision to own or rent should be centered around these characteristics, though, not around the belief that homeownership is the road to financial stability.

The Renewed Debate on Inclusionary Zoning

Stephen Smith and I co-wrote this post. In case you haven’t been following Stephen elsewhere, he’s also been writing at The Atlantic Cities and Bloomberg View.

 

This year, some of the first apartments and condos subject to inclusionary zoning laws in DC are hitting the market, stoking debate over development laws that the city adopted in 2007. The inclusionary zoning requirement is currently stalling the city’s West End Library renovation with Ralph Nader leading efforts to include an affordable housing aspect with the library project. Inclusionary zoning advocates often base their support on the desirability of mixed-income neighborhoods, while challengers argue that inclusionary zoning is an inefficient way to deliver housing with unintended consequences.

Heather Schwartz, who studies education and housing policies at the RAND Institute, says that one important feature of this policy tool is that it gives low-income families access to high-income neighborhoods while at the same time limiting the number of low-income residents in a neighborhood. She said, “Since IZ is a place-based strategy that tends to only apply to high-cost housing markets, it can offer access to lower-poverty places than housing vouchers and other forms of subsidized housing have historically done.”

David Alpert, editor-in-chief of Greater Greater Washington, a local urban planning blog, offers another argument in favor of inclusionary zoning, “a policy that builds support for both greater density and affordable housing,” he said in an email. “Much of the opposition to greater density involves a feeling that it is just a ‘giveaway’ to developers who make the profit and impose some collateral burden on a neighborhood, but many people are more supportive of the density if it serves an affordable housing goal.”

While inclusionary zoning proponents may see its ability to introduce just a few low-income residents to a higher income neighborhood as an asset, it does not typically meet an area’s demand for affordable housing. Montgomery County, MD, outside of Washington, DC has one of the nation’s most established inclusionary zoning problems. In over 30 years, inclusionary zoning has created fewer than 13,000 housing units in the county, which area developer AJ Jackson with EYA describes as “a drop in the bucket of housing demand.”

Jackson explains that the requirement to take a loss on some units leads developers to build only higher end housing, where they can make up the losses they take on the affordable units, making the remaining market-rate units still more expensive. Jackson suggests that the only viable solution to the problem of a lack of affordable housing is to increase allowable densities broadly. He points to several neighborhoods in DC and surrounding counties are currently zoned for commercial or light industrial uses, but that profitable residential development could succeed with zoning changes.

However, he points out the political obstacles to this type of development. He said, “For these jurisdictions, office density and jobs are great. But residents take more than they give in tax revenues,” so city officials may oppose residential development for budget purposes. An even greater obstacle may be current residents’ opposition, a well-documented setback to all sorts of DC-area projects from residential to restaurants.

The political incentives that confront politicians when they do decide to embrace more development complicate the density bonus calculus. The pro-density argument for inclusionary zoning is that the bonuses allow developers to build where they otherwise could not, but when an area is being targeted for development anyway, anti-density activists can easily anticipate bonuses when base zoning allowances are being hashed out and factor them in to their maximum tolerated building envelope. If those who oppose development in and of itself have enough clout, the “bonus” that developers can be reduced just a technicality.

For example, during the rezoning process for Manhattan’s West Chelsea neighborhood in 2005, New York City Assemblyman Richard N. Gottfried wrote in a statement that the city should follow the lead of the Hudson Yards rezoning, where the affordable housing programs were made “effectively, if not technically, mandatory,” which he attributed to “the leadership of Councilmember Christine Quinn,” now frontrunner to succeed Bloomberg as mayor.

The city did eventually take steps to increase the amount of affordable housing built by Hudson Yards developers by tweaking the “bonus” formula so that the rezoning yielded more affordable housing without more bulk than the administration’s proposal. Some below-market units were carved out of the proposed development, while others were pushed off-site – the affordable housing “will not generate additional bulk in the neighborhood through an inclusionary bonus,” as Chelsea Now wrote in 2009. The affordable apartments will be built on city-owned plots 15 blocks north, which given their location, were destined for development soon anyway.

And for those who support inclusionary zoning programs because of the extra density they can bring to neighborhoods, Assemblymember Gottfried’s suggestion for West Chelsea should be especially troublesome: “The Commission should look for places to lower the base FAR to allow the area available for affordable housing to increase.

Indeed that seems to be what happened. “Building density in the entire [West Chelsea] district has been reduced from the previous plan,” The Villager wrote the next month, “in order to provide more incentives for developers to apply for higher density under the inclusionary housing program.”

And New York City is not the only place that affordable housing groups have fought as-of-right density in the name of bonus incentive programs. Last year in California, some housing advocates were hostile to legislation, supported by developers and environmentalists, that would have forbidden municipalities in the state from requiring more than one parking space per unit in neighborhoods adjacent to frequent transit corridors.

As Lisa Payne, policy director at the Southern California Association of Nonprofit Housing, told the California Planning & Development Report in regards to their opposition to Assembly Bill 710, “We have 30 years of history with density bonus law, that recognizes the value of trading a planning concession, whether it be height, density, or parking for supplying the mix of incomes in a project. This bill would have removed that tool.” Affordable housing groups withheld their criticism of the 2012 iteration of the parking reform bill, but it has yet to pass.

While inclusionary zoning provides significant benefits to residents who are lucky enough to live in allotted affordable units, it does not provide sufficient housing units to address many cities’ housing affordability challenges, and in some cases can even breed alliances between affordable housing advocates and anti-density constituents. As Jackson explains, permitting more and denser development is the only viable path to this goal.

Frank Lloyd Wright’s Centrally Planned City

On my last post about Ayn Rand’s views on cities, I received feedback in the comments that obviously she loved cities and on Twitter that obviously she did not. I think I come down on the side that she likely saw cities, and particularly skyscrapers, as embodiment of human achievement. However Frank Lloyd Wright — the likely inspiration for her character Howard Roark in The Fountainhead — strongly opposed population density both for his architectural preference and from a public policy angle.

Wright called his urban development vision Broadacres because he thought that population density should be less than one person per acre. In part this may have stemmed from Wright’s practice of organic architecture. Many of the tenets of organic architecture, such as designing buildings with their users’ needs as the foremost priority, can be practiced as well in dense development as in houses like his most famous Fallingwater. However, Wright seemed to draw particular inspiration from designing buildings in greenfield locations, inspired by the natural landscape.

This is all well and good for those who want to live far from cities. However, Wright went on to argue that density of people and buildings is not merely an issue of preference, but one of democracy. He argued that city life restricted individuals’ freedom of movement, and that skyscrapers limited individualism by increasing congestion and “keeping concentration where it is,” as if working or living in a skyscraper was like being in prison rather than a voluntary activity. Like many who have argued against building density because it increases congestion, Wright downplayed the necessary traffic congestion that occurs when land use restrictions require people to live far from their workplaces.

Wright saw Broadacres as the anthithesis of Corbusian design, but both share a focus on green space and both would rely on heavy-handed planning, making them unlikely to turn out as well in practice as their originators imagined. At the time he promoted it, Broadacres received criticism from liberals who saw his design as anti-communal. While this may be a fair critique of the lifestyle that would result in Broadacres, it’s important to note that it’s also very anti-libertarian. The design relies on a central plan which Wright envisioned repeated over and over in cities across the country. He saw room for individualism in house design, but the land use plan would rely entirely on county-level planners.

In Archiectural Record (1935) he writes that Broadacres represents “a new freedom for America,” but then he goes on:

In the hands of the state, but by way of the county, is all redistribution of land — a minimum of one acre going to the childless family and more to the larger family as effected by the state. The agent of the state in all matters of land allotment or improvement, or in matters affecting the harmony of the whole, is the architect. All building is subject to his sense of the whole as organic architecture.

[...]

In the buildings for Broadacres no distinction exists between much and little, more and less. Quality is in all, for all, alike. The though entering into the first or last estate is of the best. What differs is only individuality and extent.

He sounds not unlike a Randian villain. While Wright professed support of limited government, he advocated authoritarianism in land use. Individual liberty requires the freedom for consumers to choose to live in a setting like Broadacres or in a skyscraper like one of Howard Roark’s, but Wright’s plan would not offer this choice.

(Both video links via The Atlantic Cities.)

Spring Fever Links

1) Nate Berg at The Atlantic Cities covers new research on the world’s earliest cities. The findings would make Jane Jacobs happy as researchers have uncovered evidence that the earliest urbanization was a case of spontaneous order. Their construction wasn’t directed by kings as some historians previously thought, but rather by bottom-up decision-making.

2) Alex Block had two interesting pieces a while back on the politics of increasing urban density. He points out that the vested interests in urban development complicate the policy prescriptions that we often advocate here of loosening regulations.

3) Charlie Gardner at Old Urbanist points out that we shouldn’t get carried away with hopes for housing prices dropping in expensive cities with increased housing supply. While land use restrictions that Matt Yglesias, Ryan Avent, Ed Glaeser and others have written on force urban housing prices higher than they need to be, infill redevelopment is inherently a costly, slow process. It’s much easier for the price of housing in, say, Houston to stay closer to costs of construction because Houston has available land to build on cheaply and easily. Housing in New York is expensive in large part because of market fundamentals, but density restrictions make it more expensive than it has to be.

4) The case of the successful parking pricing in San Francisco that continues to receive opposition reminds me of this passage from Murray Rothbard’s For a New Liberty:

The libertarian who wants to replace government by private enterprises in the above areas is thus treated in the same way as he would be if the government had, for various reasons, been supplying shoes as a tax-financed monopoly from time immemorial. If the government and only the government had had a monopoly of the shoe manufacturing and retailing business, how would most of the public treat the libertarian who now came along to advocate that the government get out of the shoe business and throw it open to private enterprise? He would undoubtedly be treated as follows: people would cry, “How could you? You are opposed to the public, and to poor people, wearing shoes!”

Of course the San Francisco case is not nearly so radical, as street parking spaces are still government-owned, but the implementation of Donald Shoup’s market-based prices for parking serves as a step toward allocating spaces to their highest-valued use. The program’s success so far demonstrates that it is possible to move toward a free market allocation of a good that we are used to receiving free from the government, but it will always be a political struggle. Adam previously wrote at length about Rothbard the Urbanist.

Maryland realtors fight to protect their subsidy

This post originally appeared at Neighborhood Effects, a Mercatus Center blog where we write about the economics of state and local policy.

Image via Flickr user Images_of_Money

We’ve already explored Governor O’Malley’s proposal for the Maryland budget here and here, but recently, a perhaps unintended consequence of the budget came to light. By limiting the deduction that residents earning over $100,000 can make on their state income taxes, the proposed budget would limit the size of the mortgage interest tax deduction for many taxpayers.

I stand by my earlier argument that reducing deductions for only one group of people is not a step in the direction of fairness, but a reduction in the mortgage interest tax deduction may be a positive side effect of an otherwise bad policy. From a limited-government perspective, the obvious downside of a reduction in the mortgage-interest tax deduction is that this represents a revenue-positive change in Maryland’s tax code in a state that already has one of the highest tax burdens in the country. Overall though, I think reducing this tax expenditure is a positive change because the policy has many negative consequences.

While the causes of the financial crisis were many, by subsidizing investment in homes, the mortgage interest tax deduction played some part in the overvaluation of housing stock. Aside from the poor incentives that this tax expenditure creates in financial markets, it amounts to favoritism of suburbs over cities. In Triumph of the CityEd Glaeser argues that the deduction leads many people to abandon renting in a city center for homeownership in the suburbs. However the Federal Reserve Bank of Boston provides evidence that the policy is more likely to lead people to buy larger homes than they otherwise would rather than trading renting for buying a home. Richard K. Green and Andrew Reschovsky write:

If one set out to design a policy to encourage homeownership, it would make sense to target the
largest subsidies to the households least likely to be homeowners, while providing little or no subsidy to
households likely to become homeowners even without a subsidy. Data from countries that do not
subsidize homeownership (such as Canada, Australia, and Japan) indicate, not surprisingly, that
homeownership rates rise with household income. This suggests that a policy to encourage
homeownership should give the largest incentives to households with modest incomes and no subsidies
to high-income households.

The MID, however, does exactly the opposite. For low- to middle-income taxpayers, the mortgage
deduction provides little financial incentive to abandon renting for homeownership. For those
purchasing modestly priced houses and facing the lowest marginal tax rate (currently 10 percent) the
benefits of the mortgage deduction are small. In fact, for households with low state income taxes, the
mortgage deduction may be of no value at all, because the mortgage deduction, even when combined
with other itemized deductions, may be smaller than the standard deduction.

For most high-income taxpayers, the tax savings resulting from the MID are a minor influence on
their decision to become homeowners; these households are likely to own a home regardless of the tax
treatment of housing. Rather than encouraging homeownership among high-income households, the
MID provides an incentive to buy a larger house and to take out a bigger mortgage. Economists have
long argued that the result is an inefficient pattern of investment, with too many resources invested in
housing and too few resources placed in more productive investments in factories and machinery (Mills,
1989; Poterba, 1992).

This analysis ignores that those at the margin of being least likely to be homeowners are likely the riskiest loan candidates and those most likely to foreclose, but they do make a strong case for why the MID leads to larger homes. Regardless of whether the deduction primarily increases homeownership or leads to larger houses, it results in a subsidy for suburban sprawl and its negative side effects of traffic congestion and demand for public services across a wider geographic area.

Unsurprisingly, the Maryland Association of Realtors is strongly opposed to a budget that would lead to lower tax expenditures on housing. The current policy directly subsidizes their industry. The Washington Post reports:

The Greater Capital Area Association of Realtors says that mortgage interest and property taxes account for almost 70 percent of total itemized deductions in Maryland, and they argue that the proposal, if passed, would further harm the area’s housing market, which has struggled to recover.

WAMU interviewed a leader among MD realtors on the issue:

Jim Scurvin, past president of the Howard County Realtors Association says it’s just wrong to jeopardize an industry responsible for 49 percent of revenue that goes to state and local government

“When someone buys a house, on the average you employ two people, and you put $60,000 into the economy right then and there,” he says. “Real estate is the lead when it comes to getting the economy moving again. We have the wind in our sails, the last thing we need is someone to knock the wind out.”

Scurvin, however, is acknowledging only the visible impact of the tax expenditure. As Frederic Bastiat artfully explained, all policies have unseen consequences. In this case, the unseen impact is that the mortgage interest tax deduction fuels malinvestment in housing at the expense of other, more productive sectors of the economy. While Governor O’Malley’s budget proposal has many negative features, the potential for reducing the state subsidy to housing could be its silver lining. Unfortunately as Maryland realtors demonstrate, eliminating tax expenditures is a painful and politically difficult process.

Some Belated Thoughts on The Gated City

Several bloggers have already provided reviews of The Gated City by Ryan Avent, including Aaron Renn at The Urbanophile, Rob Pitingol at Greater Greater Washington,  and Lloyd Alter at Tree Hugger. I’ve finally had a chance to read it and would thoroughly recommend it.

I often support increased density on the grounds that this is what the market wants. To me, that’s still reason enough to support the repeal of many land use regulations, but Avent offers a vision of density that is perhaps more compelling to more people. Because the division of labor is limited by the size of the market, cities offer many amenities that are not supported in less dense places. The diversity of food, art, shopping, sports, and movies is all much greater in cities than in small towns because larger markets allow for more specialization. Of course taste is subjective; many people prefer the quiet of the suburbs to the chaos of the city. However we can see that currently, many people want to move to cities but are unable to by looking at vacancy and rental rates.

Avent also points out that cities provide a sort of employment “insurance.” He uses the example of a Vietnamese chef losing his job. If the restaurant where he worked is in a large metropolitan area, he will be able to find another job in a Vietnamese restaurant. On the other hand, if he lives in a small town, he will likely have to seek employment in a more generic restaurant where he won’t  be able to charge a premium for his specialized skills. This is true for jobs in many industries. If I were to lose my job in economics research, I’d much rather be searching for a new job here in DC than in a state with one think tank, for example.

Avent goes on to discuss the empirical evidence that people are more productive in cities, citing many and varied studies that demonstrate this fact along with the theoretical reasons that cities act as “economic processors.” By artificially restricting the potential supply of housing and office space, land use regulations prevent people from moving to cities, thereby limiting their earning potential. More clearly than any other work I’ve read, The Gated City brings together the research demonstrating that people are more innovative and productive in dense population centers with the harmful impact of zoning laws. Avent acknowledges that density has decreasing returns; at some level of density average worker productivity will begin falling. There is no reason that the market wouldn’t recognize this though, and shift to building out rather than up in a world of free land use.

It’s easy and tempting to blame the inefficient land use regime under which we live on urban planners, but Avent points out that often planners want to do the right thing. Using the example of the Brookland neighborhood in Washington, DC, he discusses a case in which the city planning commission wanted to allow for taller buildings and infill development around the Metro station to facilitate transit oriented development. The neighborhood vehemently opposed the change, though, and successfully lobbied to prevent the upzoning. In this case, Avent explains that NIMBYs were able to work together even when they had completely opposite complaints. Some said the new development would allow low-income residents to move into the neighborhood, while others feared that allowing fancy new condos would drive up housing costs and make the neighborhood unaffordable. These NIMBYs with opposing viewpoints managed to overcome their differences and worked together to block the change in any case.

As much as I appreciated Avent’s perspective in The Gated City, the book left me feeling pessimistic. Avent provides several policy recommendations that would make it easier for increased development where it is most needed, but none of them seem politically viable to me. He suggests giving neighborhoods property rights to their land and the land surrounding them so that developers could purchase it to build new projects where they will be valuable. He also suggests taxing density and using the revenue to compensate neighbors or creating a zoning budget so that urban planners faced a hard limit on how much density they could restrict. It just seems that if any of these were possible in the current political landscape, the market pressure for increased density would have led them to be adopted already.

He didn’t quite get to this in the book, but on Econtalk two weeks ago, Avent suggested that perhaps the best way to improve land use policy would be for people to become more tolerant of what other people do on their own land. I would concur and add that a live and let live tolerance could improve all sorts of American policies on issues from gay marriage to drug laws. Unfortunately, I don’t know what tools are available to speed up the societal progression toward tolerance.