Continuing this series of book reviews on Jane Jacobs’ works, I now turn to Cities and the Wealth of Nations. But there is already a fantastic piece on the Market Urbanism website, by Matthew Robare, who reviews this book and outlines what Jacobs overlooks in her analysis. So, this piece takes a slightly different angle: inspired by (but not limited to) Jacobs’ ideas, it aims to highlight what mayors, governors and urban policymakers could do differently if they are serious about developing their cities into economic powerhouses. Here are some of the most important takeaways from this book and also how they can be expanded upon.

(1) Focus on cultivating import-replacement

The economies of cities do not grow out of nothing. They grow by adding productive new forms of work to old ones, by innovating, and by being cultivators of new ideas and techniques. This process of cataclysmic growth – that Jane Jacobs describes as ‘import-replacement – occurs when a city takes its existing imports and builds upon them, either improving its production through lowering costs, increasing quality, or innovating. The market for these additional goods can either be found within the city itself or serves to expand the city’s exports. These exports, in turn, bring in additional resources to either acquire additional imports or be reinvested into fuelling the processes that fuel import-replacement. Not for nothing does Jacobs describe import-replacement as a ‘cataclysmic’ process – these changes often happen over a very short period and can bring about a rapid influx of people, ideas and capital. We see this in New York City, which grew from half a million residents in 1850 to over 3.4 million at the dawn of the twentieth century. Detroit went from having 250,000 residents in 1900 to a peak of 1.8 million by 1950. Delhi went from a population of 1.4 million in 1950 to almost 33 million in its larger metropolitan area today. That import-replacement is such a simple idea also makes it one of the most crucial to understand for policymakers. At the end of the day, a city can provide everything it wants in terms of amenities, sprawling parks, leisure centres and cultural venues, but without that fundamental process of import-replacement taking place, an urban agglomeration will not grow and will be confined to decline. To quote Jacobs: ‘artificial symptoms of prosperity or a “good image” do not revitalize a city, but only explicit economic growth processes for which there are no substitutes.’ (The Economy of Cities, Pg 200).

So much for that idea; it is clear that import-replacement must be at the heart of any policy for urban development. How can policymakers leverage this idea when it seemingly depends so much on individual decisions made by companies and entrepreneurs? The first thing to address is what are the barriers that prevent economic import-replacement? Are land-use patterns overly strict and restrictive to new and innovative types of industry? Central to the idea of import-replacement is the idea that new forms of businesses, processes and industries will arise that cannot be foreseen in advance. It is therefore crucial that land-use regulation permits new forms of industries to emerge.

The process that Jacobs describes transcends individual policymakers, instead relying on decisions by financial institutions, entrepreneurs, and thrifty individuals. This should not lead to hopelessness. I would argue (and Jacobs, through her expansive uses of historical examples) that enterprise and trade come very naturally to human beings if the conditions are right. Whilst this does not guarantee that any city can become an economic powerhouse, since important factors including geography, human capital, and chance also play an important role, almost every region contains a dominant urban agglomeration. By minimising barriers to trade and commerce in these areas, ensuring regulation, taxes and land-use is conducive to growth rather than acting as a resistor, cities can begin to tap into the power of import-replacement and grow their economies and those of the regions surrounding them.

Finally, where I diverge from the libertarian-purist perspective is that I argue urban policymakers can play an active role in cultivating growth. For example, by creating forums for entrepreneurs to come together and exchange ideas, encouraging universities to collaborate with businesses so that jobs are created within the city (see HEC Paris’ incubator), and making sure the basic needs of the city (sanitation, safety, etc) are met, cities can help to kick-start the process of import-replacement.

One policy that seldom works, however, is offering large subsidies to companies to locate in a city – often in the form of tax breaks or land grants. There is significant literature outlining how this greatly distorts the allocation of resources on a national (and international) scale. Yet the idea is nonetheless tempting to policymakers if they think it’ll bring regional benefits. The research on this does not suggest this is the case – as highlighted in a recent essay published by the Center for American Progress. Jacobs provides a clear reason for why this is the case in both The Economy of Cities and Cities and the Wealth of Nations. Put simply, big businesses which are ‘transplanted’ into smaller cities do not bring about import-replacement because they are already tightly vertically integrated. Smaller businesses, however, are more likely to tap into an existing or nascent eco-system of other businesses – in a city or elsewhere – to produce its goods. This greatly increases the likelihood of innovation and new techniques being adopted as competitors strive to improve quality and lower prices. Money spent on providing large subsidies can therefore be put to much more effective use if it is instead returned to businesses as a tax cut or channelled into the other factors that encourage import-replacement.

(2) Look at what your city does well

It is not the case that cities can purchase development by simply luring in companies, through tax breaks or other means, to set up transplants in their regions. ‘Development cannot be given, it has to be done. It is a process, not a collection of capital goods,’ notes Jane Jacobs on page 119 of Cities and the Wealth of Nations. For urban policymakers, the lesson that can be drawn from this is that the focus should be placed on the existing things a city or metropolitan area does well. It would be nonsensical for a city like Fort Wayne, Indiana, to spend billions of dollars trying to become the next Silicon Valley. Agglomeration effects matter and remain a central part of how import-replacement happens. For more effective, for small and medium-sized, is to focus on what they already do well and aim to cultivate those industries. This is less difficult than it seems for again, individuals and businesses have a remarkable ability to innovate and lead the import-replacement process themselves if the conditions are right. For urban policymakers, the focus should therefore be on identifying bottlenecks in cooperation. Are land prices prohibitive to the creation of new industries and could zoning reform unlock additional growth? Is the city the kind of place that would attract potential talent, or is crime, housing availability and educational provision undermining its ability to do so? Again, whilst actively picking and choosing winners and losers seldom works, there is an active role that policymakers can play in helping to cultivate growth in existing sectors that are performing well. Cities could partner with chambers of commerce to ensure that businessmen are connected, and ideas spread faster. Collaboration with banks and financial institutions could provide seed money for new businesses to emerge. By first focusing on the basics, then looking at the particular areas of success and finding ways to encourage them further, a city can help kick-start the growth-replacement process.

(3) Beware of over-specialisation

Import-replacement depends on specialisation. Both Jacobs and later, Edward Glaeser (in Triumph of the City) highlight the importance of urban agglomerations which increase the spread of ideas and allow firms to produce new goods and ideas without having to start from scratch. Chris Miller’s Chip Wars provides a vivid description of how this process played out in Silicon Valley, noting how specialisation allows each company to focus on adding value at one specific part of the supply chain, to the point where countless companies now focus solely on chip design, others, like GlobalFoundries focus on manufacturing, yet others on marketing, transportation, the production of equipment. It is far easier to start a company in an environment where not every aspect of the supply chain needs to be replicated and companies instead tap into an existing eco-system. The odds of innovation grow significantly, as a result of lower barriers of entry.

Except over-specialisation is at cross-purposes with the long-term success of a city, if it means that it cannot recover or surmount shocks in global supply and demand. Take the classic example of Detroit, which specialised very heavily in automobile production over the first half of the twentieth century, this growth almost entirely led by private enterprise. When automation and increased foreign competition led to a decline in the Motor City’s primary industry, workers had few alternatives. Many just left, leading to a precipitous population decline from 1.8 million to just over 640,000 today.

I will again stress that a lot of the economic dynamics occurring within a city are not things that policymakers can directly control. Subsidies might work in the short term, but as noted above, their success is very limited in the long run and the money might instead have been returned to residents in the form of a tax cut. Furthermore, no single policy prescription will work for all cities, since each faces a unique set of problems and challenges and mayors must look closely at the problems confronting their particular city.

There are nevertheless some takeaways from Jacobs’ works that might apply here and that mayors and other urban leaders could take to their cities. First is that space and layout matter. Jacobs presents a view of cities that very heavily emphasises the importance of walkability and access. I would push back a little and say that perfect walkability is not always necessary. Yet enterprises and households should be in relative proximity to each other to foster greater exchange of ideas and collaboration. A fifteen-minute drive on the highway might not make a difference. A fifty-minute drive in chock-a-block traffic would. The other ingredients to fostering urban diversity (still allowing for specialisation but in various sectors) include mixed uses of land, sufficient density to provide businesses with customers, older buildings to allow for experimentation (new or experimental businesses often can’t afford new units where costs are very high), and smaller blocks to allow for more street frontage.

Jacobs’ analysis of the factors cultivating urban economic diversity is sound, but it requires further expansion if it is to apply to traditional industry and the new creative industries. In addition to these factors, cities and states should also ensure their processes allow for flexibility and collaboration with regard to permitting and other legislation; they should ensure their processes are clear and transparent, and they should keep costs at a minimum.

Simply wishing for prosperity won’t make it so. The reality is that urban success depends on governance, ideas, and some degree of luck. But another remarkable fact emerges from the literature of Jacobs’ and others I have buried myself in over the last few weeks: human beings have an incredible ability to collaborate and innovate if left to do so. It’s a hopeful takeaway, for it means that success doesn’t depend on policymakers’ abilities to play economic planners and run a city. Focus on the basics, eliminate barriers to growth, advocate for your city, and you may well turn the odds slightly in its favour.

The post Lessons from Cities and the Wealth of Nations: a manual for urban policymakers appeared first on Market Urbanism.

A natural zoning experiment in Denver: These two homes straddle a 2010 zoning boundary change. The result: The house in duplex zoning converted into two homes, and the other converted into a McMansion that cost 80% more.

Arthur Gailes, AEI

This is from AEI’s housing supply case study of Denver, by Tobias Peter and Hanlu Zhang.

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Like other authors, Marohn and Herriges discuss the history of downzoning. For example, in Somerville, Mass., a middle-class suburb of Boston with 80,000 residents, only 22 houses conform to the city’s own zoning code. And in San Francisco, 54 percent of homes are in buildings that could not legally be built today. In Manhattan, 40 percent of buildings are nonconforming. Why? Because zoning has become steadily more restrictive over time, making new housing difficult to build.

Where development occurs, it is in a tiny fraction of the region’s neighborhoods- usually, either at the outermost fringe of suburbia or in a few dense urban neighborhoods. For example, in Hennepin County, Minnesota (Minneapolis and its inner suburbs) 75 percent of all housing units built between 2014 and 2019 were in 11 percent of the county’s neighborhoods. In Cuyahoga County, Ohio (Cleveland and its inner suburbs) 75 percent of housing units were built in under 5 percent of the county’s neighborhoods.

Marohn and Herriges also critique some anti-housing arguments. For example, one common argument is that only public housing is useful, because the very poor will never be served by the market. They correctly respond that even if there will always be some people in need of government assistance, adequate housing supply will reduce that number. They write that housing policy “will look very different in a situation where the market is failing to serve 5% of people with adequate housing versus a situation where the market is failing 20% or 30%. In the latter scenario, choices get harder, resources more strained, and decisions about funding priorities become more painful and zero-sum.” (p. 136) They further note that Vienna’s widely-praised program of extensive public housing is infeasible without tax increases; the program is funded through a local income tax, and cannot easily be copied in the U.S. because Vienna’s municipal government owns an ample amount of land.

Like Gray and Caplan, the authors are basically YIMBYs*- that is, they favor less zoning and more housing. But they are skeptical about the ability of the market as currently structured to provide a significant amount of housing, In particular, they quote one developer’s statement that “There are only so many towers and multifamily things we can build. There’s a limit to the workforce, permitting, the availability of cranes.” But I’m not sure why there should be a fixed supply of construction workers or cranes; presumably, manufacturers would make more cranes if demand was adequate, and employers could hire and train more construction workers.

So the authors favor a strategy of “incremental development”- that no neighborhood should experience radical change, but every neighborhood would allow modest change. For example, they write that “for a neighborhood of single-family homes, the next increment must include duplexes and backyard cottages.” (p. 157)

But this argument makes me wonder: if reliance on large-scale developers won’t produce enough housing units to keep costs down, why would reliance on homeowners’ willingness to build a duplex here and there?

The authors suggest that South Bend, Indiana, is an appropriate role model. In South Bend, government introduced pre-approved building templates to make small-scale development easier, and creates technical assistance for small-scale developers. But if I read Census data correctly, it seems like about 6 percent of South Bend’s housing has been added since 2010- not a terrible result, but not a significantly higher number than other Indiana cities like Bloomington, Fort Wayne and Evansville.

Marohn and Herriges have proposed a program of modest improvements- and this program might be the best option that is politically feasible in most of North America. But is this program strong enough to bring rents down? I doubt it.

*YIMBY is an acronym for “Yes In My Back Yard” and is often used to describe people who favor more housing.

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(Note that the authors are updating the paper, so some of the following may change).

ABSTRACT:

Does relaxing zoning regulations increase affordable housing or simply trigger the building of new luxury units? This paper exploits a rule-based relaxation of the regulatory cap on building height and floorspace, the Floor Area Ratio (FAR), to answer this question in Mumbai, India. Leveraging granular panel data and exploiting variation in time and space, we find that the reform increased housing supply in treated areas by 28%, implying an elasticity of housing supply to the FAR of 1.59. The FAR relaxation increases the scale of development, resulting in higher investment in shared amenity space within the building. This increased public good provision facilitates an 18% decline in unit sizes, leading to a 29% decrease in apartment prices that allows lower-income households to access housing. We develop a structural model of housing supply and demand that incorporates the provision of amenity floorspace and shows that after the relaxation, average home buyer incomes are 3.18% lower. We use the estimated model to show that a further 5% rule-based relaxation would amplify the scale economies and increase the affordability gains from deregulation. Taken together, our results show that concentrating FAR relaxation can improve affordability.

Some quick notes:

• The authors have access to excellent data, including detailed permit applications complete with floor plans and some mortgage applications.
• The standard errors for all estimates are very large. The point estimates are the centers of large possible ranges, so don’t take them too seriously. The imprecision also weakens the total picture presented.
• The authors’ most novel finding is that lower-income buyers prefer amenity space, such as children’s play areas & gyms. Shared amenities make more sense in bigger buildings. So bigger buildings get smaller apartments, which are cheaper.

The last point left me with two questions the authors could answer pretty easily:

• How do the “lower” and “higher” income purchasers relate to the overall income distribution?
• What’s the distribution of amenity space as a function of building size? Are there big discrete jumps in (non-hallway) public space, or is it more of a continuum?

Excellent work and I look forward to its refinement.

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Rather than focusing solely on originalist interpretations of the clause and on policy-oriented “living Constitution” theories, the authors rely on both theories. Under a living Constitution view, they argue that zoning unfairly disfavors vulnerable minorities (anyone who cannot afford to live in a place under current zoning), unfairly limit individual autonomy by limiting the right to move to a new neighborhood, and creates an oligarchy of elite homeowners.

From an originalist perspective, the authors argue that the Takings Clause was intended to protect “a right to use [property], not merely a right against physical seizure by the state.” The authors admit that this right is not absolute, but is limited by the police power of the state. However, the authors cite some early treatises suggesting that the police power is limited to truly dangerous activities, as opposed to merely unpopular land uses such as apartments.

The post Is zoning unconstitutional? appeared first on Market Urbanism.

Affordability

The basic case for zoning reform, across the political spectrum, is that the rent is too damn high. Michael Manville, Michael Lens, and Paavo Monkkonen give a combative and accessible review of the evidence in their Urban Studies paper (2020). The principal drawback is that it is rapidly becoming dated, as evidence and research come in from more recent reforms. The most important of those may be Auckland’s, which Ryan Greenaway-McGrevy has reported in a few papers, including this Economic Policy Center working paper (2023). Using a synthetic control method (which is not perfect, to be sure), Greenaway-McGrevy finds that upzoned areas had 21 to 33 percentage points less rent growth.

A new candidate for the best review of the evidence on zoning reform and affordability is Vicki Been, Ingrid Gould Ellen, and Katherine M. O’Regan’s late 2023 working paper, “Supply Skepticism Revisited.”

Racial integration

Many authors from different disciplines have shown that both the intent and effect of zoning as practiced in the U.S. were racist and classist. That is, zoning policies have separated people by race, homeownership status, and income more than would have occurred in an unregulated market. Allison Shertzer, Tate Twinam, and Randall Walsh’s review of the evidence in Regional Science and Urban Economics (2022) is concise and helpful.

However, fewer authors have attempted to show that removing specific zoning restrictions reduces existing patterns of segregation. One is Edward Goetz, in Urban Affairs Review (2021). He makes a qualitative argument. I’m unaware of a good causal, quantitative paper showing how broad upzoning impacts local integration (but I would happily commission it if anyone wants to write it!)

Environment & climate

Along some dimensions, it is quite straightforward to argue that zoning reform benefits the environment. In other contexts, there’s more tension between environmentalism and other goals of liberalization. Does allowing denser subdivisions on the edge of Texas cities increase or reduce carbon emissions relative to baseline? I don’t know.

The IPCC chapter on urbanism (2022) stands out as a consensus summary if not as a model of persuasive prose.

Prosperity

Zoning reform can deliver a large boost to economic growth and living standards. I hesitate to accept any particular number, but the best work is clearly in Gilles Duranton and Diego Puga’s Econometrica paper (2023). From their conclusion:

Rights

Zoning directly constrains the right to use real property. It’s hard to turn that obvious statement into meaningful research. Bob Ellickson has done so as effectively as anyone, including in a widely-cited exploration of alternative, lighter-handed approaches to solving the problems zoning is purported to solve (University of Chicago Law Review, 1973).

There’s also a strain of thought around “the right to the city” and self-expression through activities from art to business, which need to take place somewhere. These literatures include interesting gems, like Beckers and Kloosterman’s 2014 study of pre- and post-war Dutch neighborhoods, but none that can make for real inclusion here.

Corruption

Property developers are almost always among the top donors to city councilmembers’ campaigns. As with segregation, this is a place where the problem is clearer than the solution. No recent paper can best Jesse Dukeminier and Clyde Stapleton’s 1961 classic in the Kentucky Law Journal, “The Zoning Board of Adjustment: A Case Study in Misrule.” I would welcome (and commission!) a paper testing whether broad upzoning (perhaps via state preemption) reduced corruption.

What else?

Add your own nominees in the comments!

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In March 2023, Arlington County, Virginia passed an amendment to its zoning ordinance which legalized so-called “missing middle” housing typologies in several residential districts, including many which had been zoned for single-family homes. Ten local homeowners filed suit in Arlington County Circuit Court in April 2023, alleging among other things that the proper procedure for amending the ordinance was not followed and the zoning change should be invalidated. The County Board and Planning Commission, the defendants in the lawsuit, fired back, alleging a fatal lack of standing and claims that, if they were true, could not and should not be resolved by the circuit court.

During proceedings held on October 19, 2023, Judge David Schell delivered a win to the plaintiffs, ruling that they have demonstrated standing by virtue of being within the rezoned area and that the case against Arlington County’s missing middle zoning ordinance amendment therefore may proceed to trial. Initial trial proceedings are scheduled for November 16, 2023. Judge Schell also ruled in favor of the defendants on a separate issue, holding that one of the plaintiffs’ seven claims, alleging a violation of the Virginia Freedom of Information Act (VFOIA), should be dismissed.

With respect to standing, Judge Schell ruled that the claims made by the homeowners, if true and presented in the most favorable light, were justiciable and ripe for relief, and that the homeowners had standing to challenge a general zoning ordinance. The latter holding may set precedent, as the cases presented to the court by the parties did not address the issue of standing in the context of an ordinance-level, district-wide zoning change. In their 162-page complaint, plaintiffs claim entitlement to sue on the basis that the ordinance “will result in a higher tax assessment,” although this appears speculative as plaintiffs did not allege that their tax burdens had actually increased. In other states, courts have held that the mere allegation of a prospective tax increase, without some explanation for particularized harm, is insufficient to confer standing in the context of broad rezonings. See Floyd v. Mayor and City Council of Baltimore, 463 Md. 226 (2019); see also West Farms Mall, LLC v. Town of West Hartford, 279 Conn. 1 (2006).

In his ruling on the merits of the VFOIA count following a limited trial on that count last month, Judge Schell held that while the plaintiffs sufficiently alleged a violation, the violation was a technical one which did not necessitate judicial intervention. In that count, which is dismissed, plaintiffs had alleged the County Board violated the VFOIA by (1) not making materials available online and (2) not immediately furnishing the “Chair’s Mark,” a document made by the Chairman for structuring the March hearings.

Judge Schell also suggested that Count V of the plaintiff’s complaint, which makes the legally tenuous argument that the ordinance is arbitrary and capricious, would be dismissed after trial. Apart from Count V, Plaintiffs’ complaint does not challenge the constitutionality of the county ordinance, but rather alleges a series of procedural deficiencies or failures to perform sufficient studies or hold enough hearings despite the ordinance being the result of a multi-year process of outreach and, public engagement.

The lawsuit, captioned Nordgren et al. v. County Board of Arlington et al. has effectively delayed the implementation of the county ordinance, which was scheduled to go into effect on July 1, 2023, with many builders awaiting the outcome of the litigation before proceeding with construction.

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Georgia is not known for onerous regulation of homebuilding – when I volunteered with Abundant Housing LA, a fellow volunteer who’d moved from Georgia would shame liberal NIMBYs by saying how much easier it was to get apartments permitted in her conservative home state – but like much of the US, Georgia’s home construction has failed to meet the growing demand. Denson and Perdue spotlight one specific regulatory tool more typical of Georgia than elsewhere: minimum home size regulations (as distinct from minimum lot size regulations, which are ubiquitous nationwide). Denson and Perdue show that Georgia counties and county seats often require minimum home sizes far in excess of American Society of Planning Officials benchmarks, and point out this drives up housing costs significantly. Below is a map (made in ArcGIS by my colleague Micah Perry) of Denson and Perdue’s data on county government minimum home sizes, showing the highest minimum in any zone on unincorporated land for counties for which data was available:

The clear lesson from Georgia’s surprisingly strict regulations is that policymakers in growing Sun Belt cities and states shouldn’t delude themselves: the crises afflicting coastal “superstar” cities are coming for them too if they don’t liberalize land use laws. Austin is now undertaking serious reform after arguably crossing over into “exclusionary superstar city” territory. Atlanta has so far kept ahead of this problem, staying relatively affordable, but the kinds of regulations Denson and Perdue list in this review risk becoming a bigger problem as the metropolitan area grows.

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