Intro. [Recording date: December 15, 2022.]
Russ Roberts: Today is December 15th, 2022 and my guest is economic historian, Judge Glock. He is Director of Research at the Manhattan Institute. Judge, welcome to EconTalk.
Judge Glock: Thanks so much for having me, Russ. As someone who’s listened for over a decade, it’s a real pleasure.
Russ Roberts: Glad to hear it.
Russ Roberts: Our topic for today is housing. We’re going to start with zoning. Based on a recent essay of yours where you gave zoning two cheers. Not three, two. I’m more like one. So, I’m very interested to hear what we have in common and what we disagree on in that area. So, what’s the argument for zoning? What’s good about it?
Judge Glock: Yeah. And, I actually also debated whether or not it should be 1.5 cheers or one cheers and I gave upon fractions and settled for two. So, the basic argument that I start with is that there’s a lot of real and justifiable complaints about the American housing system and American housing affordability. But, from my perspective, there’s a lot to be said for it in general. And, I often use–there’s the old economist joke that somebody asks, ‘How’s your wife?’ And, the economist responds, ‘Relative to what?’ You look at the American housing system, and by some measures it’s in fact the most affordable on earth. Certainly when you look at the rest of the anglophone world. We have what’s called a price-to-income ratio–the median house price to median income ratio–about four. Where, you see a lot of places like New Zealand or Australia, it’s more like seven or eight. And, even places that the data’s not as good, but, like, Japan that’s often celebrated as an urbanist success, you often see these housing price-to-income ratios more like seven or eight.
So, from a lot of measures, American housing is pretty good and pretty affordable. And, that also makes one think about it and look at the places in America that are very affordable. And, they happen to be a lot of places that do have actually extensive single family zoning, extensive powerful local governments.
If you look at places like Nashville or Atlanta or Oklahoma City, these places, for growing cities, have some of the most affordable housing on earth.
And so, if zoning is not the overwhelming issue in a lot of these cities, and if zoning is near universal, but America’s real housing crisis is located in a few areas, most importantly California, New York, and Massachusetts and some of the coast, then what’s the real issue here? To me, it can’t just be zoning. And so, in the piece, I then also talk about what some of the economic advantages of zoning could be and what some of the economic literature says about that.
Russ Roberts: So, talk about those advantages. What would be the argument?
Judge Glock: So, it basically goes back to a 1956 piece from Charles Tiebout that became kind of institutionalized as the Tiebout Hypothesis. He was trying to answer the question o: How do you decide how much governments should pay for public goods? Streets, police protection, to some extent you could say schooling. Some of these local public goods are provided by government. And, this is a similar question people like James Buchanan and Richard Musgrave and other people were trying to answer at the time.
And, Tiebout had an interesting argument about this. He said: Well, if you have a lot of competing local governments, they should actually allow people to decide the mix of taxes and public goods they want. And, this competition between local governments should keep them relatively efficient, probably not as efficient as a pure private sector thing. But, if there are public sector goods that can’t be provided by the private sector, this would be a way to figure out how much people want to pay for them.
But, it didn’t take long [for?] to realize there’s a potential issue with that Tiebout Hypothesis. And, the main one is there’s a free-rider problem. That, say, you had an area that was willing to tax itself for a lot of public goods, mainly through property taxes, but a lot of people could move in and pay for below-the-average property tax rate. You’d have a tendency of everybody to pull back on paying for public goods at all, because there was a tendency to redistribute it.
And, the economic literature is pretty consistent that when you tend to redistribute public goods, especially away from the median voter, the median voter votes for less of them.
And, in fact, one of the main people pointing out this critique was James Buchanan and a man named Goetz in 1972 arguing that there’s this perpetual chase after good local public goods and these small local governments.
And so, some economists like Bruce Hamilton and others realized, well, zoning solves that problem. That, if you have zoning that determines how much property people could afford or should afford in these kind of competitive local suburban environments, and you had property taxes that were commiserate[commensurate?] with the amount of zoning and amount of property that was allowed in these local governments, you basically had something that looked–kind of, if you really squint–a little bit, maybe like a business. That you have these owners who have a lot of equity invested in this area. They’re fairly homogeneous and they can determine who can, kind of, come in and come out investing in the business. And, they would have kind of a goal to maximize the value of their housing wealth, which can have both good and bad effects, but they would also have a lot of incentive to pay for good public goods.
And so, that’s the kind of base argument for zoning. And, there’s been a lot of debate obviously about that. But, again, I think the important point is here that in those areas we know that have a lot of this single-family zoning, housing seems to be pretty affordable. You seem to have these very successful local governments. We know these local governments tend to be more competitive and more efficient by many measures than more distant, centralized governments. So, if you care about that kind of local competition in public goods and you want some sort of mechanism to encourage that, zoning is one means to do that.
Russ Roberts: Yeah. Let’s talk about the single family piece. I mean, there’s a lot of different aspects to zoning, obviously, and housing regulation more generally and approval for new building and so on. What we’re really talking about here is whether, in the middle of a suburban landscape, you could build an apartment building or a multi-family home, an eight-unit–not necessarily a skyscraper. And, in many of those towns, correct me if I’m wrong, that’s literally against the law.
Judge Glock: Yeah. That’s correct. And so, to some extent I agree with a lot of the, as it’s known, the YIMBY movement–the Yes in My Backyard movement–that tries to advocate for more housing. But, the interesting thing, again, is their argument is–their argument is, like: Well, the main barrier to housing affordability is this inability to build these large apartments in single-family-zoned communities in the suburbs.
But to me, that does face a real query that: Well, where is the housing the most affordable in the United States? And, again, it is those–somebody like Oklahoma City is often kind of a poster child. Places like Dallas, Nashville, and the others have very low housing price-to-income ratios, and they have all of the single-family zoning, very little state restrictions on it.
But, if you look at places like California and Massachusetts–California especially–they have by most measures the densest housing in America.
They have lots of multi-family housing. They have lots of what’s known as infill housing. And, they encourage that at the state level. There’s a lot of mandates to encourage more of this apartment housing. And, that doesn’t seem to make those areas significantly more affordable. If anything, it seems to go in the opposite direction.
So, what’s the main encouragement of affordability? It seems to be this actual more development in the green fields outside of existing urban areas that’s mainly but not exclusively single family–which also seems to be what most Americans want in a house.
Russ Roberts: My urban-oriented friends would say, ‘Well, that encourages sprawl, and if you don’t provide any services for making it easy to live inside the city’–and of course they’re going to say that’s what they want. But, in a different world they’d want something else. And, they might be right. We might come back to that.
Russ Roberts: But, I want to–you’ve identified a correlation: that, many places have zoning, have affordable housing, but of course those are places where land is relatively cheap. And, it seems to me there’s two issues here. There’s: What are you allowed to build and how long does it take to build it? So, we think about–and, I think the time to build–the length of time to build–is an easily underappreciated aspect of this problem. Certainly, living here in Israel, I think the time it takes to get a building approved and get it actually executed is probably somewhat similar or worse than it is in, say, the Bay Area.
But, if I think about San Francisco, which I know you have some experience with, and I think about Palo Alto. So, Palo Alto is this pristine, adorable, fabulous, incredibly expensive suburban area of the Bay Area. And, I’m sure it’s highly regulated. I’m sure it’s hard to build a 40-unit apartment building. And, to me, the fundamental question is the people in Palo Alto don’t want those 40 people living there. They just don’t. And, the zoning keeps them out. And, I’m not sure that the 40 people who’d like to live in that apartment building and enjoy the amenities we’re talking about–some of the public goods, a very respected school system, very nice air, super-good pleasant temperatures most of the year–should people be entitled to live there?
How many 40-unit apartment buildings would you allow them to build? 50? 1,000? Would it change the character of Palo Alto? Yes, it would. For sure. Should it? Who should be in charge of that? Well, right now the people in charge of it are the people who already live there. So, that’s troubling, also. What are your thoughts?
Judge Glock: Yeah. So, I mean, I agree with most of that. And, I think it’s important to kind of frame who would be the potential winners and losers of what’s called an up-zoning, when you increase the amount of density you could build.
So, there’s a good argument that if you were a benevolent city manager–you don’t say ‘dictator’ when you get down to the city level–but let’s say you’re a benevolent city manager. And, the smaller level–again, I think there’s a good reason you actually allow more centralized, executive control at a smaller level, because there’s more exit as an option as opposed to voice as an option.
But, let’s say you’re a benevolent city manager. Bruckner, an economist back in the 1990s, said that, ‘Well, your actual goal should probably be to maximize the value of land in your city. You can’t control consumer welfare, you can’t control all the businesses and whatnot, but if your goal is to maximize the people inside it, you should maximize land welfare.’ And, it would help do all the things that I talked about in competitive local governments.
Now, a lot of YIMBYs and some of the other groups–urbanists aligned to them–assume that would mean everybody would try to prevent development. But, most of the evidence is that contemporary zoning is too strict relative to a goal of maximizing land value.
So, you mentioned that–people like to point out the person in Palo Alto has a $3 million dollar, $4 million dollar, single-family home. People say: Look at all the benefits zoning gives that person.
But, the way I often think of that, actually, is: If that person could subdivide their land into four single-family homes, maybe for a million dollars, or sell it off for a significant amount of money to an apartment developer or something else, they could get more income than they have.
And so, the argument that zoning–you can think of zoning as something like a monopolist, to some extent. The way to increase the price of something is just to restrict the supply of it. And, on the whole that actually means less welfare overall. If you restrict the supply of a good, you’re getting less of that good, including less consumer welfare for everybody.
So, zoning, in one sense, can do that. That’s a kind of bad zoning. And, I would say–again, I would agree with most of the YIMBY friends that most zoning in America today is too strict. It’s preventing the full development of land. And, there would be an argument for increasing the density to benefit everybody. And, why that isn’t taking place everywhere is one question we can deal with.
But, I think a very important issue is actually: California sets up a lot of things that make it harder for new places to grow and compete.
One of my favorite facts there is back in the 1960s, California created something called LAFCOs [Local Agency Formation Commissions]. They’re Local Area Formation Commissions, I think they’re called. And, these are set up in the county level; and they’re basically cartels of existing municipalities that can side[?] when new municipalities start. One of the advantages of places, like Nashville and Dallas and all of the rest of it, is that if you want to kind of go out into the sticks and build your own city, you can do that. You can get some people together; you can eventually vote for a city. That city or sometimes a utility or infrastructure district can build all those public goods. And, that kind of puts pressure on those other cities to be: Well, that Tiebout competition we talked about.
But, in California, to me, it’s a great kind of equivalent of a Certificate of Need [CON] stuff for a lot of the private sector–
Russ Roberts: Yeah. Hospitals–
Judge Glock: Yeah, exactly. And, you had the same arguments there about local governments that you do about hospitals or taxis or all of the rest of it: That, this is chaotic, new people are starting up cities everywhere; you don’t want it.
And so, these LAFCOs have all the existing cities and districts on their Boards, and they decide do we want a new one? And, they say, No, we don’t want new competition.
And so, this is why you look at–the argument is: Well, why is Palo Alto and all these areas so expensive? And, people say, ‘Well it’s, again, all this single family zoning.’
But, by most measures–San Francisco Bay Area is one of the densest in the country. Second, third, depending on how you look at it. And, if you look at the kind of nine-county Bay Area, almost 40% of that is grazing and pastureland.
I mean, to me, the real argument–the real kind of monopolization that’s preventing development–is that inability to grow outwards and create new municipal competitors, new districts, new areas that can really compete with those existing ones and also then kind of force them to a more optimal level. And, even if we should restrict zoning, I think a lot of our energy should be focused on: What can we do to grow outward and create new competitors, in a sense?
Russ Roberts: If you drive the 280 from Palo Alto or Menlo Park into the city of San Francisco, there’s a lot of vacant land. And it’s really beautiful, and I love looking at it when I would go visit there. And, I think the hard part on all these questions–I’m sure there’s a fancy name for it–but it’s really the character of the place. I’ve talked about this with respect to New York City in the episode with Alain Bertaud. Chelsea–the neighborhood of New York called Chelsea–is really cool. It would look really different if it was all skyscrapers. Wouldn’t be as cool, but poor people could afford to live there, and that would maybe be important.
So, I think we have a romance about place. A lot of people would say the Bay Area should not be changed. Right? All those farmlands and pasture and other things should not be allowed to be built on. It’s perfect in that way and it should be left alone. And, Palo Alto should stay these small single-family units; and then if we allowed apartment buildings there, it would be destructive. It would ruin what is special about the place.
And, I think it would, to some extent. I like to think there’s a middle ground. I like that there’s a middle ground where certain types of streets would be allowed to have larger apartment buildings or at least three or four multi-family units.
And, I think it’s–like many areas of economics, there’s a bootlegger and Baptist issue here where there’s a good reason to have zoning. There’s a good argument for it. At the same time, it allows an opportunity for the self-interested–that’s the bootlegger–to take advantage of the better-intentioned side of the discussion.
I haven’t talked about bootleggers and Baptists in five years probably on EconTalk. But, bootleggers and Baptists agree that it’s bad to sell liquor on Sunday. So, the bootlegger likes it because it creates demand for their product. The Baptist likes it because they think it’s God’s will to make it the Lord’s Day and not drink. So, the politician says the Baptist is right and then takes money from the bootleggers to make sure that the law stays outlawing liquor sales on Sunday.
But, the real reason that bootleggers and Baptists is destructive, is that it’s not just that politics makes strange bedfellows. It’s that when you get into the details of how the regulation gets implemented, often the Baptists have gone off to church and the bootleggers are really focused on how this is working to make sure it helps them. I think that’s the real issue. It’s a powerful tool, zoning. And, my guess is that in its actual implementation it doesn’t need to be as draconian as it actually is.
Judge Glock: Absolutely. And that’s exactly where I come down on this.
But, I think an important–maybe not a qualification–but an important perspective here is that a lot of these kind of public choice and government questions do look a lot different when you get down to the area of local governments. And, especially when you get down to the area of competitive local governments.
If you have a government that is local and people can, say, have a choice of one or two dozen local governments in an area to choose from and people can maybe choose. I mention in the article: there’s wet and dry counties. There’s cities and places where drugs are fair–
Russ Roberts: That means places where you can legally buy alcohol and can’t. Right?
Judge Glock: Exactly. Exactly.
Russ Roberts: Not everybody knows what that is, Judge. Sorry.
Judge Glock: No, no. Thank you. Good point. It’s much rarer than it used to be. Even 30, 40 years ago used to be fairly common to have dry counties throughout.
And that brings the question of: If you have a strong exit option for these local governments, how much do some of these broader public choice problems take place? If the bootleggers conspire with the Baptists to create those rules against drinking or the dry county or whatever it is; and you have people that, a large majority who really want to live in a dry county. Let’s even say we can put a price on it somehow, or that we could allow people to express through exit and voting with their feet–as it’s known–that this is the kind of place they want to be in. Does that temper the negative deadweight losses of a bad regulation?
It might–and, it might in a sense, even allow for a lot more consumer surplus. It might allow for a lot more people insofar as they value a certain kind of local community, the character which you talked about. You’d want them to, in one sense, pay for that. Price that in the value of land and allow them for those different alternatives across different things.
And, I think this gets to your Palo Alto question, or Chelsea: In one way, again, if we are an efficient city manager, we should look at that and say, ‘Well, there’s a value to Chelsea looking like Chelsea.’ And, you could look at, say, maybe developing a huge amount of apartments that would actually lower that value substantially–would lower the value of land because those amenity values would be lost. And, zoning, when it’s done well, can create those positive amenity values. And, everyone agrees those are there.
I think too many of the pro-development and YIMBY groups–which again, I do consider myself–are kind of dismissive of the negative potential effects of increased density. I’m not saying they’re overwhelming. In many places, they’re more than necessary. But, there is congestion, there is aesthetic costs, there are these other things.
So, what do you do about all that? Again, in one way allowing these competing municipalities whose goal is to maximize the value of the land will incorporate and internalize, as it’s known, a lot of those costs. Like, say, Chelsea is its own city and everyone can vote for: Well, do we want to develop or not? If you tell everybody, ‘Well, you can develop more and this is going to make all of your land worth four times as much,’ I do imagine a lot of the people would vote for that even if they had aesthetic or character concerns.
Russ Roberts: And, they–
Judge Glock: Or as opposed if the–yeah?
Russ Roberts: Yeah, they might be wrong, and they might make a mistake–obviously that’s not the question here. Coming back to the Tiebout Hypothesis and this idea of local competition, I think one perspective on it might be how unimaginatively uncompetitive most, say, Bay Area suburbs of San Francisco are–not suburbs, cities–that ring San Francisco; they all kind of have very similar situations. And, I’m thinking about how little experimentation there is in, say, urban transit. Now, of course, it’s tricky because some people want to go beyond–they don’t want to just travel within the little city that they live in, so that starts to get complicated. Private companies have figured that out pretty well, by the way. Google runs a massive bus business in the city of San Francisco.
Judge Glock: And, they get protests for it, too.
Russ Roberts: Yeah. And, the reason was they weren’t living in the city.
Judge Glock: Oh, something about–
Russ Roberts: But, they were.
Judge Glock: Something about: rich people on buses were taking over San Francisco. It seemed to be a win-win for everybody. But, what do I know?
Russ Roberts: No. Never can be.
Russ Roberts: On the other hand, you have a situation–I think, recently in a neighborhood in London, where they have very high taxes for car travel in certain time–I’m going to get this wrong; it doesn’t matter. But, they try to make it more expensive to own a car.
Now, not every piece of London is like that. I don’t think. This one neighborhood has done this and what it’s created–neighborhood–it’s one little, again, suburby kind of thingy. There are fewer cars. It’s easier for kids to play in the street. If you’re worried about pollution, there’s less of it to breathe. And, it’s kind of interesting. I’m not sure that’s where I’d want to live, but it might be. I don’t know.
And, then you’d say: Well, what are you going to do to go along with that?
So, we had Donald Shoup on this program where he says you don’t want to require people, when they build an apartment building, to provide off-street parking. The argument for off-street parking requirements are that: ‘Well, all these people are going to move in this apartment building. Then they’re going to crowd up the parking around the area. And that’s an externality, so you should force them to provide off-street parking.’ And, his point is that of course that just means the apartments can be very much more expensive, because a huge part of the apartment building is not rentable: it’s just taken up with a parking garage. Including a parking garage for people who don’t own a car. Because you’ve got to prepare–there’s a requirement in advance in case they do own a car.
But then you have to ask the question: So, what are they going to do when they want to go out? If you don’t build the garage, what are you going to do? They are going to cruise and look for spaces. And the answer is: Of course you have to build some urban transportation options for them. And, that seems to be sensible. And yet, we struggle to do that, it seems, in many cities.
Judge Glock: No. Exactly. I mean, I think this gets to one of my obsessions, which we briefly touched on earlier, which is: If these cities already have an incentive, as one may say, to maximize the value of their land, and yet they’re not doing it, what is holding them up and why are they creating these obscene regulations that don’t seem to benefit everybody?
One: I would say that there’s a lot of these–I know some YIMBYs will disagree with me–but a lot of the most burdensome things are happening in these central cities where a lot of the benefits can accrue to different interest groups. Different interest groups can catch the large city. In fact, the larger a city is, there’s much more evidence that these are less efficient than these smaller local government areas.
One of my favorite examples, there’s some studies on what’s known as the fly paper effect. That, if a government gets a ton of free money from usually a higher level of government or a boost in property taxes, do you keep it? If you were an efficient city manager, you should pretty much just return it down in tax cuts to people because you already had the right proportion of public services that you all wanted.
And, what you find is small governments do that, by and large. If you have a small suburb that gets a boost in property taxes, they keep their total public service spending flat and they just cut taxes.
The larger cities are much less likely to do that. They’re much more likely to have what’s called the fly paper effect: it sticks to that city and they use it for interest group and log-rolling and all of the rest of it.
So, I think that’s part of the thing. Again, using that not-perfect but somewhat-useful metaphor as these cities as competitive corporations in a market. And, I’ll even point out that, historically, a municipal corporation was not treated substantially differently from a normal corporation. It was legally pretty much the same thing. Both were just considered corporations created by the state that had some authority.
Russ Roberts: You raised the question a minute ago about why these municipalities might not want to maximize the value of their land. I’m not sure that’s a good idea. It’s an interesting idea. But, you did describe that would require a benevolent city manager. But, in fact usually that city manager has to get elected. And, of course, the incentives that person faces are going to be not quite what you might have in mind.
Judge Glock: Well, to some extent, exactly. But, as long as you have the exit option–and again, I would think of maybe if we’re using the metaphor of a corporation where, you know, who rises to the top of a corporation? It’s somebody who can promise to maximize the value of the internal stuff. And the larger the corporation gets, it’s a little tougher to kind of maximize shareholder value. There’s more problems with aligning incentives, all the rest of it. But, you have a really strong reason to do that.
And, one of the ways that William Fischel–one of my favorite researchers over at Dartmouth–talks about the home-voter hypothesis. And, he makes the good argument that a lot of people have a lot of wealth tied in a single asset that’s illiquid, immovable. And, that’s why they’re rightfully attuned to what their city manager does. And, not only do they have that asset that makes them very attuned to that, they also, when people are competing to get people inside or out of the city, they have a lot of competition, in terms of other cities do.
So, it’s just like a corporation, even if the inner internal politics of that aren’t always great for who gets to the top. As long as you have that outside competition, there’s some sort of limitation to those exploitative tendencies.
Now again, not perfect and maybe just briefly talk about some of the ways that that’s kind of been sabotaged.
Now, one of my obsessions is property taxes. So, the main argument for zoning and public goods in the Tiebout Hypothesis is that: Well, most of local government is paid for through property taxes. And, if you have a new development that increases the value of property taxes, everyone in the city benefits from that. One, they might benefit from allowing more upzoning of their land just because they themselves could build more. But, even if, let’s say, a single parcel somewhere else was upzoned and developed, even though–and the rest of the city would have face the local congestion and all the other charges–they’d get these property taxes.
And, one of my favorite quotes from a newspaper in the Bay Area in the 1960s is arguing why they should develop it. They said, ‘Cows don’t pay property taxes. You as a local voter, trying to maximize value of land, should try to do that and encourage that.’
And, they did. These cities were what known as growth machines throughout most of the 1950s and 1960s. For good reason. And, California was the quintessential example of that, becoming the biggest state in the Union in 1964 and growing very rapidly. [More to come, 30:27]