(Bloomberg View) -- For believers in the power of urban density, it’s D-Day in California. The state’s lawmakers, realizing that they’re facing a housing crisis, are introducing a huge number of bills designed to force local governments to allow the construction of more housing. Let's hope the assault succeeds. It would provide a positive example to all the places in the U.S. where California-style housing shortages loom.
The economic shift toward cities has been the story of the past few decades. As economist Enrico Moretti has documented, the U.S. has moved from old-line manufacturing into knowledge-based industries, leading to clustering of smart people, universities and top companies. That has shifted wealth toward college towns, tech hubs and -- most of all -- big cities.
But the more the economy depends on geographical concentration, the more the scarcity of land becomes a problem. When a bunch of companies all pile into one city -- think of tech companies moving to San Francisco or entertainment companies clustering in Los Angeles -- it creates a windfall for landowners in that city.
Imagine that you’re a homeowner in a city where a tech boom begins. Suddenly, companies are moving in left and right, and their engineers and project managers and lawyers are all looking for housing in your area. The price of your house soars -- where you were comfortably middle class before, now you’re wealthy. But as a homeowner, you did nothing to earn this wealth -- like a homesteader accidentally building on an oil field, your profit came from luck.
Meanwhile, the engineers and project managers have to pay higher rent. This rent saps their incomes, and they are forced to ask for higher salaries from their companies, which drives up costs and reduces profits. Because so much of the economic value created by companies is flowing to local landowners via rent and higher land prices, the situation isn’t efficient -- companies aren’t reaping as much value as they should, limiting growth in the urban economy . Meanwhile, the lucky landowners use their political power to block new housing development, which props up their house prices and rents. To every proposal to build space for the newcomers to live, they declare: “Not in my back yard!” Hence the acronym Nimby.
Economists have known about this tendency for decades and Alex Anas, Richard Arnott and Kenneth Small wrote about it in 1998. Now, with the rise of the knowledge economy, this problem may be so severe that it’s choking national output, while increasing inequality in the bargain. Richard Florida, the economist and urbanist, calls this “The New Urban Crisis.”
New data underscores how severe the problem is getting. Economists Ed Glaeser and Joe Gyourko document how over the past three decades, wealthy landowners have reaped an incredible windfall:
They write that regulation of housing supply in cities is one of the primary culprits:
For most of U.S. history, local economic booms were met with local building booms, so labor could follow shocks to local productivity. However, between the 1960s and the 1990s, it became far more difficult to build in the nation’s most desirable locations, especially those along the coasts. Higher economic productivity in San Francisco now leads to higher prices, not more homes and more workers...This change has both led to a transfer of wealth to a few lucky homeowners and to a distorted labor market.
Making it easier to build housing, as California is now trying to do, is one response. Essentially, the attack on Nimby-ism represents an attempt to return to the older model of accommodating local economic booms by building more housing.
But there are other options available. One of the most interesting is the so-called Henry George tax or land-value tax, named after the 19th century economist Henry George. The idea is to tax land itself without taxing the development of the land -- basically, a property tax with exemptions for buildings. As far back as 1979, economists Richard Arnott and Joseph Stiglitz suggested that this tax could be an economically efficient way to make cities work.
A similar but potentially more popular proposal is a progressive property tax. Because most of the housing wealth from the new economy is flowing to the richest landowners, it makes sense to tax them proportionately more. Progressivity would also probably increase political support for higher property taxes. The revenue from the taxes could be spent on things that help the poor and middle class, such as infrastructure, education and cleaner water and air.
One thing is for certain -- the nation is waking up to the problem represented by the combination of the knowledge economy and the scarcity of urban land. The U.S. badly needs to change its approach to urbanism to make its cities both engines of wealth creation and affordable places for all people to live.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
To contact the author of this story: Noah Smith at nsmith150@bloomberg.net.
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