Arnold Kling  

Housing and the Corruption Tax

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The New York Times reports


In recent years, the difficulty of getting things built has made business harder for small, local builders and easier for big companies, with their greater resources, to gain control of the housing market. "The large builders have taken the position: we're just going to fight," Chris Mayer, a housing economist at Columbia University's business school, says. " 'We have lawyers, we have experts, we have money, we're going to buy these tracts of land and fight it out' " - that, according to Mayer, is their position. "That has proven very time-consuming. But the local builder who used to have the benefit of knowing the local people - that has become far less important than the ability of the big builders to fight the current regulatory environment." As Mayer points out, virtually every state in the country now has policies to restrain developers. No matter the region, he says, the small developer is at a tremendous disadvantage.

One reason for higher home prices might be called the corruption tax--the amount that builders have to pay to get past development regulations. Apparently, the corruption tax is driving small developers out of business.

Thanks to Alex Tabarrok for the pointer.


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CATEGORIES: Public Choice Theory



COMMENTS (11 to date)
DoggedD writes:

Another factor to consider is the consolidation and national coverage of the banking system which has enabled builders to more easily expand geographically. And more recently public market access has added to their options. Canada which has had a national branch banking system for at least 60 years also had several national home builders as long ago as the early sixties.

spencer writes:

This analysis works in regions where there are still large blocks of land that large scale developers like Toll can use effectively.

But here in the Boston area or in South Florida
-- another area I am familiar with -- where there are few blocks of land and most development is of small fill-in and or tear-down housing the small builder still dominates the housing market. Toll has only one development in the Boston area, and it is in the way-out regions well over an hours commute from downtown. None of the other big block national builders are here.

This quote is just another way of saying that in the housing market we now have significant economies of scale that give the large national firms big advantages.

In the economic studies that reach the conclusion that zoning is responsible for expensive housing they use housing for square mile to represent zoning. But that could just as well reflect that the area has been long developed so that there are no large blocks of land available in the near surburbs. The studies find that it is more expensive to build in a community 5 miles from downtown then it is to build in a community 25 miles from downtown. That may reflect zoning, but I have serious reservations about that conclusion.

Tony Vila writes:

What's with the present tense and adventist tone? Big businesses have had an advantage in dealing regulations for a long time and this has been studied well since the FCC first handed out radio-waves in the 20's. Certainly the regulatory environment for housing development has not been increasing any time in the recent past.

And what's with "As Mayer points out, virtually every state in the country now has policies to restrain developers", which is just a negative way to say "zoning and safety regulations". What state doesn't or ever didn't have some zoning or safety regulations? And be an economist, do some comparative analysis! Do the states that don't have regulations (or have fwer) have better local-to-nonlocal industry ratios than other states?

Bob Knaus writes:

I wouldn't jump to the conclusion that small developers are being driven out of business.

In the produce farming community where I grew up, there are now small farmers and big farmers, but no medium-sized farmers. Why? The big ones have advantages in overcoming regulatory costs, of course, but they also have easier access to credit, better relationships with big buyers, more efficient use of their equipment... the usual list of reasons why bigger is better.

Small farmers are able to do niche farming: organic, ethnic, what I'd call "entertainment" with u-pick and corn mazes and fresh-baked bread. You can make a tidy living with these enterprises but they don't scale up at all.

Seems the same thing is happening with builders. I'd wager that some of the "small" guys complaining would be called "medium" guys by your average drywall contractor. Talking to my friends who are in the midst of getting custom homes built, it's more like the small guys are turning business away because there is too much demand.

Again, small is good when it comes to adding niche value. I have a brother-in-law who specializes in building elaborate curved staircases for the mansions north of Atlanta. He is so specialized (and correspondingly expensive) that sometimes the prime contractor hires him only to do the fancy curved parts, and subs the stair risers out to an ordinary carpenter.

A corollary to Smith's "The division of labor is limited by the extent of the market" is that as wealth increases there will be more and more "small guys" making a decent living doing the very very specialized things that our large wealthy society demands.

I'd take any "small guys going out of business" alarums with a grain of salt.

Bob Knaus writes:

I wouldn't jump to the conclusion that small developers are being driven out of business.

In the produce farming community where I grew up, there are now small farmers and big farmers, but no medium-sized farmers. Why? The big ones have advantages in overcoming regulatory costs, of course, but they also have easier access to credit, better relationships with big buyers, more efficient use of their equipment... the usual list of reasons why bigger is better.

Small farmers are able to do niche farming: organic, ethnic, what I'd call "entertainment" with u-pick and corn mazes and fresh-baked bread. You can make a tidy living with these enterprises but they don't scale up at all.

Seems the same thing is happening with builders. I'd wager that some of the "small" guys complaining would be called "medium" guys by your average drywall contractor. Talking to my friends who are in the midst of getting custom homes built, it's more like the small guys are turning business away because there is too much demand.

Again, small is good when it comes to adding niche value. I have a brother-in-law who specializes in building elaborate curved staircases for the mansions north of Atlanta. He is so specialized (and correspondingly expensive) that sometimes the prime contractor hires him only to do the fancy curved parts, and subs the stair risers out to an ordinary carpenter.

A corollary to Smith's "The division of labor is limited by the extent of the market" is that as wealth increases there will be more and more "small guys" making a decent living doing the very very specialized things that our large wealthy society demands.

I'd take any "small guys going out of business" alarums with a grain of salt.

Dewey Munson writes:

I have lived in my town for 50 years paying taxes along the way.

These taxes have purchased infrastructure like roads, schools, etc.

Developers today sell homes whose prices include the assets which were paid for by the likes of me.

When judging zoning, etc how about including a tax on home sales which reflects the costs of assets not paid for.

Even though I am a student of economics, I had not thought of or heard of "Corruption Tax".
But to be fair, not knowing that I perhaps pay the most corruption tax (Santa Barbara, CA), does not change the fact that I love it. Not!

John P. writes:

Obviously, labeling this a "Corruption Tax" is tendentious. I think you could more accurately call it a "Rule-of-Law Tax": the costs imposed by enforcement of, compliance with, and rule-governed testing of regulations (i.e., laws). I would say that a "Corruption Tax" is the flip-side of the Rule-of-Law Tax -- it's what happens when the participants decide that it's cheaper to buy off the enforcers than to comply with the laws. And, while I certainly don't want to malign small businesses, it appears that this kind of real "corruption" is what Mayer was unintentionally conjuring up when he suggested that small builders used to be at an advantage because "the local builder . . . used to have the benefit of knowing the local people."

jaimito writes:

Corruption Tax is not. If you refer to the growing body of local regulation - zoning, environmental, safety, whatnot - it is an incredible burden on the small businessman (the restaurant owner, the dry cleaning outfit, photo laboratory, etc. - it is a very heavy - possibly impossible - burden for the small entrepreneur, but corruption is not. He will never get a permit or licence by paying under the table to the local petty regulator but he may find himself in jail.

The overall effect of these frondous body of petty regulation is different: it makes impossible to enter the business except for the big guys. The requirements vary from air diffusion EPA models to prove that the kitchen is not contaminating the air, and/or sampling programs to establish that no detergents or FOG are entering the local sewage network, permits for storing hazardous materials as defined by EPA (from hypochorite solution to lab reactives). No restaurant, dry clean shop, photo printer can operate alone, needs the logistic support of experts to conform to regulation. Small businessmen frequently claim that municipal inspectors and supervisors torture them only to squeeze kickbacks, but in fact local authorities are unable even to explain the regulatory demands except to experts and therefore much prefer to face big experienced outfits or specialized engineering firms.

Chris Bolts writes:

I wouldn't call it a "corruption tax" either, but a big burden that only large corporations can afford. Here in AZ, there were several housing associations who fought against many regulations, of recent memory a mandate by local governments to have sprinklers installed in new builds starting in 2006 in the West Valley. It wasn't the advocacy groups that were out to get this slammed down, but the various builders and housing associations who fought against it.

jaimito writes:

Exactly, Chris. Now that you mention it, fire fighting regulations are ruinous to small businesses. They may require installing booster pumps, complex systems of pipes, valves and pressure controllers, as well as wireless monitoring. Insurance companies are one of the forces pushing these very expensive precautions - without them, a small business may be unable to purchase insurance and/or taking out loans on uninsured property. Small businessmen certainly have the intuitive feeling that it has become impossible to conduct legitimate business - but I doubt it is the "corruption tax" mentioned in the post.

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