David R. Henderson  

Krugman: Deregulate Housing

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Rising demand for urban living by the elite could be met largely by increasing supply. There's still room to build, even in New York, especially upward. Yet while there is something of a building boom in the city, it's far smaller than the soaring prices warrant, mainly because land use restrictions are in the way.

And this is part of a broader national story. As Jason Furman, the chairman of the White House Council of Economic Advisers, recently pointed out, national housing prices have risen much faster than construction costs since the 1990s, and land-use restrictions are the most likely culprit. Yes, this is an issue on which you don't have to be a conservative to believe that we have too much regulation.


This is from Paul Krugman, "Inequality and the City," New York Times, November 30, 2015.

Here are shades of the Paul Krugman of the 1990s. He uses basic microeconomics to analyze a major problem--why have rents and housing prices risen so much--and to present a solution--eliminate or at least relax the land use restrictions that are restricting supply. Good for him.

When I discussed inequality of income and wealth in my economics class recently, I contrasted two kinds of people in the top 1% and gave an example of each: (1) the chainsaw innovator, Robert McCulloch, whose light one-man chainsaw made life better for many people and also increased inequality, and (2) the privilege seeker, Lyndon B. Johnson, who used the Federal Communications Commission regulations to support a monopoly for his wife's radio station in Austin, which increased inequality but made others worse off.

I pointed out that, in a certain sense I'm a mini-LBJ, but not a willing one. The top 20 percent in coastal California (measured by wealth, not income), I pointed out, probably have a large percent of their net worth in their house and, if they bought their first coastal California houses more than 20 years ago, which most of them probably did, they are gaining from supply restrictions. The reason I'm not a willing mini-LBJ is that I would like the restrictions to end. I'm glad to have Paul Krugman as an ally.


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CATEGORIES: Regulation




COMMENTS (14 to date)
ThomasH writes:

Krugman, a pretty typical Liberal writes pretty typical Liberal stuff, so no surprise.

I wish Libertarians were as interested in distortions in the markets for urban land as they are in the (much much smaler, I think) distortion in the market for low-pay labor that would be introduced by a higher minimum wage.

john hare writes:

As I have mentioned in other places, it is essentially illegal to build housing suitable for the poor. Suitable being IMO, affordable without subsidies.

Anonymous writes:

Serious question: why isn't the housing market considered totally atypical and unexplainable by supply and demand in the same way as the labor market? It seems to me that some similar issues apply to both cases.

Houses are all different, so one house is never a perfect substitute for another. There are substantial search costs involved in seeking out a new house. Houses are often rented with some minimum term on the contract, so tenants cannot quickly and easily move house in response to changing market conditions. Houses take a while to build so the supply of housing cannot change quickly either. People need to live somewhere so demand for housing won't ever change that much.

Do all of these points not suggest that supply and demand probably explain almost none of the reality of housing prices - and also that rent controls are quite possibly net positive in effect, transferring a lot of income to the poor in the form of cheaper rent, while causing only very small increases in levels of homelessness?

Bob McGrew writes:

This is a huge driver of problems in the SF Bay Area. Urban areas have height limits and heavy fees on housing. Suburban areas have tight density restrictions. Everyone wants to move housing into the next town over, and the consequence is very high housing prices for outsiders - any newcomers who didn't buy homes twenty years ago.

But urban rents are high for these reasons basically everywhere people want to live other than Texas.

This is the libertarian cause of the decade - places like Reason and Cato should go after it.

Anonymous writes:

Further to my above comment I would like to add one other important complexity of housing that I didn't mention: its production costs are almost entirely upfront. So in response to rent control, housing suppliers, i.e. landlords, cannot simply stop providing housing and avoid production costs, as those costs are sunk. So, that's another strong argument for why rent control probably causes very little homelessness, and why Econ 101 does a really bad job of explaining the economics of housing.

Maybe.

Hazel Meade writes:

I suspect a big part of the problem is regulatory capture of the local building codes by professional developers. The codes are written (and enforced!) in a way that makes it all but impossible for someone to build their own home, or for small builders to crack the market. Anything that isn't done strictly to code means you can't sell the house, and the codes are detailed and updated frequently, so if you aren't up to date on the latest revisions, you'll get dinged and have to spend thousands of dollars making changes in order to pass the inspections.

The home renovation market is somewhat more open, thus the large number of small contractors specializing in redoing kitchens and putting in granite countertops and such. But you don't see that in new home construction at all. It is telling that the cost of buying a lot and hiring a contractor to build a new home is essentially the same as the cost of buying a new home in a new subdivision development.

David R. Henderson writes:

@Hazel Meade,
I suspect a big part of the problem is regulatory capture of the local building codes by professional developers.
Not where I live. The developers are trying hard to get permission to build anything.

Harold Cockerill writes:

@Hazel Meade,

Codes are developed at the national level and for the most part adopted at the state level. The main power for local officials is in zoning. Lawyers are the players for that game and given the expense of zoning fights it only makes sense to fight if there's a big payoff. This results in luxury housing on which the profit margins are high.

@Anonymous,

You give a picture of rent control in the short term. Rent control has a damping effect that manifests itself in the long term. Rent control affects the ability to profit from a project and drives investment in other directions. It also affects the willingness of landlords to maintain properties and degrades the quality of rental stock. Given the slow pace of rent control you're probably right about it's effect on homelessness but that doesn't mean that basic economics don't still apply.

Floccina writes:

The 3rd comment down, by an anonymous poster is great. I guess that I can use it freely because it is anonymous.

Joseph Hertzlinger writes:

[Comment removed. Please consult our comment policies and check your email for explanation.--Econlib Ed.]

R Richard Schweitzer writes:

There are some additional (perhaps more pervasive) factors to consider:

These might be classified as the "imposed intermediary" intrusions.

There are building codes; "union" costs; "approval" procedures; environmental impacts; "planning" (blocking residential building in favor of "business" to mitigate education costs, e.g.). In Boston - a direct square ft charge on new construction paid into a political fund to be doled out (less administrative costs)for the "affordable."

While more visible, land use may not, in fact, be the major culprit.

Anonymous writes:

@Harold Cockerill

I'm semi-seriously taking the same kind of argument that is made in support of minimum wage laws and applying it to rent control, since it seems to me that both markets are similarly more complex than a simple supply-and-demand model of identical widgets and linear supply and demand functions. Also that studies on the short-term effect rent control has on homelessness levels, if they exist, almost certainly find almost no impact.

I don't know if Paul Krugman has explicitly made the kind of jab at 'Econ 101 level analysis' that e.g. Noah Smith recently did, that caused a flurry of responses back and forth on both sides. But I have seen him support minimum wage laws, argue that humans are way too complicated to understand using simple economic models, and paint uncharitable pictures of those who disagree with him.

If you're someone who thinks that applying supply and demand models to the labor market is something only a naiive college student who's just taken his first Econ 101 class would do, does the same apply to the housing market, and if not, why not? Are there any left-leaning economists who support rent control and justify it based on arguments such as this?

Floccina writes:

To relate Paul Kurgman's call for easing of housing policy to minimum wage:

In a place with a policy of restricting building of housing units, how much of an increase in minimum wage would one expect to be captured by owners of rental housing?

Harold Cockerill writes:

@Anonymous,

Sometimes I need to be hit with a 2X4. I too quickly get my hackles up when I read that life is more complicated than "just simple" supply and demand.

As to economists I think there's a market for those that support intervention and as government expands the demand for that type of economist increases also.

Oh wait, it has to be more complicated than that.

Thanks for being gentle with the 2X4.

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