Economists who study housing have long known that the key to making housing cheaper is to allow more of it. Doing so would require massive deregulation. The economics literature, both academic and popular, on this issue has become quite extensive. Much of the literature, moreover, responds to various fears people have about deregulation, whether it be traffic jams, loss of a city’s “character,” or more pollution, to name three.
But working your way through the literature takes many hours. Various authors have written popular books making the case for allowing more housing. My two favorites are Golden Gates: Fighting for Housing in America by Conor Dougherty, which I reviewed here, and Arbitrary Lines: How Zoning Broke the American City and How to Fix It by M. Nolan Gray, which I reviewed here. Few people read these books. So, what should an economist do if he wants to get the point across in an easy-to-understand format? To Bryan Caplan, an economist at George Mason University and my former co-blogger, the answer is obvious: write a comic book.
This is Caplan’s second attempt at writing important ideas in graphic form. The first, which I reviewed here, was Open Borders: The Science and Ethics of Immigration. His new book, titled Build, Baby, Build: The Science and Ethics of Housing Regulation, like the immigration book, communicates the ideas successfully. Caplan lays out why radical deregulation would bring many positive results. These include bringing down housing costs substantially, providing millions of construction jobs annually, reducing crime, reducing traffic congestion, and increasing real gross domestic product. In case the reader has doubts about his factual claims, Caplan provides abundant footnotes that give the factual background.
How deregulation would cut the cost of housing
Basic economics says that getting rid of much regulation that prevents housing would lead to more housing and that more housing would lead to lower housing prices. But what it doesn’t answer is: how much? Are we talking about a 10 percent drop, which would be significant, or something more?
Economists have studied this issue carefully. Two economists who have done some of the best work are Ed Glaeser of Harvard University and Joseph Gyourko of Wharton. They use a simple methodology: add the cost of building to the cost of land and subtract the sum from the price of a house. Why would the result not be zero? Because of the artificial scarcity created by the need to get a building permit. If you live in coastal California or northeastern United States and have been paying attention, you’ll know what these economists are talking about. It’s not a slam dunk to get approval to build. If often takes years. And if you want to build a fourplex in an area zoned R-1, fuhgetaboutit. And I haven’t even mentioned the neighbors who complain that their view might be slightly harmed.
The result: higher housing costs. Caplan notes that regulations raise housing costs on the median lot in San Francisco by a whopping $1.6 million per acre. In New York City, Seattle, and Los Angeles, it’s $600,000, $700,000, and $800,000, respectively. Regulation even makes housing costs higher fifteen to thirty miles from downtown in those cities. For San Francisco, the added cost at that distance is $1.2 million.
A partisan issue?
One thing you might wonder right away is whether Caplan, a well-known libertarian, is simply spouting views held only by libertarians and by those who are libertarian adjacent. Anticipating that criticism, Caplan has a cartoon picture of leftist economist Paul Krugman stating, as he actually did:
High housing prices in slow-growing states also owe a lot to policies that sharply limit construction. Limits on building height in the cities, zoning that blocks dense development in the suburbs, and other policies constrict housing on both coasts.
He then quotes a further line from Krugman: “Meanwhile, looser regulation in the South has kept the supply of housing elastic and the cost of living low.”
Comments a cartoon character who is obviously Caplan, “Do you really think Krugman would praise the South for lack of regulation if the facts were in doubt?”
The panacea policy
Often when I advocate abolishing a particular regulation, I’m accused of thinking that my proposal is a panacea. Usually, that’s false: I point out that it would move things in the right direction but that it’s not close to being a panacea.
I’m guessing that for most policies he advocates, Bryan Caplan has the same reaction I have. But he makes the case that housing deregulation is indeed a panacea. He argues strongly, with data, that deregulation would reduce the cost of housing, and thereby reduce poverty, reduce income inequality, reduce traffic congestion, restore the geographic mobility that we older people experienced in the 1970s when we were younger, provide construction jobs, and even reverse the decline of fertility.
A conservative estimate, states Caplan, again backing it up with data in the footnotes, is that housing deregulation would reduce the cost of housing by approximately 50 percent. Because housing costs are about 20 percent of the average American household’s budget, the cost of living would be 90 percent of what it is now, which means that the standard of living would increase by 11 percent (100 divided by 90 = 1.11.)
The effects of deregulation would be bigger for lower-income people, notes Caplan. The reason is simple: lower-income people spend a bigger share of their income on housing. That means also that deregulation would reduce income inequality.
Mobility
Something that people over about age seventy experienced in the United States in the 1970s was geographic mobility. It was relatively easy to move to major American cities where the best opportunities were. In my own case, I moved from Canada to Santa Monica in 1972 to attend graduate school at UCLA. I made $440 per month as a teaching assistant and my Canadian roommate and I paid just $145 a month for an adequate two-bedroom apartment. (The market rent for similar apartments was about $170 but we saved a cool $25 a month by buying our own used fridge and stove for about $200 total.) The year 1970 was about when housing restrictions started in coastal California, and they grew gradually, being worse in 1980, still worse in 1990, even worse in 2000: you get the picture.
Today, someone can find a great job in, say, Silicon Valley, that pays $200,000 a year and unless he is partnered with someone else making almost the same amount, he has no hope of finding housing anywhere near Silicon Valley. That’s why you see live-in vans lined up on El Camino Real in Palo Alto. Many people aren’t willing to live in such vans and, therefore, many of them won’t take those jobs in the first place.
Silicon Valley is the extreme. Caplan cites data showing that for richer workers, movement is still from poorer to richer, higher-opportunity states. But poorer workers move in the opposite direction in order to get cheaper housing. Deregulation, by bringing down the cost of housing by more than 50 percent in rich states, would return us to the old job-opportunity-seeking pattern.
Construction jobs
While the claim that we’ve lost our manufacturing sector is false—real manufacturing output peaked in 2007 and is now only 7 percent below that peak—what is true is that we have many fewer manufacturing jobs. The number of jobs peaked in June 1979 and is now 34 percent below that peak, due mainly to increased productivity. Although deregulating would not do much for manufacturing jobs, it would do wonders for construction jobs. Caplan estimates that unleashing the pent-up demand for housing could double the number of construction jobs from the current 10.8 million for years. This is one of the few claims for which he gives no data in the footnotes, but his claim is almost certainly true. Given the low level of housing construction, it’s not hard to imagine that massive deregulation would double that level, which would imply an approximate doubling of construction jobs.
As a further bonus, notes Caplan, the “deaths of despair” that Nobel Prize winner Angus Deaton and his wife Anne Case have written about, which are differentially borne by working-class men, would decline. And of course, cheaper housing would reduce another form of despair, the despair from being homeless. Caplan cites a study showing that high rents are “one of the best predictors of cities’ homelessness rates.”
The birth dearth
Housing deregulation, notes Caplan, would even raise birthrates, which are now falling. He has a graph showing that rural counties (where housing is cheaper) have much higher fertility rates than large metropolitan counties (where regulation has driven up housing costs). Moreover, he notes, the gap has approximately doubled in the past decade. Why would housing costs matter? Because a standard adjustment to increased housing costs is to go small. Less room, fewer babies. Moreover, notes Caplan, if you put off buying a house because you’re saving for ten years to get the down payment, you’ve moved past the most fertile years and narrowed the time horizon over which you can have babies.
Crime
Deregulating housing would even reduce crime. How? Caplan points out that regulation has led to many empty lots in cities, and empty lots make crime more likely. He cites a study of Philadelphia where researchers, starting with 541 vacant lots, randomly assigned some of them for landscaping, fencing, and maintenance. The result? The crime that people in neighborhoods perceived fell by 37 percent and crimes reported to police fell by a less impressive but still striking 9 percent. Caplan notes that if people were allowed to build on the empty lots, crime would likely fall even further.
Congestion
One contributor to congestion, notes Caplan, is “free” parking. He points out that the parking requirements imposed by local governments often base the requirements on the busiest day of the year. Most of the rest of the time, many spots go empty. But those “free” spots encourage people to drive. Getting rid of the requirements would not lead to zero parking. Instead, it would cause businesses to provide parking that either they can charge for or that enhances demand for their products. A price on parking would lead some people to drive less, leading to less congestion.
Increased GDP
Caplan even argues, based on work by economists Chang-Tai Hsieh of the University of Chicago and Enrico Moretti of UC-Berkeley, that cheaper housing would lead to a large increase in GDP, somewhere between 14 and 36 percent. They based their findings on data from 220 cities to see how much productivity would have increased if increased job opportunities in cities had happened without a concomitant explosion in housing regulation. Always the honest economist, though, Caplan notes that a criticism of the Hsieh/Moretti work has come to light and undercut their results. Whatever the right number is, it has to be positive, simply because with lower housing costs in cities, more workers will move to take advantage of those job openings in which they’ll be more productive. Even if the increase were as little as 5 percent spread over five years, economic growth over each of those five years would be 1 percentage point higher.
Conclusion
I’ve dealt with most of the major issues in Build, Baby, Build. Given my space constraint, I can’t cover them all. Two such issues are his showing that rent control reduces housing and that government-built housing is very expensive. Moreover, words can’t do total justice to pictures. Get the book for yourself and you will see why. You can even show it to your kids—even if they’re as young as ten. Who knows? You might spur your kids on to becoming budding economists.
