BY JAMES PETHOKOUKIS
Why have housing costs skyrocketed in the past few decades? To what extent do these costs keep people from moving to prospering cities in search of opportunity? And how can we combat this issue through both local and state policy? Daniel Shoag explores these questions in his recent policy analysis for the Hamilton Project, “Removing Barriers to Accessing High-Productivity Places.”
Daniel is an associate professor of public policy at Harvard Kennedy School, a visiting professor at Case Western Reserve University, and an affiliate of the Taubman Center for State and Local Government. He was selected as one of Forbes magazine’s 30 under 30 in 2012. Daniel has worked as a visiting scholar at the Federal Reserve Bank of Boston, a visiting professor at Tel Aviv University, and was selected as a rising new scholar by the Stanford University Center on Poverty and Inequality.
What follows is a lightly edited transcript of our conversation. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.
Pethokoukis: A big theme of your recent work is the importance of location. I understand why it would be an important difference if you were born in Vietnam, or South Africa, or China versus being born in the United States. But how big an impact does location have on economic outcomes within America?
Shoag: It’s a good question, and the answer is that I’m focused on location because the impact is so large.
If you take one of the richer states like Connecticut and one of the poorer states like Mississippi, the gaps in income per capita can be as big as 75, 80 percent. That’s just huge, especially considering how low mobility costs are. One of the themes in my work has been housing costs as a barrier to mobility. So, when I’m talking now about big income gaps and not seeing population flows in response to them, that’s a relatively recent phenomenon — let’s say, in the last few decades.
Historically, Americans were much more likely to move in response to those income differentials. And a lot of my work hasn’t so much been trying to figure out the sources of those mobility costs, but rather why those migration patterns have changed over time — why, in the past, Americans were willing to move to these high-income places, and why that’s no longer the case.
With the issue of housing scarcity, you suggest that that’s a fairly recent issue within the last few decades. So why did that start to become a problem if it wasn’t earlier in the last century?
Again, if you start going back as far as we have data, which is back towards the Civil War, you see that Americans were moving to places that had the highest income, and places with lower income were catching up to places that had higher income. Those are two canonical trends in urban or regional macroeconomics — people moving from poor to rich, and poorer places catching up to rich ones. And both of those stopped a few decades ago.
It’s an important question: What accounts for that change? Once you start digging in to it, you see that it’s really tied to housing. There was a real change in housing markets in these rich, productive parts of the country that redirected migration patterns. You know, those places were always more expensive than other places.
I once gave a disastrous interview where the conclusion was “Professor learns that New York is expensive.” [laughs] I know, it was always the case that New York was more expensive! But the gap in housing prices relative to the gaps in income have really taken off. The places in the country that have the highest wages were always more expensive, but the price differential relative to the wage gains has really just exploded.
I guess I intuitively understand why that makes a difference as far as the ease of moving is concerned, if a place suddenly becomes a lot more expensive. But how does that play into the convergence issue, where areas don’t catch up?
One of the things that’s important that we discovered in our work is that within a labor market, housing costs really have a different effect on workers in different “skill bins.” So, if you’re thinking about how there’s a fixed component to housing in your budget share, and you’re thinking about how the rising housing prices affects a worker without a college degree relative to a worker with a college degree, they can have pretty different effects.
There may be much higher wage gains for a janitor and a lawyer living in Manhattan relative to, say, Phoenix. But those wage gains are set off by differential housing costs: For a janitor, those housing costs will eat up most of the wage gain, whereas that won’t be true for a lawyer.
And so what you wind up with when housing prices take off in these rich, productive cities is a sort of skill sorting. People with a lot of education continue to move to places that offer the highest wages. Those with less education actually start to move away. Instead of poorer parts of the country catching up, you actually get an end to that historic convergence pattern, and lower-income places no longer catch up to these skill-sorting, high wage places.
Typically, when I hear this story about affordability and high housing costs, it seems to be a lot about these high-productivity cities — you mentioned New York, and San Francisco gets mentioned frequently. Is this basically just a problem with those few cities, or does it have a broader impact across America, where we have rising costs and affordability issues?
That’s a great question, because a lot of my work points to the macroeconomic consequences of what seems like a pretty local issue. These building and housing restrictions — it’s almost weird to think about them having a macro-consequence. But one of the things we’ve discovered in our work is that there really was a way that land use was handled across the country starting in the 70s and 80s that really allowed coordination at a much broader level. That generated these macroeconomic impacts.
So it’s not just one city doing a one-off thing, but through environmentalism and some legal changes that happened at the time, it just became much easier to block development in broader labor market areas. So you start to see a change that seems like it could be a local issue take on these macroeconomic consequences, where it redirects migration patterns more broadly.
Before we get into some of the very specific ways in which regulation makes housing development more expensive, since you mentioned the macroeconomic consequences, what are those big-picture consequences? It’s not just about how expensive a small apartment or house in the Bay Area is — so what are the larger consequences?
One of them is that because the housing prices differentially deter lower-skilled workers, this can be an additional source of inequality. So if there are high-wage opportunities for workers without a college education in some of these rich areas like San Francisco but they just can’t afford to live in that area, that’s an extra source of inequality.
It can also have productivity effects. Wages and opportunities are large in these productive areas, and we’re shutting workers out of them. That can drive down productivity by redirecting people to mid-wage places — you know, central Florida and places like that. So there are productivity consequences, inequality consequences, and then there’s this problem of convergence which had been an important part of the fall in inequality in the postwar period largely stopping.
What if we didn’t have these additional barriers — which we’ll get into detail on — and the kinds of housing policy that we saw before the 70s had continued into the 80s, 90s, and into the 21st century? How would we look different? Would San Francisco be much bigger, and would New York have megalopolises?
I do think it’d look pretty different. I agree with what you said — San Francisco, Boston, these sorts of places would be bigger.
Right now, if you’re thinking about moving to one of these cities and you don’t have a college degree, your wage would likely go up. But it would not make sense given the housing cost. So people are sort of directed away from these high-wage places.
And if you think about it, Manhattan used to be denser than it is now, right? You know, you used to have immigrants get off the boat, and the Lower East Side was full of immigrants along with Lower Manhattan, and that’s not what it looks like now. It’s less dense than it used to be. Now it’s very hard to live in some of these high-wage places unless you yourself are in a quite high-skilled occupation category.
So much of the national conversation lately, certainly since the 2016 election, has been about the “left behind” parts of America. Would we have as many left behind areas, or would they still be there, but just fewer people would be living in them?
There’s a literature that discusses the fact that migration in general has decreased, but that hasn’t been the focus of my work. There’s still a fair amount of migration in the country — it’s not that people aren’t leaving the Rust Belt per se, they’re just moving to different places. So you may not have seen some of the rise in population in these mid-wage places like central Florida, where costs of living are low. Those are attractive options even if the wages aren’t incredible.
Now, one of the things you did historically have even when there was a lot of migration to the rich parts of the country was this convergence, where poor places were catching up. Some of that was driven by migration itself, but as labor became scarcer and as the migration gave an outlet for lower skills, you were able to see incomes in lower-income places converge to the richer places. So the gaps that we see today between places like New York and places like Mississippi are much smaller than they were in the 1930s or something like that. But that process of catch-up has also stopped. In the last two decades, we don’t see much convergence.
What are the kinds of regulations that really make development a lot more expensive than it needs to be? We don’t want buildings to collapse, right? We don’t people to be able to build anything they want anywhere. So what are these policies, and what would be the impact of getting rid of them?
I think there are answers at the local level as well as a little more broadly about the kind of changes that made this a nationwide problem a few decades ago. So at the local level, you have a lot of restrictions on things like height and density.
Back when I was living in a beautiful apartment in Brookline, the apartment building was six stories. Why not add a seventh story, or an eighth story, which would’ve been extremely profitable? Obviously, there are height restrictions that prevented that. And so that made everything more expensive. Economists believe in supply and demand, and if you choke off supply and there’s lots of demand, you’ll get rising prices.
So Econ 101 still works? I’m on Twitter a lot and what people say is that Econ 101 no longer works.
Yeah, people have all of these assumptions about housing — about how increasing supply will not generate affordability. And I think it’s easy to understand some of the confusion, in that when you do see development, it’s often in expensive areas.
It’s kind of the correlation-causation problem, right? People die in the hospital, cops show up when there’s a lot of crime, but we don’t think the hospital’s killing people or that police are creating the crime. So yes, there’s often development in the expensive places. Then people make the incorrect assumption that the development is causing the place to become expensive. But there’s really good evidence on this, and I hope I’ve contributed to it, that things really go the other way.
Supply and demand do work — you increase supply, prices will come down. That’s not just true at the top of the distribution: Housing filters down. So as housing ages, something that may have appealed to the richest part of a labor market can start to work its way down the income spectrum. In the end, you wind up increasing supply which makes things cheaper for everybody. You wouldn’t know it from reading Twitter.
You certainly wouldn’t.
In your work, you go through some of the different kinds of regulation. Isn’t it also a density issue? It’s not so much that we’re not building enough single-family homes, but we’re not building enough condos and apartment buildings where there’s just a lot more density, and I guess preferably density near public transportation.
Yes. I mean, Boston is not that dense an area. There’s plenty of undeveloped land around Boston. And if you walk around Palo Alto you’re not blown away by how dense it is. So even if you thought, say, Manhattan was the outer limit — that’s how dense we were technologically able to be — there are plenty of these expensive, productive places that are far less dense than that.
This really isn’t a technology story, or a “we’ve run out of land” story, but we’ve really just set up restrictions on supply. I don’t know if this interests you, but what I’ve started to say is that these local regulations make a difference, but the problem is really the degree of coordination we’ve enabled. We have things at the state level like environmental review boards that provide a kind of double veto. And we have processes that make you, say, require a supermajority to make these zoning changes.
If you had one neighborhood in a productive place shut off development, well, that would be fine as long as there were other parts of the city that were still developing. What you really have here is an increase in regional coordination, so you have whole labor markets that have really just become prohibitively expensive.
So if you’re trying to attack this issue, it’s not just hyper-local: There are certainly things that can be done at the state level to increase the housing supply, right?
Yes, for sure. And I think that’s where you’re more than likely to be effective rather than trying to fight this city by city.
It makes sense that this has become such an issue, and it’s so important, because people have a lot of money invested in their house. You know, I recently became a homeowner, and I like the value of my house, too [laughs]. I certainly understand the incentives. But if you kick this up to the higher levels, it may be more effective. Because rather than trying to target the really strong individual incentives in local government, you can make reforms that make development possible and broadly beneficial.
So we’ve seen some action in California — things like SB-35, which was not perfect, but required cities that were failing to meet their housing needs, which is basically every city in California, to create an approval process without a public hearing, have well-defined time limits. That gave some teeth to these regulations by allowing developers to use the courts to enforce them.
There are a myriad of ways in which cities and local governments can block development, and it’s hard to play whack-a-mole with each one. These state-level initiatives are, I think, the best target for success.
The best thing that can happen on the federal level is what? What can the federal government actually do?
[laughs] One of the things the federal government can do is stop exacerbating the problem via the tax code, which does have incentives for promoting larger housing and things like the mortgage interest deduction. Those things have definitely have been capped and things are moving in the right direction.
There’s also room for “race to the top” programs that encourage development by tying federal funds to it or punishing anti-development policies. That’s, say, using HUD funds or providing incentives to local government.
So the federal government can both get out of the way on this problem and also use public money to be a spur.
So far, about the only way this issue has popped up in the race for the White House in 2020 on the Democratic side is by talking about national rent control as a solution. Do you know about any of those proposals, or what do you think more broadly of that idea?
I think that’s unlikely to help the situation. The problem here is a supply problem. Developers are just unable to build, given the regulations in place. And it’s very hard to solve the supply problem by trying to cap prices or regulating demand.
So something like rent control is likely to be counterproductive and make it less profitable for developers to build, and the issue here is really the opposite. We need to be encouraging people to develop in these high-wage places — making it easier, and making it more profitable. So national rent control, I think, is not the solution.
I understand why someone who has a house might be against there being a lot more housing, because they figure, “Well, not only will my house price not go up as fast, maybe it’ll fall.” But other policy-oriented people, do they think that more supply will mean just very expensive places being built?
Do they not believe that more middle or lower-income housing won’t be built in a different regulatory environment?
At the very local level, there can be some concerns about gentrification and changing neighborhoods. In my read of the literature, it’s actually more likely to go the other way. It’s not the high-income people who are kept out of the neighborhood, and increasing supply does not lead to more gentrification or neighborhood change. But there is a difference between targeting housing and affordability at the very low end.
So there are people who, even in relatively cheap cities, would struggle with housing costs, and there’s room for policies that would target those groups. That’s a bit of a different problem from what we’ve seen recently, in which some parts of the country are becoming unaffordable even to relatively mid-wage people, who are relatively high up the distribution. There’s room for policies that worry about housing affordability for people who can’t afford housing even in affordable cities.
So people mix the two issues together?
Yes.
What cities are getting it right? Oftentimes, people will point to Texas as a good example of a place where regulation is much lighter.
But other people say, “No, you don’t want that. It’s crazy, and you have cities like Austin where there’s too much congestion.” So what cities do you think are hitting the sweet spot, with lighter regulation but still enough of it?
I think the concerns about Texas are a little bit unfair. Many urban economists used to point to cities like San Francisco or Boston as successful because they were increasingly educated and the rest of the country couldn’t catch up to them in income. But they got that way by basically pricing out a large part of the population, which was the lower-skilled population.
There’s been giant population growth in Texas, because it’s an attractive place for people. That can be considered a big success.
In addition, we have examples of very dense places like Tokyo which has had enormous construction, and prices have come down and are affordable. Tokyo hasn’t had the same kind of price growth that cities like Boston, San Francisco, New York, et cetera. You can point to cities here like Raleigh, which has grown a lot in population and hasn’t seen prices take off in the same way.
So we have both domestic and international models, including giant megalopolises that have had construction. We know how to do this technologically, so this is really a policy problem.
So should policymakers still try to encourage building in certain ways? For instance, building highly-dense downtown areas versus more open suburbs where you have a lot of sprawl. Is there a particular method that you think is better?
There are a lot of concerns that go into this.
Because what you’re saying is that it’s going to be more congested. If you want new buildings and lots of density, there’s going to be lots of congestion, and people then point to examples of cities that they don’t like. Is there a better path that hits the sweet spot of everybody?
So I’m a fan of allowing people on the ground to decide where it’s most profitable to build. The real issue here is the overregulation which prevents decision-makers from deciding what to do with their own property.
The problem is not me telling you, “Hey Jim, you need to turn your house into an apartment building.” Rather it’s me telling you, “Hey, you’re not allowed to sublet your basement apartment,” you know what I mean?
I don’t want to come in to this saying that I think there’s only one way a city can look, but I think states and the federal government can do things like encourage cities with financing to have a certain number of units built over time. You can do things like change zoning budgets, create minimum housing needs, reward development, or simplify the process so you don’t have things like environmental review boards at the state level which provides a double veto on things that are approved at the local level. You can remove supermajority requirements — basically eliminating some of the things that prevent people who want to build housing from being able to do so.
Would it be the case that if we do nothing and these high-productivity cities just continue to be wildly expensive, at some point, high-skilled workers will stop going there?
Maybe they don’t look at it as an inviting place to start their company — a company that maybe, they hope becomes wildly successful — so they go elsewhere in the US. And by then, you’ll eventually have a situation where the talent and entrepreneurial people will disperse to other areas, as the other cities are simply too expensive for anybody. Therefore, the problem kind of solves itself over time.
Well, I think that, one, there’s a big loss to keeping people out of these high-wage places now. It used to be the case in America that there were two ways you could dramatically improve your fortunes if you were, say, born in a lower-income part of the country. One was to get an education, and the other was to move to a richer part of the country. And we basically priced out one of those options.
So I think that’s a real loss, and we’re keeping talented people out of places that would make them the most productive. That’s a loss I don’t think we should tolerate.
The second thing is that I think there are structural issues I think we’ve unleashed in the last two centuries that make this problem more likely to occur as places grow and become more productive. You know, we’ve enabled this level of regional control and development, and this ability to block development at that level, which means that, as new places become hubs for innovation and things like that, we may face these problems again.
You’re saying that we kind of know how to fix it, but the problem is really the politics. That’s a pretty big problem. Is it such a big problem that, perhaps we should think of other ways of dealing with the issue?
If it’s really hard to build in the Bay Area, maybe we should instead focus on building public transportation to get people from lower-cost areas to these high-productivity areas. Not just buses, but maybe we need to build high-speed rail in places much further from the highly dense areas, and bring the workers in from there. I’ve had people suggest this idea to me as well.
I do think that transportation can be part of it, but I’m not as pessimistic as you are about the potential solutions.
It is, at the local level, a formidable thing to come to someone and say, “We want to build more in your neighborhood.” I’ve certainly had neighbors come around to me and say, “Oh, we want to block this. It’ll overcrowd the school, it’ll create pollution,” and stuff like that. But I think that this really became a problem when our legal system changed the way we treat these land-use issues legally at the state and regional level. But it wasn’t always this way, so I don’t think this has to be the case either.
There are international models of dealing with this, we’ve dealt with this in the past, so I think we can do better going forward.
So you think it’s more likely that we could solve the political problem rather than building high-speed rails 90 miles outside major cities to bring in the workers?
Maybe I’m just that optimistic, but I think there’s increasing recognition at higher levels of government. You’re seeing these reforms starting to take place at state capitols — I mentioned some action in California.
You’re seeing this big movement called “YIMBY,” so, “Yes in My Backyard.” You didn’t see this two decades ago. It’s a movement pushing for housing reform and construction. They’ve had some real progress in the political process, and they’re growing in strength. So, you know, you’re doing this podcast, people are getting the message out, and there’s more recognition among policymakers and others about the consequences of this, so I think there’s a lot of reasons for hope.
One last question: One would think that, given the role of housing in the financial crisis and the Great Recession, politicians would be talking about housing a lot, and in all different ways. That’s especially given the fact that there’s an already existing concern about income and wealth inequality, and it seems that housing is a pretty big issues for both of those things.
Maybe this is changing, but why are we instead talking about things like raising taxes on the wealthy or corporations to deal with inequality rather than housing? It seems like the Democrats, rather than spending 40 minutes on inequality or something, should be spending 40 minutes on housing.
You raise a good point. I think that this would be a healthy direction in the debate. Part of the discussion we had before is one of the reasons that this is difficult.
Right now we’re in this situation where people have a lot of their wealth invested in housing. A lot of the reforms seem piecemeal and one-off, so this isn’t a charge that applies to everybody when a developer cut a particular deal for some development. So my property isn’t more valuable because it hasn’t been upzoned but some other property is, therefore my property value might fall.
It’s hard, because there’s the correlation and causation problem that we talked about earlier. A lot of development does happen in more expensive places for reasons we’ve talked about. I do think that it’s a hard issue to demagogue.
Even with the environmental discussion, where people say, “Oh, well if we allow unregulated development, things will be congested and polluted,” I think that the research says the opposite. It’s like with your suggestion that people can just live really far from work and do a lot of commuting —
In beautiful, sleek, air-conditioned bullet trains.
Exactly, “We’ll all live in the Sunbelt.” I mean, all of this land use regulation, the environmental review, and all this other stuff that’s kept people out of California and pushed people to live in Phoenix is terrible for the environment, you know? So this is the macro-picture.
Right now, we do environmental review at the very local level — “What’s this apartment going to do for the environment locally?” But the people don’t just disappear. So if you’re out of San Francisco and you move to Phoenix, and you need all this air conditioning and all this commuting, it’s much worse for the environment. And our politics right now aren’t even set up to have that discussion.
So I’m not sure I answered your question well, but hopefully if we can change peoples’ perspective to think about this as more of a macro-issue, and to think not about, “What should we do in my small town,” but, “How should we set this up nationally? Or at least at the state and regional level.” At that point, we can have a more intelligent conversation.
Dan, thanks for coming on the podcast.
Thanks so much for speaking with me.
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