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Intro. [Recording date: January 29, 2020.]
Russ Roberts: Today is January 29, 2020 and my guest is Jenny Schuetz, a Fellow at the Metropolitan Policy Program at Brookings. She writes extensively on land use regulations, zoning, and other urban issues, and those are our topics for today. Jenny, welcome to EconTalk.
Jenny Schuetz: Good to be here. Thank you.
Russ Roberts: You wrote in a recent essay,
The process of building new homes is full of uncertainty and unexpected obstacles. Regulatory barriers make it riskier, longer and more expensive, which has consequences for housing affordability.
Let's talk about that. What are some of those regulatory barriers?
Jenny Schuetz: So, the procedural barriers are one of the parts that I think don't get talked about enough. When you own a piece of land, you can't go out and just build a house or an office building on top of it. You have to go to the local government that controls it and ask them for permission to build something.
Particularly if you think about, say, a subdivision on the edge of a city, a developer may buy a piece of farmland. They then have to get the land rezoned from its current use, which is agriculture, to residential.
And, there is a negotiation process that happens. So, the developer will ask the local government, 'I'd like to build some houses: maybe I want to build 500 houses here.' And the local government can go back and forth and say, 'Well, we're okay with you building some houses, but instead of 500, we're only going to let you build 250, and we're going to require you to leave a third of the space as open space and have that landscaped.'
So, there's this back and forth negotiation just to get the permission to start moving forward.
There can be a lot of other layers on top of that, so almost always there has to be some kind of an environmental impact review. In the DC [Washington, D.C.] area, we worry about run-off into the Chesapeake Bay, for instance: so developers have to manage their runoff during the construction process so that nothing, no toxic chemicals run into water and wind up in the Bay.
So, there are a whole layer of procedures--often different agencies within the same local government. So, you may have to go through zoning, environmental review. You have to get the fire marshal to sign off on the plan that you're going to have access roads that fire trucks can get in on. So, there are a whole bunch of different processes that the developer has to go through typically even before they start the construction. So, what we often think of as sort of the beginning of building houses, which is a construction crew showing up, that's actually pretty far into it.
Russ Roberts: And, you're talking about, in this particular case, a housing development on the edge of town.
Let's talk about a more complicated case, which I think in the literature is called 'infill,' which is a really bizarre word, but it means filling in a space or a parcel of land, say, in an urban area.
So, we're in a downtown metropolitan area, could be DC or anywhere, San Francisco, New York, Chicago, and there's some property that's not being used for housing. It could be a parking lot. It could be an existing structure that's for whatever reason, say, retail only. And the developer wants to buy that property and turn it into a multi-family, say, apartment building or a set of condos, or a mix of retail and condos and housing. Is that more complicated?
Jenny Schuetz: It's usually more complicated to do some kind of an Infill Development in part just because you have a lot of neighbors.
So, the advantage of a subdivision that was originally a farm is that nobody lives around it. And, it turns out neighbors don't really like change. That's true for almost all neighbors everywhere.
So, the parking lot example is a good one because we've seen a lot of that. For instance, downtown Los Angeles had a lot of surface parking lots and that's been a good location to build housing. But you still have this negotiation. So, it's currently zoned for a parking lot; maybe you can build housing on it just directly.
But, Infill Development, you have to think about the individual parcel. So, one of the complicated things is that every parcel of land there is a little bit different. What's the width and the depth of the parcel? Is that what will hold an appropriate sized building? If you have existing neighbors on both sides and they have windows, you may not be able to build close to the neighbors because you'll block their view or their light access.
An existing infill parcel, there's also a good chance you're going to have to do some kind of remediation. So, a piece of land that's been a parking lot for cars for the last 40 years is going to have some level of environmental contamination because all of the oil and chemicals from the car has seeped into the land. So, you first have to scrape off the asphalt and then you have to dig down and clean that out.
One of the really big issues with infill development is whether or not parking is required. It turns out that most people still drive to work and want to have a place to park their car. So, if you're building an apartment building, you may need to do structured parking underneath the ground. Structured parking is expensive. It's expensive to dig out the land, expensive to build. If you're doing this in California, you have seismic issues to worry about.
And, so the negotiation with the local government may include: How many parking spaces do I need to build for an apartment or a condo building?
The developer would like to build less to save some money. The local government probably wants more. And the neighbors are going to show up and say, 'Well, if you don't build enough parking, then we're going to have more people parking in the streets in front of our buildings and we don't want that.' So, those are some of the typical issues that are more likely to come up with an infill project.
Russ Roberts: We like to think in America, some people do, that we have private property and the rule of law. I remember when my--I probably mentioned this once ages ago on EconTalk--I remember when my oldest son, who was probably about 10 at the time, and I explained to him that you can't build a building in your backyard if you want, without some approval. And it may just be illegal. And, his reaction was, 'How's that possible? Isn't this America?'
And, of course, in America we put a lot of strings on land. But one of the more complicated strings, which I find deeply disturbing in the rule of law part and in the desirability of having a regime of property rights that's predictable, is that veto power of various groups.
So, when you said neighbors can be heard, what does that mean exactly? Obviously it's very different in different cities, the number of hoops you have to jump through, the approvals you have to get to. And many of them--the part I really think is destructive--are discretionary. They are not, 'Well, you complied with the rules. You knew going in advance what the rules were. You complied with them, you have permission.' Yeah, that's not the way it works. So, talk about some of the discretionary aspects that city councils and boards have in various cities.
Jenny Schuetz: Most of the development that we see, especially in infill locations, is really discretionary at this point. So, every stage in the process is going to require some kind of a public approval.
One of the complicated things is that this process is different in every city and town and county, so there's really no standardization. So, you may have to go before the City Council to get your permission granted. You may have to go through--there may be a zoning board of appeals, which is usually sort of an appointed group, appointed by the Mayor or the Council, but independent of the council. Sometimes you have to go through both. You may have to go through a historic preservation board. So, just figuring out who the people or the groups and agencies are that you need to talk to and ask for permission can be pretty complicated.
The order in which you do this may be laid out, but often it's not. So, one of the things that developers complain about is that they don't even--it's not like there's a known sequence: you have 50 different groups you have to talk to, but here's the order in which you go, and once you get approval from one, that makes it easier to get the next one. Sometimes the processes run simultaneously. Sometimes you have to do one before the other. Sometimes one will ask you to make a change that then negates the decision you've got from a previous group. So, there's really no sort of written down roadmap for how to get things built and even how to get the approvals done.
Russ Roberts: It may strike some listeners as, 'Well, so you have to wait a while to get permission. So, it's frustrating, it's a little bit annoying. There's all these--you have to have some lawyers, presumably, and experts to deal with these roadblocks.' But, it affects the price of the unit eventually, ultimately. Why? Explain that.
Jenny Schuetz: All of this stuff costs money. So, I think that the process that we have at the moment, is a really terrific process if you are a land-use lawyer or consultant because you make your money off of this.
Russ Roberts: Or an existing homeowner, as we'll see. Existing land owner.
Jenny Schuetz: Exactly, exactly.
But, because the process is very complicated, it involves a lot of time for the developer to do this, and so the developer often has to hire specialized consultants or attorneys to tackle different pieces of this. So, there's the direct cost of the developers' time, the cost of all of the experts that they're hiring and paying to do this. For instance, say that the neighbors don't like the material you're proposing to use for the exterior of the building, which is something that comes up a lot. The neighbors will say, 'Oh, I don't like the cladding. It looks cheap. I want you to use brick,' or, 'I want you to use fiberglass,' or something.
Then you have to go back and talk to your architect. Your architect has already billed you some hours, now the architect has to revise the plan, so you're paying the architect for more hours. Every single request, every pushback, turns into real time and somebody is getting paid for that time.
Russ Roberts: But, just the time itself is a problem. Explain.
Jenny Schuetz: The time makes it really difficult for developers to get their product on the market when it needs to be available. So, in an ideal universe, a developer would start building a couple of years before they anticipate the market really needing more units. By the time the units are finished and ready, they can rent them up and fill them and they don't sit vacant for awhile.
One of the things that we learned in the Great Recession, many of these big projects are taking a decade or longer. So, people started working on projects in the late 1990s, early 2000s, and those projects finished just as we hit the Great Recession, and then buildings just sat empty. Had they finished four years earlier, they could have at least gotten people in there. Even if they took a hit on the price, they would at least have bodies moving into the new buildings.
Russ Roberts: But, there's also just the forgone rent--fhe fact you're not earning anything over this period. All that money that's being spent without any return, the longer that goes--so, let's say you spent, you could spend it all up front to make it simple: you just had to pay a big fee and it would cover your architect and your lawyers and your surveyors and whatever else was needed, and then of course, the raw materials, but you can't build for two years. Well, now let's say but you can't build for five. You can't build for 10. Every extension of that downtime where nothing is coming in, only stuff is going out, is stuff that you need to be compensated for in the--and the marketplace will compensate you for that because otherwise you're losing money.
Jenny Schuetz: That's right. I mean, this is a risky business because the developers essentially have to front a lot of this. They take on loans once you get to, say, the construction stage, so you can get a from a bank to do the actual building; but banks don't like to lend for, sort of, the development process, the approvals--
Russ Roberts: For maybes. They don't like maybes.
Jenny Schuetz: Exactly. So, banks don't want to lend you money to spend the next five years paying consultants and lawyers to go through a process, and then at the end of the process they still say no and you can't build anything.
So, developers essentially have to come up with the equity to do that themselves. You can imagine this really limits the sphere of who can be a developer and who can build. So, you have to have pretty deep pockets, or you have to be a company that has a bunch of projects going on in different stages of completion.
So, there's actually a nice paper out by an economist at the Federal Reserve Board, who looks at how the big home-building companies essentially cross-finance different parts of their company. So, you have cash flows coming in from one project. You use that to finance the development of the next one. But, most developers work in one location, and they don't want to take on too many of these projects simultaneously because any one of them could wind up being a bust.
Russ Roberts: And, the area itself could be a bust in a certain period of time, and you'd like to have some diversification and be in lots of cities. But, since they're all complicated in different ways, it's hard to be involved in lots of different cities at the same time. So, you tend to have all your eggs in that one local basket.
Russ Roberts: And, also thinking about this, you realize that the number of firms that can acquire the kind of expertise you need to deal with this regulatory thicket, it's something akin to the pharmaceutical industry, where, you know, if you're not big and large to spread the cost of FDA [Food and Drug Administration] compliance over lots of products, you're done.
And so, for better, for worse, what we've done with the pharmaceutical industry is we've created a world where the large firms, they do their own research; but part of what they really are, tragically to me, is compliant experts, compliance experts. They know how to get through the FDA. A small firm can't do that, can't afford it, can't acquire the expertise easily. And they are going to develop some products. They'll sell those to the larger firm because they're the ones who know how to shepherd it through the different trials, clinical stage of clinical trials.
Something similar is going on here, it would seem to me, where the regulatory burden can only be borne by large--a very small number of large firms. Which, of course, reduces competition and raises prices a little further probably.
Jenny Schuetz: That's exactly right. And you can see the difference in industry structure across different markets.
So, the less regulated markets, where there's a shorter period to development and a more straightforward process tend to have more small-scale developers who do a handful of units a year or a handful of projects. The big, complicated, expensive markets only have a couple of developers who work there, who developed expertise, relationships with the local government. They know how the system works and how to get through it.
And, one of the things that we've seen since the Great Recession is that the number of development firms has gone down. A bunch of guys just went bankrupt in the Recession because they were holding on to assets that became worthless. But, also, it's become so complicated and expensive, the little guys just can't keep going, and so the big firms are the only ones that can really do business and get through this.
Russ Roberts: And, this reminds me also a little bit of finance, of the financial sector, where having friends in high places is unfortunately an important part of the business. I don't want to be unfair to my former students who I know, and some family friends who are in the real estate business, but it seems to be a business that demands a certain--how shall I say it--level of cronyism, a comfort and connection to the powers that be.
And, as time passes and you continue to have that relationship, you donate to their campaigns; you get more likely to get favors taken care of. There's a certain inherent corruption and non-market aspect, it strikes me, in real estate. It's amazing it works as well as it does, is the way I sometimes think when I get depressed about it.
Do you think that's a little too cynical, that cronyism thing?
Jenny Schuetz: The developers definitely have to know the system and have connections. But interestingly, even the developers that are pretty well-connected, it's not like they can just call up the mayor and get their project approved, because ultimately, a lot of the pushback is coming from neighborhoods. It's coming from small groups of organized voters who, as it turns out, also have sway over elected officials.
So, I think it's an interesting question. You know, if Mayor Bowser in DC gets a call from a real estate developer who says, 'My project is hung up. Can you make things move a little bit faster?' but on the other line she's got 50 constituents calling up and saying, 'We don't want this thing to go through,' at the moment, it looks like the neighbors are winning.
Russ Roberts: Yeah, let's talk about that. So, a longstanding concept here on our program comes from Bruce Yandle--the bootlegger and baptist idea. So, the phrase comes from the days of when, often Sunday, liquor sales were banned. So, the bootleggers like that a lot because it means you can't go to a store; you've got to go to the guy out of the back of his truck who's got a still out in the country. The baptists like it because it's the Lord's Day and they don't want people carousing on the Lord's Day.
So, there's this weird coalition of high-minded folks--people who are not thinking necessarily about themselves--and sort of very self-interested folks who have a profit-motive involved.
One way to think about that, is: Politics makes strange bedfellows. I think the deeper insight--there's many of them, I think, from Bruce's idea--but the deeper insight is that the bootleggers are really focused on this. And they're focused on the details. They're not just focused on the general idea.
So, a baptist--and I'll take a simple example--the Tobacco Master Settlement. A lot of people thought, 'Well, tobacco is bad. We ought to not make it easy to buy and sell.' So, a lot of people just thought, 'Well, this is a good thing, this tobacco thing.'
The tobacco companies spent a lot of time crafting the tobacco settlement and working with the Attorneys General. And they made sure it helped them, as much as they could. And, it actually did help, unfortunately, I think it helped turn their industry into a cartel. It made it really hard for entrance. And that changed the ability of people to innovate. And, we had to do this ridiculous end-around of e-cigarettes, as a way that was to cope with that, rather than, say, lower-harm, actual tobacco products.
So, it's a really ugly process often, the bootlegger and baptist phenomenon, because the baptist gives the politician cover. Politician always says, 'You know, I'm just listening to my,' you know, 'it's the Lord's Day. I'm trying to protect the sanctity of the Sabbath.'
Whereas he's telling the bootlegger, 'Thanks for the money. This is going to work out fine for you. And let me take your help in how this legislation is actually written.'
So, in this case, how does that work out? Well, you mentioned the neighbor is upset about the cladding or the other thing. And that's a baptist idea. Like, who wants an ugly building? Everyone cares about that. It's a negative externality. Or parking. Certainly it's unfair--it would be a negative externality for a new building to not have any parking. That imposes parking costs on the people who already live around there, and also there's congestion and so on.
But of course, there's a bootlegger motive there too, which is the neighbors often, not always, but often, care about their pocketbook and their personal financial stake in this, which is: The more development there is, the lower land values will be.
And what we've done in my view, is privileged existing homeowners and property owners, and have created a process that allows them to veto things that make them poorer. I think it's really bad for the country. We'll talk about that in a minute. But, react to the bootlegger-baptist thing.
Jenny Schuetz: I think that's exactly right. The neighbors who are protesting sometimes believe that they're doing this out of very good motives.
Russ Roberts: And they could be.
Jenny Schuetz: They could be. So, in California there are a lot of people who say, 'I care a lot about the environment and we shouldn't be building more. It's bad for the environment. We should have slower population growth. We should have lots of trees instead of buildings.' And, some of them truly believe that. Some of them are being pretty direct, that they are worried about the impact on their property values. They will say that, 'We have created a whole generation of people who have become millionaires by sitting on dirt. They haven't done anything. They bought a house in the right place at the right time and stayed there.' So, they've had enormous wealth gains, almost none of which are taxed, because our tax system isn't set up that way. And, they're worried about new development that at most is going to cap the increase of their value in future, but it's not going to erase the gains that they've had. The most of the development that we're talking about isn't at the scale that it's really going to make that much difference to neighborhood property values.
Russ Roberts: But, of course, the tragedy there is that the people who'd like to move into those locations, either because where they live now is not economically viable-- they're struggling to find opportunities like to move from, say, a rural area to the city--they can't get a toe-hold or a foothold.
And then they can't express their views politically: that their voice is silent. Because, naturally, that mayor you're talking about, or the City Council member, is listening to the people who live there already, and not a future voter who might live there tomorrow. And that just kind of cries out for some kind of national remedy. We'll talk about that later.
But, I think it's important to keep in mind here that certainly people who've bought property with the expectation of appreciation, you can understand that they're not going to like the idea that they might not make as much as they would've hoped or it might even lose money. We all understand that. But, the cost of that is really severe. It is discouraging people from moving there. I think maybe more importantly, it's encouraging people to leave who can no longer afford to stay in those areas. That combination seems to me to be extremely destructive.
Jenny Schuetz: It is. The very hyperlocal decision-making overdevelopment doesn't serve the larger region or the country particularly well--so, allowing a neighborhood within a city, or a relatively small residential suburb, to make decisions about what can and can't get built, when that has implications for employers and for the economic growth of an entire metropolitan area. To a certain extent now, California, New Jersey, Massachusetts have statewide problems. Local governments are making decisions and neighborhoods are making decisions that affect the states' economy and their ability to grow.
You're exactly right that the problem is: The only people who get to vote, who get to put direct political pressure on elected officials, are the people who already live there. The people who would benefit from the new housing live in another jurisdiction altogether.
Also, we see really big differences in the rate of voting between homeowners and renters. So, renters in a jurisdiction would benefit from having more housing--keep their rents from rising, might give them more opportunities. But, renters don't turn out to vote as much. They definitely don't turn out to community meetings to protest the way homeowners do. Some of that is because renters are more likely to have say multiple jobs; they're younger; they may have kids--
Russ Roberts: May be planning to leave in the next six months, five years? Don't have a stake in the area.
Jenny Schuetz: It takes an enormous amount of time and energy out of your personal life to show up and engage with a community meeting. If you don't have the time to do that or if you think, 'My voice isn't going to be heard,' why would you do that?
Russ Roberts: Let's talk about some of the, what we know about the consequences of these decisions. I just want to say as an example, I think this is a true story. Maybe you know of the story, and correct me if I'm wrong. But, there was a laundromat--this is a reductio ad absurdum, but sometimes a reductio ad absurdum is informative--a laundromat in a parking lot in San Francisco that a developer wanted to turn into, I think, eight condominiums. So, the first thing he had to do is prove that the laundromat didn't have historical significance. So, that took a while. But, eventually historians agreed it was not historically important.
Eventually the project was killed. It took about five years. So, it was up in the air for awhile. Well, not ever really up in the air, it was down on the ground, never got up in the air. The decision was up in the air for about five years. I think it's in limbo right now.
The thing that ultimately killed it was the shadows that the building would cast over a park where children played, even though those shadows would not be cast when children were actually playing there.
And it's basically, 'Nothing's changing here, folks. Don't even think about it.' I mean, to invest five years for nothing, which I think is a common problem, it must be very discouraging, obviously.
So obviously, that, in a place that's growing economically where people are wanting to move there, and you're effectively capping the increase in housing is going to cause rents and land prices to rise.
But, the other thing that's going on, and we had Alain Bertaud on the program last year and I talked about how informative this was for me. If we go back to a city 100 years ago, 50 years ago even, there was a wider range of housing choices for new arrivals. Some were in beautiful, fancy, massively expensive spots; some were much smaller. And what he talked about, among other things, was the role that minimum square footage causes in keeping prices high. Not just that it can't have as many units, but also the fact that an option that a really poor person might want, which is an inexpensive, small--what we might call a hovel, to be really blunt about it--people might be willing to live in a hovel, meaning a tiny, small place, because they really care about that location. They want to be in Midtown Manhattan or they want to be in Downtown DC or off of Dupont Circle. And, they're not allowed to by law.
So, we've talked about some of the range of hearings or other things, but there are these specific things that--they are black and white. They're not discretionary. But they have a very bad effect, I think, on the scope and a breadth of housing choices that people can make. Talk about that.
Jenny Schuetz: Yeah. There's a whole range of things that are basically just illegal to build at this point. Most cities, and even central cities, big places--New York, San Francisco, Washington, D.C.--have just outlawed multi-family building on two-thirds to three-quarters of their lands. So, you just can't build apartments, period.
It's not just the zoning code. We've also got things built into, for instance, building codes. I've been doing some research recently on the demise of boarding houses. The idea that you used to be able to have, essentially, a large single family house, but you could turn that into a boarding house. There was one kitchen for the house, and so the landlord would provide meals for tenants at certain times. But, you didn't have the idea that every single dwelling unit needed to have a freestanding kitchen and bathroom. You probably had one or two bathrooms that everybody shared. You had one kitchen that tenants didn't even have access to. And people just rented a room. That was all you needed, was a space. We've seen the iterations here. This used to be sort of kind of working class or even middle-class phenomenon in big cities. Then, boarding houses turned into SROs [Single Room Occupancy], which were very cheap options--
Russ Roberts: Which stands for?
Jenny Schuetz: Single room occupancy. So, essentially that you would just rent a room in a house to sleep in, and you also didn't have to have a long-term lease.
So, for poor people coming up with a month's advance rent for a security deposit is a lot of money if you have to pay for a full year. But, being able to rent a room for a week or a month at a time is something that's more affordable.
We no longer have any of these cheap options. So, small units, fitting a lot of units onto one piece of land, things that are not a complete housing unit with kitchen and bath, shorter term leases--all of these options that we used to have, where poor people could find a place to live that wasn't their car or the sidewalk, we've basically made those only illegal.
Russ Roberts: When I talk about this--we talked in that Bertaud episode about Chelsea--Chelsea neighborhood in New York, which is a really beautiful neighborhood, really low buildings and some of the most expensive real estate in the world. And it gives a certain nice look and feel. And his reaction--and, I said, 'People like walking around there.' And, he said, 'Yeah, but it means poor people can't live there.' When I told that to someone else that, their reaction was, 'They don't like poor people.' Talk about some of the roots of zoning and land use restriction that were driven by racism.
Jenny Schuetz: Yeah, absolutely. Zoning became a bigger part of the U.S., most local governments adopted it, either in kind of the 'teens and the '20s [1910s-1920s]. And then there was another wave after World War II. But, a lot of current zoning was explicitly racist. So, when you couldn't have racially restrictive covenants, you instead adopted zoning that required new houses to be large and expensive. If you can't legally discriminate by race, you can discriminate based on income. And, that's still okay. And so that's what a lot of places do now--
Russ Roberts: 'Okay' meaning legally okay--
Jenny Schuetz: Legally okay--
Russ Roberts: But, not really okay because it was really designed to keep out poorer people who happened to be black.
Jenny Schuetz: It's not ethically okay, but it's legal. Yeah. So, that's what a lot of places do now, is they write these zoning rules and building codes that mean that new housing is going to have to be very expensive. Snooty, white suburbs are fine with black people moving in as long as they're a CEO [Chief Executive Officer] and can buy a $2 million house. But, nobody gets to move in unless they can afford a $2 million house.
Russ Roberts: Of course, there's a side effect of that, which is that if the best schools or even only the decent schools are in those neighborhoods, poor people are priced out of that. It makes it hard for their children to rise. I find it deeply distressing, and I wish we could do something about it. But, let's put that to the side for the moment.
Now, the boarding house phone, I just want to say as a footnote, that in 1976, I think it was '76, I lived here in DC in Hartnett Hall. Maybe some listeners there have either walked by Hartnett Hall or have stayed there, perhaps. It was just a block or so off of Dupont Circle. It's been since gentrified, turned into a really nice set of offices. But in those days it was a boarding house. I got a bedroom. That was it. No access to kitchen. I got wonderful[?] access. I was on the first floor so I could hear the sirens going all night when DC was a less safe place.
When my dad came to visit and he said, 'Well, this isn't so bad,' I said, 'Dad, that's a cockroach on the bed.' Remember, I didn't have a kitchen or any food in there. It was--I wouldn't say it was a hovel, but it wasn't fancy, it wasn't nice. But, I was 22 years old and it was great for me. I loved it.
Jenny Schuetz: What was your rent?
Russ Roberts: I don't remember. I want to say $75, but that's just the first number that comes into my head.
So, similar to the minimum-size thing, banning boarding houses, SROs--single room occupancy--is going to effectively, not just lower the total number of units available in the area, meaning higher rents. It's closing off an entire part of the market that is "lower quality," but it's quality that a lot of people were very eager to pay for it because they can't afford anything else and they'd like to be in that location. So, that's one thing.
So, it seems to me though that we've got these two end-arounds to this problem right now. We have Airbnb, which is a single room occupancy solution.
And then we have these companies, I've heard of a couple of them--I can't remember the names off the top of my head; we'll link to them--where, it's a dorm. It's the old fashioned boarding house. It's a bunch of bunk beds in a big public space. There's a kitchen. And some of these are very downscale and some are super upscale. The upscale ones have a really nice kitchen that's shared, a really nice public space for throwing a party. Might have a gym. But, the whole idea is that your square footage that belongs to you is a bedroom that has a lock on it. It's not an apartment. It's something[?] like an apartment. And that's allowing in certain cities, I don't know if it's everywhere, but in certain cities, the opportunity for poor people--lower-income people who don't want to pay as much and are willing to trade off quality and quantity and location to have a foothold. So, how are they getting around these restrictions. Do you know?
Jenny Schuetz: Yeah, there are a couple of different ways that I've seen companies do this.
Russ Roberts: Are they getting special permission for this kind of a one unit?
Jenny Schuetz: Yeah; they'll have to get some sort of--
Russ Roberts: A waiver.
Jenny Schuetz: Either a zoning waiver or a variance.
There are some places that technically do still have an allowance to build something like a boarding house or a hotel. So, they often get regulated like hotels instead of apartment buildings.
There are a couple of different ways that I've seen this done. At the high-end, they've rebranded this as co-living. It's basically like a college dorm and a pretty fancy one. So, it has a lot of amenities. Some of those actually do have small kitchenettes in the units. It's not just a bedroom. But those are expensive. Those are not any cheaper than just renting an apartment. They're essentially marketing it saying, 'You get this social aspect to living.' It's not so much that this is a cheaper way to live. But I think there are a couple of companies in California that are doing this more sort of a big open space with a bunch of bunk beds. It's like staying at a youth hostel or the YMCA [Young Men's Christian Association] or something.
Russ Roberts: Yeah. I think, one of the ways they are getting permission to do this is that they are at the same time offering to have some of the units below market price. And this is a way--I think this is a super bootlegger and baptist thing. This is a way the politician can say, 'Oh, I'm not--this isn't about allowing a bunch of people to get special privileges. We're caring about the poor.' These are the upscale ones. And it just the wrong way to help the poor. It's just--I think it's like a one off. It's a specialty thing. And it destroys the political incentives to fix it in much more, more effective ways.
Jenny Schuetz: And one thing that we should notice is that poor people have to live somewhere. If you make cheap housing illegal, they will find whatever work-around they can.
So, obviously in places like California, we're seeing increasing homelessness rates. So, people living, sharing a place with family, people living in their cars. San Jose has entire streets full of people living in RVs [recreational vehicles] because they can't afford a house to live.
DC had a really tragic example about a year ago. There was a row house in Northwest that was not licensed to be an apartment building. But, the owner of the house was renting out rooms mostly to immigrants who have not a lot of money and very few options and aren't going to complain that this is illegal and that the dwelling has poor quality. And the row house caught fire and a bunch of people died.
So, people will find a place to live because they have to have a place to live. If we make it expensive and illegal to build reasonably safe housing that's cheap, then people will find illegal places that are dangerous to live instead.
Russ Roberts: And yet, a lot of people blame that homelessness. Of course, many of the homeless are not homeless because they can't afford a house. They're homeless because they're struggling to deal with life in all kinds of ways. But there are a lot of people living in those RVs--a lot, meaning more than one. It's a shocking thing. Some are in Palo Alto. And there are certain blocks--I don't know whether the police turn a blind eye, it's sort of okay, where people have lined up RVs and trailers. It's strange. And, they're just living out of them. It raises a lot of questions we're not going to answer, this moment.
But, I think a lot of people when they see it they go, 'See? Landlords are really greedy and they've exploited the existing houses that they have and they're making a killing and they've pushed prices up so high. This is all about greedy landlords.' I have to say that. I think I did a good job saying that with a straight face. Don't you think you think?
Jenny Schuetz: You did.
Russ Roberts: We're doing this face-to-face at the Hoover Institution in Washington, D.C. and I was--I think I looked very empathetic. Do you feel I did a good job there?
Jenny Schuetz: Absolutely, yes.
Russ Roberts: Thanks, Jenny. It's not easy for me.
Jenny Schuetz: I hear that argument a lot, that this is just landlords being greedy and trying to squeeze extra money.
It's certainly true that landlords would rather charge a higher rent and take a profit if they can. But, landlords can only charge what the market will bear. So, in a well-functioning market, if a landlord charges $2,000 for a studio apartment, somebody else can charge $1800 for a studio apartment and they'll take the tenants.
So, landlords can only get away with that if there's a limited number of apartments and more people wanting to rent them than there are units available.
I will say that I've looked at the dispersion of rents within metropolitan areas--so not just what the median rent is, but the 75th percentile, and the 25th percentile. And, you see, when you look at the bottom end, that there's really a floor below which rents don't fall. Even in places like Detroit where land is basically free.
So, it's hard to pay the minimum operating costs on an apartment for less than about $500 a month. So, if you think of just paying the mortgage on the building, the property taxes, water and sewer, common electricity and so forth, the stuff that the landlord has to pay to cover the cost of operating it, doesn't go below about $500 a month.
Russ Roberts: As opposed to abandoning it because it's a losing proposition.
Jenny Schuetz: That's right. As opposed to just closing it down and taking it off the market altogether.
So, and that's for sort of apartments that are good enough to meet our quality inspections. You probably, you've got some illegal rentals that are cheaper than that, but they're cheaper than that because mostly they're in pretty poor shape.
So, but, when you look at a place like San Jose, so the 25th percentile of rents in San Jose is about $1,200 a month, right? That's close to the bottom. That's not because it costs landlords $1,200 a month to run the apartment. That's because there's such limited supply that they can charge that. The best way to fight against greedy landlords is to flood the market with supply of new apartments and take away their market power.
Russ Roberts: Now, some people argue that that won't work. Again, I'm trying to say this with a straight face. They argue that supply won't work in this market. Usually, 'True, in many markets, you add supply, you get lower prices. But in housing it doesn't work that way.' They have various stories they tell. What do we know about that? Is there evidence on that, that might not be compelling to everybody, but what do we know about that?
Jenny Schuetz: We know from the places where it's easier to build housing and that have historically built a lot of new supply when there's demand, their prices are lower. Their prices just don't go up by as much.
The hard part is that in places like California and New York and DC and Boston, we have under-built housing, especially multifamily rental housing, for 30 years. So, there's an enormous pent up demand. And if we build another 10,000 units of housing, it's not going to dent the problem. So, the people who say, 'If you build a bunch of new apartments, it's not going to make rents drop by 50% tomorrow,' are right. We have to build at really large scale for a long period of time and we have to make this process cheaper.
So, part of it is: All of the new construction is going to be very expensive because we've made it expensive to build.
If we made it possible to throw up a hundred-unit apartment building in two years with just sort of the bare minimum of costs for land, construction, and materials, but without this regulatory cost, and just did that for the next decade, you would see softening of rents even in the expensive places. But, I don't see any sign that we're getting to that soon.
Russ Roberts: Yeah. We're going to talk--before we conclude I have some ideas that I want to share with you that I've read about that might help us. But I think it's important--I just want to say something about the landlord, greedy landlord story.
I assume landlords are greedy, by the way. They'd like more money. As you point out, if there's competition, it's harder for them to get it. And, you have to deal with the fact that prices and rents have gone up dramatically over the last 30 years. Did they get greedier? Weren't they greedy in 1990? I mean, did suddenly a lower class of person get in the--that weren't grasping? Those kind of explanations are difficult over time. I just want to point that out.
I want to say something, though, on behalf of zoning, which doesn't come easy for me, but I want to say it.
I spent time in the Bay area. I was fortunate enough to be in Paris this last month for the first time and--30th wedding anniversary. Wild applause. If you say you've been married for 30 years, people just share. It's an interesting phenomenon.
Paris is a beautiful city. A magnificent city. I was overwhelmed by just how pleasant is to walk along the streets and look at the stores or look at the architecture and there's a lot of wrought iron in Paris. I couldn't help but think, in the 19th century whoever had that franchise, if it was a government thing, it really made a killing because it's everywhere.
And, part of the reason Paris is beautiful is it's highly regulated. The buildings are all roughly the same height. There is a weird little area that I guess, I don't know if they call it downtown or 'le downtown,' where there's a bunch of tall buildings. But, everywhere else is pretty much the same. The Eiffel Tower , towers over all, of that territory around the Seine. And, it's just magnificent. It's housing stock is gorgeous. There's something magnificent about it.
Similarly, you walk around San Francisco . There's an amazing photograph from the air recently that showed--San Franciso is basically flat, not topologically, but all the buildings are low. It's low density. There's a few little areas downtown where it's in the center of downtown that have high buildings despite the seismic issues, the earthquake issues. But, it's basically flat. And, it's an enormously underdeveloped city. It would be enormously cheaper to live there if it was even as developed as Paris, which is not very developed by New York--say, Manhattan, Midtown Manhattan standards.
And, yet, so part of me says, 'You know, we've turned San Francisco and Paris into a museum. It's a beautiful museum. It's really pleasant to walk around. There's a charm and a delight in it.' And, what do you think?
That there's a wonderful benefit to this restrictive zoning and stasis also--the lack of dynamism, the lack of opportunity to remake those cities has created a beautiful, a work of art.
Jenny Schuetz: Yeah. So, Paris is a lot denser than San Francisco. If we'd let San Francisco become Paris, it could still be lovely and charming, but you could house more people.
I will say that Paris has dealt with housing markets really differently. So, the central part of Paris is low density and regulated and old and very rich. Paris built all of its social housing in the suburbs. So, if you go out to the banlieue surrounding it, you have what looks like public housing in the United States, very tall buildings and really poor. So, they've kind of inverted--
Russ Roberts: Ugly, too.
Jenny Schuetz: like we do with a lot of our cities. Yeah. You know, I love, I go to New York often and I love walking around Greenwich Village. I love walking around the brownstone neighborhoods. I mean, they're beautiful. We would lose something if we allowed all of that to be redeveloped as skyscrapers.
We don't have to redevelop all of the old housing, but we also don't need to keep all of it.
So, there needs to be some balance between keeping, particularly keeping some fragments of architecture so that people can see them, so that we know what we used to build in the past. But, we have made too much of the older housing off limits for redevelopment at much lower densities than they need.
People also think that in order to get more housing, you have to build skyscrapers: 'We're going to turn everything into Midtown Manhattan.' If you build six- to eight-story buildings all the way up to the curb line--so, one of the things about Paris is you have very narrow streets and very narrow sidewalks and the buildings go all the way up to the sidewalk. So, all of the land that you can build on, you build every inch of that.
We have setbacks in San Francisco, you have to have yards, you have to have setbacks from your neighbors. We could get a lot more housing and look more like Paris and not look like Midtown Manhattan. But that's not even on the table for discussion.
Russ Roberts: I guess the other thing I would add, and I'm trying to be, you know, intellectually honest here, that I do very much appreciate the architecture of San Francisco, that--the Painted Ladies and other, just, there's just beautiful doorways and things that would be lost when those six- to eight-story units came into existence.
At the same time, there's an unseen aspect to it that I think is important to remember. And, Alain Bertaud mentioned this; and it haunts me, I guess, since I, when I think about these pleasant places, these are places for rich people. They are places for--it's a museum where only rich people can live. It's pretty much a museum where only rich people can visit unless you're going to make a commute from the way-outside as a tourist to get in there. Even all the hotels, the Airbnbs even, it's very expensive to be privileged enough to be able to walk around that neighborhood when you wake up. You've got to come from a long way if you're going to afford it. And, I just think--
Jenny Schuetz: And, we're also not asking the rich people who own the land or houses in those neighborhoods to pay for it. So, if they want to preserve their big house with a yard in San Francisco and not allow somebody to build, they should at least have to sort of contribute funds to, you know, the city to build housing elsewhere.
Russ Roberts: Like a carbon offset for the big carbon footprint folks.
And, I should mention--we haven't talked about this-- but of course higher density is a bunch of better for the environment.
Jenny Schuetz: Absolutely. Yeah. And, I mean, California is the worst offender on this because of Prop 13.
Russ Roberts: Explain.
Jenny Schuetz: So, the state caps the increase of property taxes in the late 1970s. So essentially if you have been in a house for a long time and the house has appreciated in value, you're not paying property taxes on the market value. You're paying property taxes on what the value was when you bought it with a slight increase over time.
And, this is really inequitable just for people who have moved to San Francisco recently or to California recently. You can live in an identical house to your neighbor, but they bought it 30 years ago and you bought it yesterday, and the new arrival is paying 10 times what the older person is in property taxes.
So, the state has really cut off its main source of funding and taken away any incentive for people living in these older, expensive, low density homes to bear, essentially, the social cost of taking that off the market for development. If your property tax bill is $500 a year, you have no incentive to turn this over to a developer and allow them to build an apartment building on it.
Russ Roberts: Say something about Houston. For me, Houston is kind of an alternative world. I wonder if how true that is, the idea 'Well, it's in Texas. In Texas, you can carry a firearm and drink while you're driving and build whatever you want, wherever you want, whenever you want.' Is that true? I know that there's "less zoning in Houston," but is it a lot less zoning? Is Houston cheaper per square foot in midtown? In the densest part of the city for, say, office space or residential space?
Jenny Schuetz: Houston doesn't have zoning the way that other cities do, so they don't have a municipal zoning code. They do have a bunch of restrictive covenants that govern certain neighborhoods. So, in practice it has something that functions kind of like zoning. It's not totally the Wild West. Land values are cheaper in Houston, prices are cheaper. The Texas metros have done a much better job of building to accommodate population growth over time. They're also running into some limits though, because the way that they built is mostly building farther and farther out into the suburbs. At some point--
Russ Roberts: Sprawl.
Jenny Schuetz: Sprawl. At some point you run into the limit of how far people are willing to drive for their commute, and when you hit that point, then there's demand to go back and start redeveloping in the center. It's not actually clear that--leave Houston aside because of the zoning issue--but for instance, the city of Dallas, is easier to build than the city of San Francisco, but it's harder than it to be. And the city of Dallas it's harder to do redevelopment projects than building subdivisions in the suburbs of Dallas. So, I think the Texas cities are probably 20 years behind where the East Coast and West Coast is, but they're going to have to grapple with this, too.
Russ Roberts: Let's talk a little bit about that change over time. So, over time we've made some zoning, I assume, more restrictive, meaning maybe those minimum setbacks have changed. The heights of the buildings have been more limited. The minimum square footage of a unit maybe has grown. We've banned certain kinds of boarding house and certain types of options. Why do you think that's changed over time? Right? Have we changed our attitudes about what government can do, and therefore when we have this more expansive vision of government, it can be mobilized in this way to protect both existing visual, attractive things as well as the self-interest of the people who already own land there? The bootlegger and baptist phenomenon? So, why has it changed?
You know, I was making fun of the greedy landlord thing, but how do we understand the greedy politician? I mean they wanted to make their constituents happy, before, 30, 40 years ago. Why do you think it's gotten so much more--it appears to have gotten much more restrictive. It's not just, 'Well, it's restrictive and there are certain cities where people want to live and of course that's pushed up rents.' No. There's certain cities where people want to live, yes. But, the ability to move there at a particular rent has gotten much more expensive because the restrictions have grown at the same time as the demand. Why has that happened, do you think?
Jenny Schuetz: So, on the process side, you can think about sort of like the end of World War II until maybe the early 1960s or so as the time when politicians were very growth-minded. So, building more stuff, increased your tax base and you brought in more companies, and that was good. And, most people were just buying their first home, right? So, we had this huge expansion of housing in the suburbs, in new spaces where there were no neighbors to fuss. And so you could just build subdivisions without any complaints because nobody was there to complain.
We had sort of a series of things that happened starting in the 1960s and 1970s--so there was pushback against urban renewal where the Federal Government went into urban neighborhoods, tore down what was there, built a bunch of highways through urban neighborhoods, essentially with no community engagement or planning process.
Russ Roberts: The Robert Moses phenomenon.
Jenny Schuetz: The Robert Moses. But, it happened all over the country and a lot of this was tied to building federal highways through cities. And there was a reaction towards that: 'It's not good for the Federal Government to just take land by eminent domain, kick people out, tear things down, and sort of shove them off wherever they can go.'
Building on that in the 1970s you started to get the environmental movement: 'We should think about the environmental impacts of what we're building and have a process before you start building to think about what the impacts are going to be.'
And, so both the community planning process that came out of urban renewal and the environmental push started to merge together to say, 'Every time we build anything, but especially big projects, the community, however you define that, needs to be consulted. It needs to get a chance to weigh in and to provide feedback to public officials.'
A lot of this came from the idea that poor people and minorities were getting bulldozed in urban renewal: 'We should give them more voice.' But, this movement has been co-opted by rich white people who now have said, 'Well, the community needs to be engaged and the community is us.' And, 'When you ask our opinion, our opinion is: don't build anything and don't change anything.' The community planning process and engagement process has just become the norm. Elected officials everywhere don't want to push back against their constituents.
I don't know how you get people back to realizing that when I buy a piece of property I have some say in what I can do on my property, but I don't have the right to control what my neighbors do with their property. Because once we've sort of made the shift that you should in fact be able to weigh in on your neighbor's property and what they can build, it's very hard to reverse that.
Russ Roberts: Yeah. We talked about the fact that your neighbors can show up at these hearings. In one article I recently read about these issues, a developer said there were over a hundred meetings. So, it's not like two. Just kind of strange.
One of the things that crosses my mind--I don't know what direction it goes--but, America's cities over the last 40 to 50 years have become much more politically liberal. The urban-rural or urban-suburban divide is not just a question of density, it's a question of political preference. Most American cities, I think, have a Democratic mayor--not all, but many. And, it's not that it's a Democrat--I don't think that's what's so important. It's that there's not a lot of competition at the mayoral--by election time. It's going to be a rout. And there are some cities where it's always going to be a Republican, by the way. So, again, it's just that some of them, more[?] headliner cities, have been Democratic, have had Democrats in office for a long, long time.
And, I would think that would reduce, that lack of competition would have an impact on responsiveness. Now, the problem with my claim is that they are responsive. They're responsive to the existing homeowners.
But I think there's also a more complicated dynamic there with, you know, developers, the ones we're talking about. Obviously, competition among developers is good for prices, for buyers of land. And, renters. But, when you have a handful who are good friends with that politician who is going to be there forever, and--there's something going on there that I think is part of the story. I didn't say that very well, but I feel like there's a certain dysfunctionality in an urban governance these days: not, again, Republican/Democrat, but just one party.
Jenny Schuetz: The lack of political competition definitely hurts because parts of the city that want change don't really have a venue to push. And, I think it's not whether it's liberal or democratic or who the mayor is beholden to, but change is scary and change is hard. So, mayors have an easier time getting reelected if they just don't push for too much change, particularly in the cities that are doing well. So, I think there are different dynamics in a Detroit or a Cleveland where the city is sort of struggling to hang on. Although even there, there's fear of change. So, people are worried about anything that's different than what they have.
But, it's not just that there isn't competition between the Democratic and Republican parties when the mayor gets up for reelection. There's often not competition within the party in the primaries. An awful lot of mayors, and even more city councilers, never have an opponent. So, whether they are responsive to people or not, what are you going to do? You can write letters and you can yell, but there isn't somebody to vote against. And, people choose to protest by not showing up to vote. So, when people just disengage from the local political process altogether, it's easier for the incumbents to just keep getting reelected by not doing anything.
Russ Roberts: So, let's talk about what might be done about this. Historically, zoning and land use regulation is the most local issue. But, for the first time there are people at least talking about both statewide and federal intervention. I just want to say, there is a role for shame and culture that we're alluding to in our conversation, that there was a time when people felt, 'It's your house; you can paint it whatever color you want.' And, now it's like, 'It's your house and I should have a say.' And, that that change is going to make a difference, if people feel that way.
But, I'd like to think that listeners to EconTalk might feel a little more guilty showing up at that neighborhood meeting to keep out poor people from the neighborhood. But, that's kind of a distant hope. What kind of interventions are people talking about that might be more immediate?
Jenny Schuetz: Well, as an economist I'd like to think that we can use fiscal tools to change people's behavior. And, some of the homeowner behavior is motivated by financial concerns. So, if you are worried about protecting the value of your property, then you're going to defend that. But, if we change your financial incentives--if we either offer you money to behave in a different way or take away money that you already get if you don't reform your zoning or reform your process, that could be effective. So, I think this is something worth trying. The hard part is figuring out what are the financial levers that either--
Russ Roberts: How do you specify it? How do you do it in a way that actually is going to make things better rather than just net worse?
Jenny Schuetz: Yeah. So, if, you know, I got to design the right intervention, rather than say, 'Rather than set the target for local governments, you need to change your zoning on paper,' but say, 'You need to produce more housing units. And, some of the housing units that you build need to be below the median price that's there now.' Because that's really what we want, is for them to build more housing and build housing that's cheaper than what's currently available. And, those are actual--we could come up with quantitative targets or some sort of range.
Russ Roberts: When you say 'you'--'you need to build,' you don't necessarily mean that the city would build it? You need to change your regulations in a way that would lead to more, right?
Jenny Schuetz: Yes. The city needs to allow private sector developers to build more housing and to build at a wider range of price points. And, the city has to figure out what they need to change in their current systems, because it's not going to be exactly the same thing they need to change in every city.
So, giving them all a quantitative target to hit; and then if they don't hit it, we're going to take away money. States, I think, are in a good position to do this because they do a lot of redistribution across local governments within the state. So, most of them give money to local governments for school systems, which they care about a lot. They give money for roads. They give money for police and fire and emergency services. So, state governments have a bunch of pots of money that they move around, and they could withhold some of that money from local governments that are really being bad actors and not contributing enough housing.
The problem is that to get something like that through a state legislature, you have to get state legislators to vote for it. And, those legislators come from the exclusionary places.
So, California has been trying this, and you can see that the people who sit in Sacramento but come from the exclusionary suburbs are voting exactly the way you would expect them to vote. You know, a governor who really took this on as a signature issue and was willing to put some of their political capital behind it and potentially not get reelected but get something done in the meantime, might be able to push forward. But, this is a heavy lift for the governors.
Russ Roberts: So, I want to mention a really creative idea I read about, an article by Judge Glock of the Cicero Institute, a policy group in the Bay Area. It's a genius idea, on the surface. I don't know if it would actually work. But the idea is that a developer who somehow in San Francisco manages to get a project approved, a building approved in the Bay Area--and, by the way, just from his article, he gives you some examples of how challenging that is in the Bay Area. He says,
A typical example is the Planning Department's East South of Market (East SoMa) neighborhood plan, drafted in 2008. The plan lays out 42 separate "objectives" the city wants to achieve through development in the area, with no ability to rank them in case they conflict, as many clearly do. (Objective 4.8 aims to "Encourage Alternatives to Car Ownership and the Reduction of Private Vehicle Trips," while Objective 4.9 [Russ Roberts: Only one over--] aims to "Facilitate Movement of Automobiles.") The reader's despair only increases when one realizes that each of these objectives also contain numberless policy subheadings exhorting urban planners to fulfill indecipherable goals, such as policy number 8.5.3., demonstrate preservation leadership.
So, the Bay Area is really hard. And, once you get through all of these--you've done your best to comply with the 42 goals and you've gone to all the 83 hearings and it's looking good, you still can lose the vote on the 84th hearing and you're out of luck.
And, what Glock recommends, which is a brilliant idea, in this piece, is that in addition to all these hurdles, there are substantial fees, out-of-pocket fees, for any developer. They are very, very large. They can be millions of dollars, if I remember correctly from the article. His genius idea is, what if we redistributed those to the people in the neighborhood?
Now, San Francisco's really curious. There are other cities like it, but San Francisco is particularly neighborly, neighborhood-y. There's, whatever it was, there's dozens and dozens of little enclaves with their own rules. There's a Bernal Heights, there's the Mission, there's Hayes Valley, which is not a farm area. There's Haight-Ashbury, etc., etc.
So, all these little areas have their own rules. And, to build at any one of them is extremely difficult. But, what if, when you built there, the fees that currently go to the government instead went to the residents as a compensation for the fact that there will be more congestion? So: It's not an unreasonable thing to make it hard to build, but 'Let's give people the incentive to support it, who will then lead to a better city overall, perhaps.' Perhaps.
But, I thought that was an extraordinarily interesting idea that would transform the 'Not In My Back Yard' [NIMBY] to, 'Hey, yeah, in my backyard.' And, the amount of money he was talking about could be, say, $2,000 to a family of four. A politician trying to explain why they're against that is going to have constituents calling, for the first time saying, 'Yes: In my backyard.' So, what do you think of that idea?
Jenny Schuetz: In theory, it could work. I think the structure of how you set it up matters quite a lot. And, we actually have some versions of that that happen now.
So, the Atlantic Yards redevelopment in Brooklyn around where the Nets play involve pretty substantial, essentially, payoffs from the developer to the community. One of the hard parts is sort of defining: Who is the community who gets to negotiate, who is the community you have to pay to?
Russ Roberts: Yeah. Where do the checks go, exactly?
Jenny Schuetz: Where do the checks go? Is it really you're writing a check to everybody who lives in the neighborhood, or is it a contribution to a neighborhood school or a park or something?
This is already part of the negotiation process. The developers are willing to pay to get something done. But, there is--
Russ Roberts: On top of the actual fees that are written into the legislation, yeah.
Jenny Schuetz: Exactly. But, it's contentious figuring out who has the right to negotiate.
So, say that you have a neighborhood of 5,000 residents. Do you have to get a vote of a simple majority of the neighborhood in order for it to go forward? Or, is it the people who show up and yell and protest?
Because, again, the larger the group is, the harder it is for the developer to do not just one-off negotiations, but to get an agreement among the whole group and then make them stick to it.
We wind up--so, in land use we wind up with holdout problems. If the developer has to get 50% of the landowners to vote for something and you've got 49%, that last person is going to ask for an outrageous payout. Right? So, that's why we actually have used eminent domain sometimes before to get around that. I think in theory this could work. You would need to set up a process where you can't have one holdout or a handful of holdouts who push back, and to figure out, sort of: Is the money actually going to go to something that benefits the community?
In some sense the developer writing a check to everybody in the neighborhood is the simplest process.
Russ Roberts: Kind of like it. Yeah.
Jenny Schuetz: I could live with that.
Russ Roberts: I kind of like it. It's like, 'I think somebody should get off this plane because there's a bunch of people that really want to get on the plane. Is there a way that I can convince you?' 'Yes, here's some money, here's a ticket, get off the plane.' 'Thank you.' Everybody's happier.
Of course, there are still externalities. There's still neighborhoods near an airport that takes in[?]. So, I understand it's not straightforward. It's a little bit tricky. And it would have to be structured, obviously, in a particular way to make it work.
Russ Roberts: Do you know anything about the Hudson Yards project, by the way, which is this massive, massive, extraordinary--in a way, exhilarating human achievement? But, I suspect there were some payoffs there that allowed that to happen.
Jenny Schuetz: Well, there were very big subsidies involved. New York is a really interesting example.
Russ Roberts: The opposite. Payments from the government to the developers? Or vice versa?
Jenny Schuetz: Yes.
Russ Roberts: Yeah.
Jenny Schuetz: Payments from the government to the developers to make it happen.
Yeah, New York is an interesting example because the city has a process for developing plan, ULURP, the Uniform Land Use Reform Process, that's incredibly complicated and difficult to work through. But, the state, Empire Development Corporation, can take control of projects if they are big enough and important enough. And, so developers would often try to go around the city process and go to the state, who is more friendly to development. Because Albany doesn't care what gets built in Manhattan--
Russ Roberts: As much.
Jenny Schuetz: So, most of the big projects that have happened in New York have circumvented the city's land use process and gone through the state.
The state has kicked back some subsidies for things that they think will have a good long-term payoff. Atlantic Yards in Brooklyn, Hudson Yards in New York. The proposal actually for the new HQ2 Headquarters, Amazon headquarters in Queens, would have gone through the state process as well before that got nixed altogether.
And, you know, again, I think this goes back to, the state has an incentive to get stuff built because it cares about the regional economic growth and development. The city either has less of an incentive to build or has these sort of local political pressures to make it happen. And, so in some sense removing the problem to a higher level of government that has a larger interest and also has less direct political pressure, I think is one of the ways that we could make some headway on this.
Russ Roberts: So, let's close talking about optimism. You point out in a recent article that this issue is on the burner. People are paying attention to it for really the first time in a while. It's not just about affordable house prices or home ownership. It's about rental rates. Which is surprising, right, the fact that it's getting a little bit of political traction? Do you think anything's going to happen? Do you see encouraging signs? For me, I'm always looking at emergent phenomena like these end-arounds, Airbnb and these co-living creative ideas. You think it's going to change?
Jenny Schuetz: We're talking about it, which is a good first step. You can't change it until you start talking about it.
There are a number of different proposals. For the first time people are actually talking about whether the Federal Government could get engaged, could use some of these financial carrots and sticks. For instance, attaching strings to federal transportation dollars that local governments are going to have to reform their zoning and build more.
The Federal Government doesn't have a ton of these financial carrots and sticks, but it has a really big bully pulpit. So, an Administration or a Congress that really wanted to make this a big deal and talked about this frequently--you know, named and shamed the worst players--and had some financial leverage, I think could help move the needle. There are a handful of states that are really most of the problem, and most of those states are now talking about it at the State House level, so they could make some progress as well.
I think one of the concerning things is that we've got both what I think of as constructive proposals, like, 'Let's not spend federal money building a light rail system in a place that's only single family homes. Let's use our infrastructure dollars wisely.' But, there are also proposals, mostly on the Left at this point, for things that are less constructive, like, 'Let's have national rent control,' or, 'Let's have lots of tenant protections,' which we may or may not be able to enforce and may have the potential actually for hurting vulnerable tenants the most.
Russ Roberts: The thing that really drives me crazy is, people want to subsidize poor people's rents, which is going to drive up the rents for the people who don't qualify for the subsidy, and so on. Yeah. Sorry for interrupting.
I want to close on a different note. I want to say the following. I think you and I see eye to eye. I don't know your work very well. Preparing for this interview, I read as much as I could of what you write. There's not much to disagree with. So, this has been a little bit of a choir singing here. I think it's important to hear that choir just because it's such an important issue. I think it has ramifications way beyond urban development. I think it's an important national question for people now in areas that are struggling economically that can't move to these areas. I think it's a terrible thing that we've made it harder to move and mobility is down in the United States. So I'm really passionate about it.
But, we've gotten up on our moral high ground here and said, yeah, 'All the people who agree with us are awful people. Well, there's a few who think it's okay to live in a beautiful city that doesn't change, but most of them are just self-interested, existing landlords.' Are we missing anything here? Do you think, is there someone who could be sitting listening in on this conversation and saying, 'Boy, these guys are really missing the boat here'? Is there another side to this that I'm missing, that you're missing?
Jenny Schuetz: I think economists have to remember that people are attached to the places they live. So, some of the resistance really is NIMBY-ism [Not In My Back Yard] in the worst way. Some of it--
Russ Roberts: Not In My Backyard.
Jenny Schuetz: Not in my backyard. Some of it is thinly veiled racism and class-ism: 'I don't want poor people living next to me.' Some of it is, at least I think people think that they are arguing for environmentally beneficial policies, although I think they're not.
But, there are a lot of people who just like their neighborhood the way it is, and they don't want it to change. And, that's true for poor people and rich people. That's true for people in cities that are doing well and cities that are declining. Most people, once they get to a place and they've been there for a few years, they don't want things to change.
Denying that makes it harder to have a conversation. So, telling people, 'You have to accept an apartment building next to your house whether you like it or not, and I don't care whether you like it,' doesn't help you win votes.
So, somehow I think we have to have a conversation with people who resist, who maybe don't understand the implications of their personal behavior: You want to stop an apartment building next door to you. That has ramifications for the people who could live there, for the city, for the country, for people who live in another city who can't afford to move here. But, we understand that you don't want things to change overnight. We understand that change is scary. We want to make cities be a place of economic opportunity for everybody without making them unwelcoming and threatening to the people who currently live there.
And that's hard. It's hard to make the change that you need, but to do it at a pace that people are comfortable with. And, I think we don't often have the right language. We can't get people in a room where they leave aside the pretense and talk to one another as human beings, understanding the effects of what they're doing.
Russ Roberts: My guest today has been Jenny Schuetz. Jenny, thanks for being part of EconTalk.
Jenny Schuetz: Thank you.