Zoning Reform Backfires
Over at Reason, Christian Britschgi writes about how federal money meant to encourage zoning reform ended up in the hands of those who want to further restrict housing construction.
If you want a recap of why land and zoning deregulation is one of the most important policy matters that no one cares about, read Bryan Caplan on this issue and watch this. As Caplan notes, “we’re talking trillions of dollars of annual gain, implying an astronomical present value” that would materialize from even just modest housing deregulation (and immigration liberalization). Housing deregulation would increase the supply of housing, which in turn would lower the cost of housing, and allow workers in low-productivity regions to move to higher-productivity regions.
One idea that has been offered by my colleagues at the Mercatus Center, but also by other scholars, is to use federal funding to incentivize states to loosen zoning rules. The Biden administration tried to do something similar with grants to state transportation departments and port authorities:
The White House made a big splash in May 2022 when it announced that its Housing Supply Action plan would use competitive transportation grant programs to reward jurisdictions that remove regulatory barriers to new housing construction.
The $1.2 trillion Infrastructure Investment and Jobs Act, enacted in November 2021, also dramatically boosted funding for these grant programs—giving the feds a lot more carrots with which to reward governments for removing red tape on new development.
However, in practice it didn’t work all that well. Britschgi explains:
But as the grant awards from these retooled transportation grant programs trickle out, there’s little evidence the money is going to reformist jurisdictions.
Late last week, the U.S. Department of Transportation announced the recipients of $1.5 billion in grants from the Infrastructure for Rebuilding America (INFRA) program—one of five grant programs the administration said would be used to encourage zoning reforms.
Of the 26 INFRA grant awards this cycle, 19 are going to state transportation departments or port authorities that don’t set zoning regulations or issue residential building permits. These bureaucracies can’t be incentivized to change regulations they don’t have any power over in the first place.
I can’t say that I am surprised.
Before I explain why, I want to offer two caveats. I totally get why this idea is appealing—it’s not as if we have been very effective at convincing politicians to put an end to most zoning rules the old fashioned way- despite some bipartisan support from scholars—and I also don’t have any idea if there are other instances outside of the ones mentioned in the piece where this approach has worked.
That said, there is always a danger in using government funding—in addition to the money spent—to create incentives to deregulate rather than press for deregulation directly. That’s in part because the incentives within government are rarely the ones that appear on paper.
Obviously, public choice economics has a lot to say about this. Unlike in the marketplace, the incentives for government officials to manage public funds prudently are very weak, not least because personal accountability for bad decisions or misspent money is almost nonexistent. In addition, the pressures are intense on government officials to reward both their friends and special interests. After all, it’s not their money.
To be fair to scholars who suggested using government to create incentives for zoning reforms in the first place, they are explicit about the fact that the grant program must be specifically designed to achieve zoning reforms. The Biden grants were set to incentivize zoning reform- alongside many other goals. Unfortunately, the “if only we could get the right design, it would work” assertion is omitting the reasons why it is unlikely for the government to produce and to stick to the necessary design for this plan to succeed. In other words, there is a reason why the grants weren’t designed simply to encourage a loosening of zoning rules. That’s the same reason why bills meant to reduce inflation or at keeping the government from being shut down are always loaded with pork barrel projects. Incentives to add all that junk are powerful.
The same is true in many other areas. For instance, the literature of austerity tells us exactly what a government should do when it wants to reduce its debt-to-GDP ratio. The legislature must adopt a fiscal adjustment package that is mostly based on spending cuts – including cuts to entitlements – rather than tax increases. However, researchers have shown that 80 percent of the fiscal adjustment packages that are adopted are based on tax increases or the so-called balanced approach (which in practice means that taxes are raised, and spending doesn’t get cut). That’s because the special interests that help to fuel the fiscal problems in the first place still exert influence on legislators and stop them from cutting spending.
Now, it’s not as if I have great ideas about how to get zoning reforms pronto, except to continue fighting the battle of ideas and trying to convince the American people – who could eventually put pressure on those who rule us. This is what has happened in some states with occupational licensing, Certificates of Needs restrictions, and school-choice reforms. Hope springs eternal…
Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators.