Upzoning?

A favorite target of mine in the progressive blogosphere is Matthew Yglesias, an economics writer for Slate (a pandering “online magazine” holdout from the dawn of time).  Mr. Yglesias has no economics training, so I don’t understand how he can be an economics journalist, but leave it to poorly thought out editing to allow this nonsense.  It’s like asking a non-doctor to provide medical recommendations… like going to a chiropractor.  Anyway…

I found this: http://www.slate.com/blogs/moneybox/2013/10/23/how_to_fix_everything.html.

Mr. Yglesias’ five points to fix everything, and buried among the rubble is point three:

“Step three—upzone everywhere: I’ve been tedious on this subject, but you know the gospel. Raise the real wages of people currently residing in high-cost metro areas by reducing housing costs. Raise the real wages of people currently not living in high-cost metro areas by expanding access to the higher nominal wages in expensive cities. Raise real wages even more by allowing everyone to take advantage of the agglomeration externalities and gains from trade (through larger market size and greater specialization) associated with greater density. Also note that if everyplace upzones, the actual impact on the vast majority of specific places will be modest. It’s a large quantity of marginal changes that will make a huge difference.”

In a couple of his points, Mr. Yglesias was close to having small insights of brilliance.  Step three, which I believe is one of the foundations of his new book about rents (although I haven’t read it, and I won’t, so I could be wrong), is full of nice buzz words from spatial economics.  It’s also full of nonsense.  Sure, spending power goes up if rents fall.  Rent controls in large cities are designed to prevent evictions based on resident’s inabilities to pay.  I don’t believe he is necessarily advocating rent control here, but he doesn’t say what the plan is, only that rents should be kept down.  Rent control also lowers returns to investment, suppressing capitalization rates and reducing landlords’ incentives to maintain buildings.  That’s why, for many years, NYC was one giant slum in any rent controlled area.

By upzoning, I can only assume he means to require everything to be higher density (its a weird term, and like I said, I don’t want to read the book to find out the details).  Great, there is a real world example of how upzoning is going: California.  Where the green lobby has made it so expensive to build single family dwellings in new developments, that everybody is forced to build condos and apartments.  Rents there have skyrocketed, land cost has skyrocketed, and poor people are relegated to small, shitty, run-down, multifamily houses in dilapidated neighborhoods while those who work in the tech industry (N. California) pay $1,500 – $2,500 per month for decent one or two bedroom apartments.  Sounds great.  More importantly though, upzoning everywhere makes zero economic sense.  You don’t attract the “externalities to agglomerations” just by making people build high density.  You might end up with lots of little high density pockets in the middle of nowhere.  In fact, there is a great deal of debate about what really attracts agglomeration benefits: jobs or people?  The chicken or the egg?  Planners will just make larger apartments further away, or people will just move further away to have houses, so that the suburbs become the ex-urbs, which become rural developments.  You’ll end up with the same problem: the wealthy will have their houses further out, will move their offices closer to them, and leave the cities to rot, i.e. Detroit.  So really, you could end up creating even greater disagglomeration of productivity.  Additionally, as more productivity is attracted to an area because of the “externalities to agglomeration,” rents will naturally be higher as amenities increase.  In the end, you would be back to the same problem in different neighborhoods.

Finally, lets assume that his plan works and all these marginal changes put small amounts of money back into each person’s pocket – say $50 per month – that will then get spent on consumption according to the person’s propensity to consume.  I assume Mr. Yglesias thinks this will boost the economy and make everyone’s lives better.  On the other hand, for each $50 saved in rent, some landowner is getting $50 less.  Which means their consumption, and more importantly, investments in future developments, will decrease according to their propensity to save.  What you have added on one end has been removed on the other.  With less incentive to invest in property development, fewer apartments would end up on the rental market – eventually driving rents back up as population increased.  Voila, you’re back at the same problem

The solution?  As I will do ninety-nine percent of the time, I will advocate market allocation of resources.  It may not have equitable outcomes under all circumstances, but it ascribes to people the lifestyle commensurate with their productivity.  I don’t know of any better solutions we have yet seen work the way planners intend, but if anybody does know of an example, I want to hear of it.

Some of Mr. Yglesias’ points are interesting, others are just silly crap, attempting to wax incorrect economics over populist policy options, and Mr. Yglesias is nothing if not a populist.