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.

Below is an abbreviated transcript of our conversation. You
can read our full discussion here. You can also subscribe to my podcast on iTunes or Stitcher, or download the podcast on Ricochet.

You suggest that housing
scarcity is a fairly recent issue. Why did it start to become a problem if it
wasn’t earlier in the last century?

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 them. That
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.

It was always the case that places like New York were more
expensive. But the gap in housing prices relative to the gaps in income have
really taken off. The price differential relative to the wage gains has really
exploded.

These
high-productivity cities always seem to be the ones with the skyrocketing
housing costs. Is this basically just a problem within those few cities, or
does it have a broader impact across America?

A lot of my work points to the macroeconomic consequences of
what seems like a pretty local issue. There was a way that land use was handled
across the country starting in the 70s and 80s that allowed coordination of
regulatory regimes at a much broader level. That generated 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.

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? So what are these policies that
we should reform?

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.

On the Democratic
side of the debate, one solution that often comes up for solving this problem
is national rent control. Do you think that would be effective?

I think that’s unlikely to help the situation. The problem
here is supply. 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.

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? 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 there’s a big loss to keeping people out of
these high-wage places. It used to be the case in America that there were two
ways you could dramatically improve your fortunes if you were 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. We’ve 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.

The second thing is that there are structural issues we’ve
unleashed in the last two centuries that make this problem more likely to occur
as places grow. We’ve enabled this level of regional control, and this ability
to block development at that level, which means that, as new places become hubs
for innovation, we may face these problems again.

It is, at the local level, a formidable thing to come to someone and say, “We want to build more in your neighborhood.” But hopefully if we can change peoples’ perspective to think about this as more of a macro-issue, we can have a more intelligent conversation.

The post 5 questions for Daniel Shoag on how to combat skyrocketing housing prices appeared first on American Enterprise Institute – AEI.