Over the holidays, I read William Fischel’s new book, Zoning Rules! It’s an important text for anybody seeking to understand why zoning (and urban planning in general) was invented and proliferated, and how they influence the shape of our cities and societies.
In the first part of my review, I examined Fischel’s analysis of the origins of zoning. In short, it was the homeowners who dunnit: their demands for restrictions on land use led local governments to put them in place. This is an inconvenient truth for critics of planning, as it suggests that there will be ongoing, bottom-up pressure to reverse any liberalisation of controls.
This week, I want to look at Fischel’s analysis of the economic efficiency of zoning. It’s well thought out and a bit counterintuitive.
Fischel focuses mainly on “exclusionary zoning”, which refers to policies like minimum lot sizes or minimum dwelling sizes. These policies implicitly require people to have a certain minimum amount of income or wealth to live in a suburb or neighbourhood, as land is often expensive.
A local example is Auckland’s single house zone, which requires a minimum lot size of 600m2. If you want to know why house prices in much of the isthmus start at upwards of $1 million, it’s because you’ve got to buy lots of expensive land to get a house there.
Exclusionary zoning is a hard case to defend, because it is often predicated on keeping “the wrong types of people” out of a place. This can have serious negative consequences across multiple geographic scales:
Zoning is not simply retarding the mobility of the poor from central city to suburbs. According to an important study by Peter Ganong and Daniel Shoag (2013), land use regulation is retarding the mobility of low-income people within the entire nation… [They] show that rising house prices have substantially reduced America’s intranational tradition of moving to opportunity. Like some other researchers, they have found that high housing prices repel potential workers from regions (Raven Saks 2008; Young, Varner, and Massey 2008) and that this pattern is strongly associated with land use regulation (Gyourko, Mayer, and Sinai 2013). [Zoning Rules!, pp. 164-165]
Notwithstanding these issues, Fischel lays out the argument in favour of exclusionary zoning. At least in the US, minimum lot sizes interact with local property taxes (and local expenditures) and with the large number of local governments in the US. In this context, they can play a role in managing fiscal burdens on local governments, albeit with an economic cost.
Fischel begins by observing that local property taxation in the US funds a range of services and local public goods. This includes some things that are locally-provided in NZ, such as transport, parks, and libraries, as well as many services that are provided by central government in NZ. For example, local property taxes provide the overwhelming majority of funding for primary and secondary schools in the US – education consumes around 36% of local government budgets. Police and fire departments are also funded locally, and some local governments run their own welfare systems, provide water and power, etc, etc.
Many of these things can be thought of as “common-pool” goods. If overconsumed, they become rivalrous – i.e. one person’s enjoyment of them reduces someone else’s ability to enjoy them. However, they’re difficult to exclude people from at the point of consumption. (Although certainly not impossible, as toll roads and congestion pricing schemes show.)
In this context, exclusionary zoning can be used to regulate access to common-pool resources – or, at least, to ensure that new entrants to the community have sufficient financial means to pay for their share. As the logic goes, if you have enough money to buy 600m2 of land, you also have enough money to pay sufficient property taxes to put your children through school. This can be described as “fiscal zoning”:
What the present chapter has argued is that the community itself – its elected and appointed officials, more or less responding to established residents – actively shapes and manages the property tax system in a way that would be difficult to do with any other tax base. Local land use regulation constrains the wholesale tax-avoidance behaviour that bedevils most other potential tax bases. Supplemented by revenues from impact fees and negotiated exactions from developers, fiscal zoning makes most development pay its own way. [Zoning Rules!, pp 160-161]
Of course, a key assumption that Fischel is making is that residents have choices about where to live, both at a national level and within individual urban regions. (Or, in economese, there is Tiebout competition between local governments.) This seems like a plausible assumption in the US, where there is a very large number of local governments – perhaps 85,000 in total. For example, here’s a map showing the fragmentation of local government in Massachusetts, which has 50% more inhabitants than New Zealand but roughly four times as many local governments.
In principle, choice between different local governments that offer different planning rules, taxes, and public services should ensure that everyone has a place to go – regardless of exclusionary policies in any one town. Consequently, Fischel takes a moderate view on the good or evil of individual policies. When commenting on Houston (which lacks comprehensive zoning) and Portland (which combines an urban growth boundary with policies to enable infill and intensification), he concludes that:
It is difficult to be too censorious about either city in a nation where most adults have some choice about where to live. [Zoning Rules!, p. 312]
That being said, Tiebout competition seems to work in principle but not in practice. As I discussed last week, bottom-up demands for restrictive planning rules are widely distributed – every community has its share of loud homeowners who will argue in favour of preventing change. Consequently, tight land use restrictions also seem to have proliferated widely. The exceptions, in the US, are places with relatively undemocratic local governments that do not have to respond to the demands of voters:
The South is different from both the North and the West. The South lacks the fragmented local governments that characterize the North, and it uses the voted initiative sparingly and hardly at all on land use matters [unlike the West]… If the demand for zoning is an expression of popular control, why has the South refrained from developing similar mechanisms by breaking up counties into more autonomous municipalities and enabling the voter initiative for land use measures? The answer is the legacy of slavery and racial segregation… [which] undermined the creation of local institutions… [Zoning Rules!, p. 315]
To conclude, it’s worth considering whether Fischel’s arguments about the efficiency of exclusionary zoning apply in New Zealand. In my view, they do not:
- Unlike the US, New Zealand has a small and decreasing number of local governments – 78 in total. Consolidation of borough councils in 1989 and the creation of the unitary Auckland Council in 2010 are likely to have reduced competition between local governments. This is in some respects positive, as it prevents small councils from simply assuming that their neighbours will house the people they don’t want, but it may also imply an increasing need to restrict local governments from pursuing exclusionary planning rules to prevent them from exercising their monopoly powers.
- Unlike the US, local governments have much more limited fiscal powers and responsibilities. Crucially, they do not have to fund schools, which are an important common pool resource that is funded locally in the US. As a result, there is no good reason to regulate to keep people out of individual school districts – I’m looking at you, Grammar Zone – as those schools are funded by everyone’s taxes, not just local property taxes.
Consequently, the case for exclusionary zoning to “keep the wrong people out” is likely to be especially weak in New Zealand. That doesn’t mean there’s no case for urban planning at all – after all, other types of rules are often aimed at managing real nuisances and spillovers associated with development.
What do you make of the arguments for and against exclusionary zoning?