Why don’t we have boomtowns anymore?

This is a guest post from reader Brendon Harré. It was originally posted on his Medium blog.

California attracted tens of thousands of gold prospectors during the Gold Rush of 1849. San Francisco’s population quadrupled in size as a result – and the state continued to grow rapidly for almost a century. New Zealand shares a similar ‘boomtown’ history, with rapid growth in the late 1800s and middle of the 20th century. So why did this trend stop?

Querying the demise of Boomtowns is an unusual way to advocate for affordable housing reforms, but it is a surprisingly useful way of analysing the global housing crisis. The New York Times has written an article about the disappearance of Boomtown America. It was largely based on the work of David Schleicher, a Professor of Law at Yale Law School, who writes about the regulatory impediments to mobility in the United States. A section of David’s report focuses on land-use restrictions which I have republished as the main bulk of this article.

The problem Schleicher highlights is that the cities with the highest incomes are no longer attractive to low and middle income people because the gains of moving to the city are lost in high housing costs. This being a change from the past and has lowered economic growth, productivity and widened inequality.

These tightening land-use restrictions from the 1970s to 1990s can be seen in the following graph depicting Los Angeles zoning capacity. New Zealand cities, such as Auckland, have similarly tightened land use restrictions. The recent increase in zoned capacity from Auckland’s Unitary Plan, like Los Angeles is inadequate when compared to expected population growth (see my article on Downsizing Auckland’s Unitary Plan).

This restrictive regulatory system as David explains systemically advantages existing residents and makes it difficult for low and middle income earners to successfully enter city markets. This labour market barrier to entry has serious implications, Auckland for instance is no longer attractive to new teachers, due in large part to the high cost of housing. How long can a city last if it cannot attract essential workers like teachers?

The inability of prosperous metropolitan areas to inclusively share opportunity and wealth with new residents can be seen in the following graph.

Schleicher lays out the causes of this change in an article entitled Stuck! The Law and Economics of Residential Stability (in Yale Law Journal, Vol. 127). Here’s an excerpt from the article:

Of limits on mobility, the best understood in the legal and economic literatures are land-use regulations. Before the 1970s, land-use restrictions (zoning laws, subdivision regulations, historic preservation, and so on) limited access to some towns or communities, usually rich suburbs. They did not, however, cap housing construction in entire metropolitan regions. Builders could always construct new housing, either in downtowns or on the urban fringe.

Something dramatic happened to land-use regulation in the 1970s and 1980s: it became much, much stricter. Importantly, while this phenomenon affected all types of municipalities — from urban downtowns to inner-ring suburbs to exurbs — it only occurred in particular regions of the country. In particular, coastal metropolitan regions like San Francisco, New York, and Boston restricted construction in cities, suburbs, and exurbs. Because these popular regions restricted new housing, demand for living space outpaced supply. Housing prices soared, but population growth did not.

In contrast to these coastal regions, Southern and Southwestern metropolitan areas like Houston, Phoenix, and Atlanta continued to impose minimal land-use restrictions. Though demand to live in these regions grew as well, this demand led to increased housing construction and population, rather than substantially higher housing prices.

Because the most restrictive regions tend to be the nation’s richest, their lethargic population growth has reduced levels of wealth in the United States as a whole. As previously described, Hsieh and Moretti estimate that GDP would be 8.9% higher if land-use restrictions were reduced in three restrictive regions: Silicon Valley, San Francisco, and New York. And once again, because barriers to mobility reduce the capture of information spillovers, land-use restrictions may indirectly impede growth as well.

Land-use restrictions also contribute to economic inequality. Because these restrictions raise the cost of housing, they disproportionately prevent poor and working-class people from taking advantage of high-wage job markets. Housing costs eat up a larger percentage of a poor person’s paycheck than that of a wealthy person. Thus, even in a city that can provide marginally higher wages, low-income persons simply may not be able to afford the cost of living in rich, land-use-restricted areas. While nominal incomes for janitors in New York are much higher than in poor states in the Deep South, real incomes, factoring in housing costs, are lower. As a result, restrictive land-use rules have meant that poor and middle-class people have little incentive to move to places where higher incomes are available. Therefore, these restrictions reduce labor income at the bottom of the income distribution. As Jason Furman, former Chair of the Council of Economic Advisers, notes, land-use restrictions “can increase inequality by reducing one of the channels through which workers get a raise, specifically moving from job to job.”

This is no small effect. Thomas Piketty famously argued that increasing returns to capital relative to economic growth are a major driver of economic inequality. But Matthew Rognile and others have found that nearly all of the increased returns to capital in Piketty’s work came from housing capital: “The long-term increase in capital’s net share of income in large developed countries has consisted entirely of housing.” This is a stark and important finding: Piketty’s result about capital is almost exclusively about real estate. Why? The most important reason is land-use restrictions.

Today’s rentiers have something in common with the classic rentiers of old — they are landowners, but instead of deriving income from owning arable soil that can produce income when farmed, they own access to valuable labor markets, which increases either their own income or produces rental income. Today’s rentiers then use zoning to ensure, and increase through monopolization, the value of their rents.

These restrictions create income disparities not only between individuals, but also between states and regions. As discussed above, Ganong and Shoag have shown that from 1870 to 1970, states’ per-capita GDPs were converging. People would leave poor states like Mississippi to move to richer ones like Connecticut. But starting in the 1970s, the combined effect of land-use restrictions in many of the richest metropolitan areas stopped that convergence in its tracks. Though doctors, lawyers, and other high-skilled individuals who could afford the higher housing costs could still move to capture higher wages in richer, restrictive states, less-skilled workers could not. Notably, although the GDP gap between richer and poorer states is now static, convergence continues to this day within the set of states with less-restrictive land-use regulations.

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