March 31, 2015

Inequality and housing

By Ethan W. Blevins Attorney

A new economic theory indicates that land use restrictions have worsened wealth inequality. Normally, we shouldn’t fret too much over wealth inequality from natural market forces. After all, free exchanges of goods and services between consenting adults are just, even if the resulting distribution is unequal. Moreover, free markets tend to improve quality of life for everyone, even if some benefit more than others. But when bad government policy causes inequality, we should worry.

Economist Mathew Rognlie has published a paper indicating that regulations widen the gap between rich and poor. The paper challenges a popular theory proposed by Thomas Piketty in his book, “Capital in the Twenty-First Century.” Piketty argues that capitalism cannot survive without wealth redistribution because it inevitably leads to inequality that destabilizes society. In his analysis, the rich sit atop ever-growing mountains of returns on investment even as economic growth slows. The result–inequality ad infinitum. Piketty concludes by proposing a global tax to redistribute the goodies.

The Progressive left has fawned over the book like Cookie Monster with the letter C. Many agree that the book is a major contribution to economic literature. Nevertheless, notable economists of all stripes have questioned his analysis.

Mathew Rognlie’s recent response to Piketty offers an intriguing alternative view. He doesn’t deny that increases in capital investment and inequality are unrelated. Rognlie argues, however, that this trend stems from the increased cost of housing, not the return on non-housing investments.

If housing prices have deepened inequality, less government intervention would fix the problem, not more. As Rognlie notes, “many urban economists . . . have documented how restrictions on land use and residential construction inflate the cost of housing.”

Examples of how land use laws hike up housing costs abound. Zoning laws that limit residential construction create scarcity that drives up housing prices. Complicated and expensive permitting schemes increase costs for developers, which pass on to consumers. Federal environmental laws like the Clean Water Act can often impose expenses on ordinary Americans so severe that anyone with an income outside the top tax bracket may have to abandon plans to build their dream home. If government ceased to fiddle with market forces, prices would fall to a level where a much broader segment of society could afford good homes.

PLF has stood at the forefront of the struggle against laws that increase housing costs and hurt everyday people. Among other things, we’ve fought massive critical habitat designations that allow the feds to rope off private property, unfair zoning laws that stop multi-family housing development, and tenant relocation laws that exact huge ransoms from homeowners. When regulation restricts liberty, hurts the economy, and causes unjust inequality, it’s worth the fight.

What to read next