Historically, a source of American prosperity has been the willingness of workers to move from regions with poor economic prospects to regions with better economic prospects. Think Depression-era Okies fleeing the Dust Bowl to California. Think Jim Crow-era African-American sharecroppers migrating from the rural South to booming Northern industrial centers.
Since the 2008 recession, the rate of inter-state migration has slowed dramatically, observe Kyle F. Herkenoff, Lee E. Ohanian, and Edward C. Prescott in a new paper, “Tarnishing the Golden and Empire States: Land Use Restrictions and the U.S. Economic Slowdown,” published by the National Bureau of Economic Research.
Sluggish geographic labor mobility has coincided with three other trends: a spike in real estate prices in California and New York, an end to the population booms in California and New York, and a slowdown in the convergence in incomes between states. The authors think those trends are intertwined.
“U.S. economic growth has gone hand-in-hand with the regional reallocation of labor and capital,” write the authors. “The pace of resource allocation, however, has slowed. This decline has coincided with lower productivity and output growth, as well as growing home premia in high income states, including California and New York.”
Here is what they think is going on: Land use regulations create housing shortages, which drive up housing prices. Sky-high housing prices price lower-income residents out of the housing market in high-productivity metropolitan regions like San Francisco-San Jose and New York. Despite the superior work opportunities, people leave and people from lower-productivity regions are discouraged from moving in. Millions of Americans remain trapped in lower-productivity labor markets.
Herkenoff et al build an elaborate econometric model designed to gauge the effect of land-use regulations. (The model is way too complex to describe here — I’ll confess, the methodology is beyond my ken.) After running the numbers through their black box, here’s what they conclude:
Reforming land use regulations would generate substantial reallocation of labor and capital across U.S. regions, and would significantly increase investment, output, productivity, and welfare. The results indicate that too few people are located in the highly productive states of California and New York. In particular, we find that deregulating just California and New York back to their 1980 land-use regulation levels would raise aggregate productivity by as much as 7 percent and consumption by as much as 5 percent.
Deregulating all U.S. regions would raise labor productivity by 10% and consumption by 9%.
Under various deregulation scenarios, the authors noted that the “Mid-Atlantic” region, which includes Virginia, would, with California and New York, see the greatest population gains.
Bacon’s bottom line: This is an important paper. I firmly believe that the links described by Herkenoff et al are real — land use regulations restrict the housing supply, which drives up housing prices, which hinders geographic mobility, which hurts productivity gains and economic growth.
These linkages shed light on a two ongoing debates about American society.
Slowing rate of economic growth. Economic growth in the Obama business cycle was the slowest in the post-World War II era. The debate over the reasons for the slowdown has almost totally ignored the land use-housing shortage-migration connection. Economists look for national reasons — aging workforce, dearth of breakthrough technologies — to explain national economic phenomena such as national economic growth. Land use is a local phenomena, so it tends to be overlooked. If Herkenoff et al are right, it will be difficult for the U.S. economy to resume a 3% to 4% annual growth rate, no matter how Congress reforms taxes and the Trump administration prunes national-level regulations. (I’m not defending the status quo in taxes and regulation, just acknowledging that they address only a part of what ails the economy.)
Income inequality. The debate over income inequality in the U.S. has largely overlooked the malign effects of land use regulation. Insofar as incomes have become more unequal in the U.S. in recent decades — I think the extent has been exaggerated, but that’s another debate for another time — the slowdown in the migration of Americans from low-productivity (and low paying) regions to high-productivity (and high paying) regions has played a major role.
Land use is the most overlooked and least understood driver of the American economy. The influence of land use upon the economy is even more pervasive and complex than described in the Herkenoff et al econometric model. But their article is a good place to start the discussion.