Mandated Waste and Exclusionary Zoning: Politics vs. Markets
It was back in the early 80s that I gave a talk to conference entitled “Mandated Waste.” The purpose was to expose how exclusionary zoning regulations were meant to force people to waste resources in the name of some higher good.
If someone wanted to buy a small house on 2 acres but was forced, by legal regulations, to buy a large house on 10 acres, than all the difference between the two is waste as far as the values of the buyer goes. I said:
Waste will mean the use of any resource, in any amount, forced on the user. If, for instance, a consumer wants to buy a Volkswagon Rabbit but is forced to purchase a Cadillac instead, the difference qualifies as waste. This definition is subjective in that the intentions of the buyer or consumer are the determining factors, but it is objective in that it defines waste as the use of resources, which under normal — that is free-market — conditions would not be used.
In this paper I will evaluate the political process of resource allocation, focusing on land and housing resources. I will briefly discuss zoning and rent control. My main thesis is that local governments encourage the waste of scarce resources, while the market process encourages conservation of these same resources. Housing is necessary — that isn’t denied. Local governments, however, have so disrupted the housing market that we are in the midst of a housing crisis. Much of this is the result of mandated waste.
What I didn’t know at the time was a similar topic was suggested to David Rockefeller as his Ph.D. dissertation in economics by F.A. Hayek when Rockefeller was studying at the London School of Economics. In his preface Rockefeller made this quite explicit: “I must express my tanks to Professor Friedrich A. von Hayek, of the London School of Economics, who suggested to me this topic. It was also under his guidance that I began work on this study.” Mr. Rockefeller titles his dissertation Unused Resources and Economic Waste. Prof. Mario Rizzo discussed the dissertation and said:
So what is waste? This is the unrealized net value that could be attained but is not. In the above examples, entrepreneurs do the best they can, so practically speaking, there is no waste. But waste can be engendered by monopoly, legal restraints, political barriers and so forth. Therefore, waste may occur at different levels of analysis and of constraints. What is not waste from the perspective of the firm — say the monopolist producing less than “ideal” output and hence using a smaller physical plant which does not produce at the lowest possible cost for that output — may yet be waste from the perspective of society. Waste “can only have meaning in connection with environmental conditions which are subject to change by means of conscious human action” (p.226). Waste is the foregoing of value due to a failure to act. Overcoming waste involves changing the current constraints.
I argue that any time a consumer is forced to spend more than they wanted they are indulging in waste according to their values. When there is wholesale regulatory manipulation of markets the net result can be widespread waste imposed on a large number of people to the exclusionary benefit of a minority.
Often the regulatory states acts in precisely this manner—it redistributes benefits from the lower income masses to an upper-income, politically-connected class. In 2018 I wrote a piece here on Democrats and Depoliticizing Markets, arguing that on numerous issues the Democrats were actually the ones pushing for deregulation while Republicans and conservatives were trying to protect artificially high housing prices—prices that benefit the owners but harm eveyone else.
Now the Biden White House has released a short piece: Exclusionary Zoning: Its Effect on Racial Discrimination in the Housing Market. It has been well documented how the regulatory state manipulated laws regarding housing to segregate neighborhoods even where markets had produced integration. Government at all levels rigged markets to force racial separation even when contrary to the good the consumers themselves. (For a detailed discussion see Richard Rothstein’s, The Color of Law: A Forgotten History of How Our Government Segregated America.)
In the White House article they note:
One area that is particularly important for economic well-being and wealth accumulation is housing. Families who can purchase their own home in the neighborhood of their choice at a fair price and see the value of their home grow over time do better economically in the long run. But numerous policies have systemically discriminated against Black families who wish to pursue that path. This blog focuses on one of these policies: exclusionary zoning laws, which have played a role in causing racial disparities in the housing market.
They also argue:
Exclusionary zoning laws enact barriers to entry that constrain housing supply, which, all else equal, translate into an equilibrium with more expensive housing and fewer homes being built. Consistent with theory, the empirical literature finds a relationship between restrictive land use regulations and higher housing prices.For example, a study in 2005 finds that prices of Manhattan condominiums are 50 percent higher than they would be without zoning restrictions.
As a market-oriented libertarian I have to agree. In fact, I will note that libertarians were arguing precisely this half a century ago, long before Democrats discovered the issue. In the 70s I read Prof. Bernard Siegen’s work, Land Use Without Zoning which argued rational land use could be found without the regulatory state mandating waste or exclusionary zoning. Now we have the Biden White House saying things libertarians were arguing for half a century ago. When Siegen was nominated to the 9th Circuit Court of Appeals the “liberals” the day scuttled the nomination largely because of his defense of property rights.
The reality is land use regulations have often purposfully been used to drive up the value of the existing housing stock—which tends to benefit middle-class and upper-income property owners, while pricing lower income individuals out of the markets. That has a disproportionately negative impact on Black Americans. I have long felt that the regulatory system is one that is meant to benefit a small number of individuals privileged enough to have clout with the political manipulators. The regulatory agencies are frequently take over by the very industries they are meant to “regulate” who then pass regulations that benefit the big players in the field at the expense of newcomers and competitors.
In the housing market we have had both types of systems used. In cases laws were explicitly passed to drive lower-income buyers away while in other cases the regulations were justified for other reasons, but still had the same exclusionary impact.
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