How Zoning Laws Exacerbate Inequality

As urban cores become more populated, the need for more buildings—more housing, more offices, more everything—increases. In many cities, it’s not so easy to simply increase construction, thanks to zoning codes that regulate how high buildings can be, whether land can be used as commercial space, and what types of properties can be erected where.

But these laws aren’t only a nuisance to developers, they’re also making inequality worse. That’s the argument of the economist and chairman of the Council of Economic Advisers Jason Furman, which he made during a recent speech at an event hosted by the Urban Institute and CoreLogic.

In order to calculate the impact of land-use restrictions on the final price of housing, researchers compare the sale price of a structure with the actual cost of constructing it (which includes labor and material). The difference between the two is what a buyer is paying for the land, and that cost is higher in places where laws governing land use and zoning are stricter. The growing gap between what land would cost if there were no regulations inhibiting development within a city, and what it costs in reality is an example of an economic rent, a premium that is paid due to an item’s scarcity, rather than because the item has actually increased in quality or productivity. Though the amount of land in any city is of course fixed, if developers can build as high as they’d like, or wherever free land is available, space would seem somewhat less scarce. But zoning regulations help create artificial scarcity, and the price of land skyrockets as a result.

According to Furman, the growth of economic rents extracted due to of land-use regulations has been significant. In the 1990s final sale prices were on average about 33 percent higher than construction costs. By 2013, that gap had grown to 56 percent. Which means that across the country, Americans are paying more and more for essentially the same plots of land.

Policies that regulate the way land is used differ largely across the country, and they aren’t inherently bad. They can be used to preserve historic areas or to delineate between retail districts and residential ones. But they can also be used as tools of exclusion, and that may in some ways be by design, Furman says. He suggests that the racial unrest, rioting, and property damage that occurred in the 1960s, which lead to white flight, also lead to stricter zoning laws, meant to kept new buildings and new tenants out and make some neighborhoods more exclusive, by restricting the land available for development and pushing the price of that land higher.

And if that was the intent, the laws have succeeded.

That’s dangerous for America’s economy. The high price of housing can prevent Americans from moving to cities where jobs are plentiful, but home prices are high—thus limiting mobility and productivity. And restrictive zoning can also hinder intergenerational mobility, by preventing parents from moving their kids to better neighborhoods with less crime, better school districts, and more opportunities—a choice that has been shown time and again to improve outcomes for children.

Furman isn’t alone in his belief that the growing prevalence of economic rents are one of the root causes of inequality today. The economist Joseph Stiglitz goes into great detail in his latest book about how the phenomenon is worsening the divide between the haves and have nots.

But solving the problem won't be easy. “Rent seeking behavior is often framed as serving some meritorious purpose, complicating the community’s ability to determine whether a particular proposed regulation is merited or misguided,” Furman writes. That often means that changing zoning laws or other supply-constricting regulations is in the hands of those who stand to collect on those economic rents in the first place, which can make change slow and difficult, if it happens at all.

In the meantime, cities just keep getting more crowded and less affordable.