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Business as Usual or Revolution?

Free Markets

Liberals want to bring about a range of progressive goals for the poor and underprivileged, while Republican Tea Party types argue that, rather than trying to carve out larger slices of the pie for these groups, we would all be much better off relying on free markets to make the pie bigger for everyone. I want to suggest, provocatively, that both liberals and Tea Party enthusiasts are just paying lip service to their respective beliefs, and that given a concrete opportunity to achieve their goals, both groups would back off from the revolutionary changes that would be needed.

For the sake of brevity let’s restrict the argument to real estate. A truly free market in land i.e. one based exclusively on voluntary transactions, with no artificial restrictions in supply or demand, would go a long way to lowering the cost of housing. However, this would entail privatizing all the land owned by the U.S. government (another homestead act?), which currently represents 30 percent of the land area in the United States. In California the federal government owns almost 50 percent of the land.

A truly free market in housing would also eliminate government mandated zoning which protects the ‘haves’ at the expense of the ‘have-nots’. Here in San Francisco, the planners have decided to protect the ‘haves’ by the cessation of building, ensuring higher property values for existing homeowners and higher prices for everyone else. It’s a similar situation nationwide where there’s no shortage of affordable housing, just skyrocketing land costs because of zoning and land use restrictions. In Snob Zones, journalist Lisa Prevost describes the outrageous lengths to which town leaders and affluent residents will go to prohibit housing that might attract the “wrong” sort of people.

A truly free market would also dispense with federal or state mandated environmental impact laws which increase the costs of permits and utility hookups and impose fees for park, wetland and transportation mitigation expenses, all of which contribute to increasing the price of homes. Furthermore, a truly free market in real estate would also reject inclusionary zoning ordinances which mandate that developers sell a certain percentage of the homes they build at below-market prices to make them affordable to people with lower incomes. These ordinances typically add more than $100,000 to the price of the average home in the Bay Area, but subsequently prices have been found to rise again, as fewer homes are built because developers tend to abandon cities that impose such mandates.

Such radical measures would substantially increase the country’s supply of affordable housing but, does anyone imagine that, for example, wealthy and liberal Bay Area residents would voluntarily agree to abolish restrictive zoning and welcome affordable, multi-family dwellings into their neighborhoods? Similarly, does anyone imagine that members of the Tea-Party would support the sale of all federal lands, including military bases? Truly free markets work, but they are a revolutionary idea whose time has not yet come.

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 “After accounting for inflation, regulations are associated with a $200,000 (80 percent) increase in Seattle’s housing prices since 1989, while housing demand raised prices by $50,000. Cities with less stringent land-use regulations had significantly lower price increases due to regulation.”  Theo S. Eicher

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About Malcolm Greenhill

Malcolm Greenhill is President of Sterling Futures, a fee-based financial advisory firm, based in San Francisco. I write about wealth related issues in the broadest sense of the word. When I am not writing, reading, working and spending time with family, I try to spend as much time as possible backpacking in the wilderness.

View all posts by Malcolm Greenhill

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18 Comments on “Business as Usual or Revolution?”

  1. Anne Says:

    Well, there you go. Being really sensible again. Gah!

    Reply

    • Malcolm Greenhill Says:

      Anne, thank you. I’m glad you think so. The concept of truly free markets being, not something we already have, but rather a radical and revolutionary idea, is not something most people would call sensible.

      Reply

  2. Michael Denny Says:

    It’s an old article but certainly supporting this theme….

    Mike

    How to start solving the affordable housing problem by Bill Winter

    Americans want to own their own homes. That desire is so ubiquitous there’s even a name for it: The American Dream.

    It’s so prevalent that the phrase, “A house with a white picket fence,”
    has become a cliché.

    It’s so common that William J. Levitt is mentioned in almost every American history textbook. He’s the man who built Levittown on Long Island in 1947. It was the first mass-produced suburban housing tract, and helped make it possible, for the first time, for the American middle class to afford a home of their own.

    However, according to a new survey, the American Dream is threatened.

    In a poll commissioned by the National Association of Realtors (NAR) and released in September, two-thirds of Americans in 25 large metropolitan areas worry that average-income workers — like firefighters, teachers, and police officers — won’t be able to afford to live in the cities where they work.

    About 50% worry that their children won’t be able to live near them because homes will be priced out of reach.

    And more metropolitan residents worry about affordable housing than are concerned about crime.

    The NAR concluded: “There is a continuing, growing crisis in housing affordability and homeownership that is gripping our nation.”

    To be sure, the NAR may have a political agenda; trying to convince politicians to build or subsidize more “affordable housing,” which realtors can then sell. (The survey also asked if people would be more likely to vote for a candidate who “works to make housing more
    affordable.”)

    But the survey touched on a genuine problem for many would-be
    home-buyers: The cost of homes is rising inexorably, and at a considerably faster rate than inflation.

    In most places, the price of a home is higher than it should be because of the government. Ironically, while local, state, and federal governments spend billions of dollars to promote “affordable housing,”
    they are working to solve a problem they actually helped create.

    Here’s what we would do to start making the cost of housing as reasonable as possible:

    1. Repeal zoning laws.

    We have always made the argument that zoning laws drive up home prices by restricting the amount of land available for home construction.
    (Scarcity always equals higher prices.)

    However, a 2002 study by the Harvard Institute of Economic Research at Harvard University conclusively proved that this intuitive conclusion was, in fact, absolutely true.

    In the study, “The Impact of Zoning on Housing Affordability,” Edward Glaeser and Joseph Gyourko compared the effect of zoning on housing prices in 26 U.S. cities, including Atlanta, Baltimore, Cincinnati, Houston, Miami, Milwaukee, Phoenix, San Diego, and Seattle.

    Glaeser and Gyourko used a clever method to figure out the cost of the “zoning tax.”

    First, they compared the prices of houses on quarter-acre lots to the cost of equivalent homes on half-acre lots. The difference gave the “raw” market value of an extra quarter-acre of land.

    Next, they subtracted the cost of constructing a house from the sales prices of homes on quarter-acre lots. This gave them the value of a quarter-acre of buildable land.

    “The first value is the amount people are willing to pay for an extra quarter-acre of land in their yard,” wrote Randal O’Toole in an article about the Harvard study in the Heartland Institute’s Environment News (November 1, 2002). “The second value is the amount it costs to own a quarter-acre of land on which you can build a house.

    “Without zoning and land-use regulation, the two values would be nearly identical. If someone had a house on a half-acre, and the value of developing the extra quarter-acre grew to be more than it was worth to the owner as a part of their yard, they would subdivide and develop it.”

    If there is a difference in the price of an “extra” quarter-acre and a “buildable” quarter-acre, that difference is the added cost of zoning laws (and local regulations), concluded Glaeser and Gyourko.

    And what a difference it was. In San Francisco, for example, the cost of an extra quarter-acre of property is $85,000 — while the cost of a buildable quarter-acre lot is nearly $700,000. The difference, in this case, about $615,000, is the cost of strict zoning laws.

    In some other cities, including Seattle, New York City, San Diego, Anaheim, and Los Angeles, the cost of zoning is more than $200,000 per quarter-acre.

    “In these areas, only a small percentage of the value of the lot comes from an intrinsically high land price; the rest is due to restrictions on construction,” wrote O’Toole.

    The results of the study inspired Glaeser and Gyourko to offer a blunt
    proposal: “If policy advocates are interested in reducing housing costs, they would do well to start with zoning reform. Reducing the implied zoning tax on new construction could well have a massive impact on housing prices.”

    2. Repeal building regulations.

    In 1991, Americans learned for the first time exactly how much government regulations cost them when buying a new home.

    The Kemp Commission, headed by Housing and Urban Development Secretary Jack Kemp, had spent a year studying “barriers to affordable housing,”
    and then released a groundbreaking report.

    The commission found “the evidence is overwhelming that regulations needlessly raise housing costs,” reported the Heritage Foundation’s Carl F. Horowitz.

    Building regulations — which covered everything from the size of the house, to the type of plumbing fixtures allowed, to which agencies had to approve construction — is “choking off the supply of affordable housing,” the commission reported.

    For example, the Kemp Commission discovered:

    * In Chicago, Illinois, restrictive building codes added $20,000 to the cost of a 1,500-square-foot home.

    * In New Jersey, regulations increased the price of a new home by 25% to 35%. In Mercer County, a construction project had to clear 11 reviews from nine different government agencies.

    * In Orange County, California, the permit process jacked up the cost of a single-family home by $20,000 to $40,000.

    But are government building codes needed to protect families from unsafe construction? No, said Joseph L. Bast in an August 1991 study for the Heartland Institute.

    France, he noted, has never had a U.S.-style building code enforcement system. Instead, building standards are voluntary, but building contractors face strict civil liability if they construct shoddy, hazardous buildings.

    To protect themselves against civil liability, French builders buy insurance. Insurance companies, in turn, inspect buildings under construction to make sure they are safe.

    In France (of all places!), a free-market system takes the place of a slow, cumbersome government regulatory process.

    3. Eliminate “Smart Growth” policies.

    There are two words that affordable-housing advocates should fear above all others: “Smart Growth.”

    The phrase denotes a wide range of government action designed to limit a community’s growth — usually in the name of “stopping sprawl,” or “protecting quality of life,” or “saving open space.”

    Smart growth initiatives come in a variety of forms: Strict limits on growth, impact fees on new construction, “open space” land purchases, or an out-and-out prohibition on new construction.

    But they have one thing in common: “Smart growth initiatives are effectively pricing most new homes beyond the reach of entry-level buyers,” note Wendell Cox and Dr. Ronald D. Utt in an April 6, 2001 report for the Heritage Foundation.

    “By restricting the amount of land available for development, growth-guiding policies indirectly raise the price of homes by rationing the supply of raw land,” they report. “Policies designed to reduce or discourage growth, by comparison, generally involve techniques and approaches that directly raise the price of new housing through a variety of mechanisms, such as minimum lot sizes, impact fees, or mandated amenities.”

    As a result, “these actions discriminate against the less well-to-do by pricing them out of the homeownership market.”

    After Portland, Oregon, for example, imposed strict growth limits, home prices jumped well beyond the national average, and the rate of home ownership fell (in contrast to most of the nation, where it rose), noted Cox and Utt.

    What can be done? At the very least, local governments should be less rigid about land-use and zoning; employ more “thoughtful road design, expansion, and construction” to reduce congestion; and allow land trusts to protect open space (rather than rely on tax-funded land purchases), said Cox and Utt.

    But the real solution, they say, is simple: “State and local governments should refrain from implementing coercive and costly growth control mechanisms that limit freedom of choice and raise house prices beyond the affordable range of the entry-level buyer.”

    4. Eliminate government-mandated “low-income” housing.

    In addition to low-income units built by the government, politicians frequently claim they can expand housing opportunities by mandating affordable housing construction by private contractors.

    Frequently, such programs require builders to set aside 25% of new homes for low-income families at sharply reduced prices. If the construction company doesn’t agree, it won’t get permission to build.

    The problem with such programs, says Jerald W. Johnson in a 1997 report for Hobson Johnson & Associates, is that while they do provide some low-cost housing, they drive up the price of most other houses.

    The net result: “The majority of low-income households [are] harmed by [low-income set-asides].”

    Why? Because contractors lose money on each low-income home they are forced to sell at below-market rates. So, they raise the price of their other units to recoup that loss.

    As a result, such laws “function as a tax on new development,” said Johnson. “This tax, or the cost of providing the below-market housing units, is passed on to the consumer.”

    So, while a minority of low-income families benefit, the majority are forced to watch the prices of homes soar even further out of reach as such laws “reduce the stock of housing available to low income households substantially,” noted Johnson.

    If politicians genuinely want to help the largest number of low-income families, they would repeal all laws that mandate “low-income” housing set-asides.

    Conclusion

    To be sure, the cost of buying a home in most regions of the United States does not constitute a “crisis” — the survey by the National Association of Realtors notwithstanding.

    A record 68.4% of Americans own their own homes, according to U.S.
    Census data. (The rest rent apartments, live with relatives, reside in college dorms, and so on. A tiny percentage are homeless.)

    And thanks to near-record-low interest rates, sales of new and previously owned homes continue at a strong pace.

    But there is a dark side to the rosy statistics.

    Nationally, the number of homes that are being foreclosed because of nonpayment of mortgages is the highest in 30 years, reports the Mortgage Bankers Association of America.

    And in some municipalities around the USA, average American families are being shut out of home ownership because of absurdly high prices. They are being forced to commute long distances, move to different states, or settle for living in an apartment.

    Eliminating the artificial “tax” that government imposes on the price of homes — via zoning laws, building regulations, and anti-sprawl laws — would help solve the problem.

    It would reduce national foreclosure rates, since lower housing costs would mean lower, more affordable mortgage payments.

    It would help some families buy “more house” for the same amount of money.

    And it would make it possible for more Americans to purchase their coveted “house with a white picket fence.”

    —–
    Source: http://www.lp.org/lpnews/0312/libsolutions.html

    Archive: http://www.liberty-news.com/archive.php?src=emtxt
    =====================================================================
    Quote:
    – The Government is like a baby’s alimentary canal, with a happy appetite at one end and no responsibility at the other. — Ronald Reagan

    Reply

  3. cattalespress Says:

    Makes so much sense…it always does when one take “politics” out of the discussion!

    Reply

    • Malcolm Greenhill Says:

      Thank you. No doubt about it, politics is a polarizing subject. The other day someone remarked to me that this is the politest blog on the internet dealing with the most divisive of subjects. I hope to keep it that way.

      Reply

  4. Stan Dorn Says:

    I’m not an expert on housing. But my impression is that cities like Houston have pursued much less regulated zoning practices than cities in the Northeast and Pacific Northwest, by and large. Houston has cheaper housing, but it’s a much, much uglier city than Boston, Portland, Seattle, or San Francisco. There are trade-offs, and specifics matter. Some land use restrictions raise costs more than others, and some achieve benefits more than others. I’m a big fan of making decisions on a case-by-case basis, supporting restrictions when the benefits outweigh the disadvantages and opposing them when they do not.

    Reply

    • Malcolm Greenhill Says:

      Stan, thank you. You’re certainly right about Houston zoning practices but Houston is never going to be as pretty as San Francisco or Seattle whatever regulations they have. Also, I think it would be just as unfair to call Houston ‘all ugly’ as it would be to call Chicago and Philadelphia ‘all beautiful’. There’s a mixture of good and bad in all large cities. Furthermore, not having zoning doesn’t mean there are no building regulations. Many neighborhoods already have deed restrictions or homeowners associations which address concerns as to what can be built where.

      Finally, while it sounds good to say you’re a fan of “making decisions on a case-by-case basis”, the reality is that most major city planning decisions are decided on or influenced by political considerations, so it should be no surprise that the outcome usually reflects a “business as usual” philosophy. If you want an inside look into how big city planning decisions are actually made read Robert Caro’s opus, The Power Broker: Robert Moses and the Fall of New York.

      Reply

    • Malcolm Greenhill Says:

      Stan, a local photographer posted to his blog this piece on Houston’s Colors:

      http://ronscubadiver.wordpress.com/2013/06/09/houstons-colors/#comment-8332

      Please see below my question and his answer relating to the question of whether Houston is uglier than other cities:

      “MALCOLM GREENHILL says:

      Ron, someone commented on my blog that Houston is uglier than other cities because it lacks zoning. As you have a great eye for beauty and local color do you have any thoughts on the question?
      JUNE 9, 2013 AT 2:07 PM REPLY

      RON SCUBADIVER says:

      Houston is better looking than most cities. The lack of zoning allows for reallocation of land to better uses. Most residential neighborhoods are protected by deed restrictions so your next door neighbor can’t open a bar in his house. There are also setback and density rules that apply to prevent developers from building too many townhouses per acre, but the choice to build townhouses or something else is up to the landowner. The only thing zoning accomplishes is to strip property owners of their rights and enrich the government officials who grant variances. Our mayor who is a Democrat even praises the system as it is.”

      Reply

  5. L. Marie Says:

    Excellent post. This is clearly the case of an idea being good in theory but unwieldy in practice.

    Reply

    • Malcolm Greenhill Says:

      Thank you. Definitely unwieldy in the sense that it is currently not politically acceptable. However, I do believe that we are approaching a general reset after a 30 year credit binge. It is difficult to predict the social implications but if history does at least rime then I suspect that sometime in the next decade these ideas will be taken out, polished and given a more serious look.

      Reply

  6. 1WriteWay Says:

    I’m not sure I fully understand your argument. A totally free market does not come without its risks. What would happen to our parks, to the environment in general if we allowed a totally free market? Would a totally free market, in your example anyway, really create more affordable housing? Or would it instead just make it easier for the “haves” to buy and privatize land? Instead of the federal government owning 50% of the land in California, would it necessarily be better if that land were owned (and controlled) by a handful of billionaires? At least some of the federal lands I can enjoy as a private citizen, but if that land were privately owned, then I would likely be banned from it (or charged Disneyland-type entrance fees).

    Reply

    • Malcolm Greenhill Says:

      I understand your fears but they are misplaced. Monopolies and oligopolies occur when corporations use the power of government to gain special privileges for themselves. The most recent egregious example is that of the large banks capturing congress to milk the taxpayer of a few trillion dollars. Protectionist tariffs, the government monopoly of credit and money, the assignment of titles to land and natural resources based on expropriation and political wheeling and dealing, these are just some of the ways big business and big government work together to screw the little guy. Most corporate elites don’t want competition, they fear it and have worked together with government to restrict it. Nowadays the most competitive sector in our economy is the technology sector where even the largest players such as Microsoft and Google have to keep looking over their shoulders because of the fierceness of the competition. However, even in this sector competition would be all the greater if government did not grant patents, which protect companies (particularly the larger ones who can afford to build a library of patents) from competition and hinder innovation.

      As to the parks, the National Park Service was almost responsible for destroying Yellowstone National Park in the fires of 1988 because of their incompetent fire policy. Furthermore, what is to stop the park regulators from being captured by big business? Under President Reagan, Secretary of the Interior James Watt quintupled leasing federal land to coal mining companies and regularly mocked environmentalists despite at one time being the ultimate overseer of the National Park Service. There are plenty of models for private conservation around the world. Putting aside their politics, nonprofits like the Sierra Club and the Nature Conservancy have great records in conservation. The Land Trust Alliance is another worthwhile organization.

      Reply

  7. Raunak Says:

    In New Delhi, affordable housing projects made by the government are distributed to low income families on the basis of a lottery system. A noble endeavor but one rife with corrupt practices. Ineligible people would pick up the properties and then earn huge profits by selling them in the secondary markets.
    I agree that its easier to talk revolutionary ideas and very difficult to walk that talk. History is full of examples of revolutionary leaders who messed it all up after coming to power.

    Reply

  8. skywanderer Says:

    “A truly free market in land i.e. one based exclusively on voluntary transactions, with no artificial restrictions in supply or demand”

    A truly free market is merely a theoretical construct, with view of the fact that under the conditions of ceteris paribus the largest financial institutions and companies dictate all supply and demand on any market, and when these entities start lobbying on a truly free market they artificially grow larger and larger – through cartels and mergers – until they become monopolies, and as such become controllers of the totality of production and of the labour market as well.

    On a truly free market those who under current conditions grab natural resources by corruption and by lobbying with state officials, would build their private army and would obtain these resources by physical force. Or they would use tacit but equally coercive methods to get rid of the weaker ones – and if necessary they would invade folks somewhere else (see Iraq war for instance). And as we know those individuals (either in a company or a stet) who control the vital resources control everything / everyone else.

    As I mentioned earlier in less specific terms: at the present day giving a go to a “truly free market” is especially fallacious, because in practice it would simply yield to giving a go to the same private global lobby of billionaires who already are on the go, that is, who are de facto functioning as the world government anyway.

    Reply

    • skywanderer Says:

      corr: “either in a company or a state”

      Reply

    • Malcolm Greenhill Says:

      Skywanderer, thank you but the historical account just does not bear out your thesis. As the New Left historian Gabriel Kolko demonstrates in his masterly The Triumph of Conservatism and in Railroads and Regulation, the dominant trend in the last three decades of the 19th century and the first two of the 20th century was not towards increasing centralization, but rather, despite the growing number of mergers and the growth in the overall size of many corporations, toward growing competition.

      “Competition was unacceptable to many key business and financial leaders, and the merger movement was to a large extent a reflection of voluntary, unsuccessful business efforts to bring irresistible trends under control…As new competitors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many important businessmen that only the national government could (control and stabilize) the economy…Ironically, contrary to the consensus of historians, it was not the existence of monopoly which caused the federal government to intervene in the economy, but the lack of it.”

      The thesis of the Kolko books is that the trend was towards growing competition in the United States before the federal government intervened, and that various big businessmen in different fields found themselves unable to cope with this trend by private economic means. Facing falling profits and diffusion of economic power, these businessmen then turned to the state to regulate the economy on their behalf.

      You say “On a truly free market those who under current conditions grab natural resources by corruption and by lobbying with state officials, would build their private army and would obtain these resources by physical force.”

      However, this is a description of crony capitalism not a free market.

      You go on to say “As I mentioned earlier in less specific terms: at the present day giving a go to a “truly free market” is especially fallacious, because in practice it would simply yield to giving a go to the same private global lobby of billionaires who already are on the go, that is, who are de facto functioning as the world government anyway.”

      But you can’t be serious about this? Today’s crony capitalist billionaires would run a thousand miles from a truly free market which would mean no preferential land grants to politically-connected speculators, no government control over the money supply artificially limiting the issue of money and credit to a government approved banking cartel, no government grants of monopoly privileges to patent-holders and copyright holders, no tariffs to protect politically-favored domestic producers from foreign competition, an end to agribusiness subsidies, an end to the military industrial complex, an end to government built roads, rails and airports with extensive tax subsidies and resources allocated to government infrastructure on the basis of political pull, an end to the communications monopoly by which media companies have built empires because of access to broadcast bandwidth through the FCC or local government grants of concessions on laying cable and fiber, an end to regulatory protectionism which benefits established businesses at the expense of new upstarts.

      That is actually just the beginning of what a truly free market would mean. It would certainly be the end of crony capitalism as we know it today.

      Reply

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