What Are the Effects of Housing Constraints on Economic Growth?

According to a new working paper, the effects are huge:

Image result for housingWe use data from 220 metropolitan areas in the US from 1964 to 2009 to perform two calculations. First, we quantify the effect of spatial misallocation. We find that most of the increased spatial dispersion in the marginal product of labor is due to the growing spatial dispersion in housing prices. In turn, the growing spatial dispersion of housing prices is largely driven by strict zoning laws in cities such as New York and the San Francisco Bay Area with strong productivity growth. We find that the increased spatial misallocation of labor due to housing supply constraints in cities with high productivity growth rates lowered aggregate growth by almost 50% between 1964 and 2009.

Second, we calculate the contribution of each US city to aggregate US growth and compare it to an “accounting” measure based solely on the growth of the city’s GDP. The difference reflects the effect of a city’s growth on the efficiency of labor allocation across cities. While the accounting measure suggests that New York, San Francisco and San Jose’s contribution to aggregate GDP growth between 1964 and 2009 is 12%, viewed through the lenses of our model, these cities were only responsible for 5% of growth. The difference is because the aggregate benefit of TFP growth in New York and Bay Area was in part offset by increased misallocation of labor across cities. In contrast, for Southern cities the accounting and model-based measures are the same. Due to an elastic supply of housing, much of the growth in the South took the form of employment growth, with no effect on misallocation.

We conclude that local land use regulations that restrict housing supply in dynamic labor markets have important externalities on the rest of the country. Incumbent homeowners in high productivity cities have a private incentive to restrict housing supply. By doing so, these voters de facto limit the number of US workers who have access to the most productive of American cities. In general equilibrium, this lowers income and welfare of all US workers (pgs. 2-3; bold mine).

We’ve blasted zoning laws here at Difficult Run several times before. Just one more reason to do so.