Tuesday, January 27, 2009

Economics versus Morality

Wendell Cox (Demographia) & Hugh Pavletich (Performance Urban Planning) recently released their 5th Annual Demographia International Housing Affordability Survey. (HT: Freedom is the Solution) This study offers a comprehensive view of housing affordability around the world.

Much of the study addresses land use regulations and the impact on housing affordability. The authors identify to types of land use regulations:

The Difference: There are substantial differences between metropolitan markets in one factor of market influence: land use regulation. Generally, land use regulation falls into the following two categories:

Responsive land use regulation: Liberal or traditional regulation is referred to as responsive land use regulation because it responds principally to the market as revealed by people’s preferences. Under responsive land use regulation, there is a substantial interplay between buyers and sellers of land, resulting in generally lower land (and house) costs.

Prescriptive land use regulation: The newer regulatory systems are referred to as prescriptive land use regulation because they are based on “visions” or plans, which prescribe where development is to occur. Under prescriptive land use regulation, the interplay between buyers and sellers of land is substantially interfered with, resulting in generally higher land(and house) costs.

These two categories of land use regulations may differ in detail, but they do not differ in principle. The latter may be more restrictive than the former, but both violate property rights and distort the market. While the authors make a very strong case against prescriptive land use regulations, their silence on the underlying principles implies that responsive land use regulations are acceptable.

The authors cite a long list of economists who have expressed concern about prescriptive land use regulations:
• Nobel Laureate Paul Krugman of The New York Times noted that the house price
bubble has been limited to markets with strong land use regulation.
• A United Kingdom government report by Kate Barker, a member of the Monetary Policy Committee of the Bank of England, blamed that nation’s loss of housing affordability on its prescriptive land use policies under the Town and Country Planning Act of 1947.
• In last year’s Demographia International Housing Affordability Survey, former Reserve Bank of New Zealand Governor Donald Brash wrote that the affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land.
• Theo Eicher of the University of Washington produced a working paper placing much of the blame for house price escalation on land use regulation United States municipalities.
• A New Zealand government report by Arthur Grimes, Chairman of the Board of the
Reserve Bank of New Zealand blamed the loss of housing affordability in the nation’s
largest metropolitan area, Auckland, on prescriptive land use policies.
• Reserve Bank of Australia Governor Glenn Stevens told a parliamentary committee that “An increase in state government zoning regulations is a significant factor driving up the cost of housing.” He also noted the increase in local and state government levies on new developments as a driver of higher housing prices.
• An Organization for Economic Cooperation and Development (OECD) report noted an association between strongly regulated land markets and higher housing prices.
• Research by Harvard University’s Edward Glaeser the University of Pennsylvania’s Joseph Gyourko others shows a strong relationship between prescriptive land use policies and higher housing prices.
• William Fischel of Dartmouth University Fischel shows that the diversion of house prices between California and the rest of the nation from 1970 to 1990 was associated with stronger land use regulation
Glaeser et al at Harvard University further show that Boston’s house prices had
been inflated 60 percent by scarcity created by prescriptive planning that relies heavily on large lot zoning (rural zoning).

While all of this evidence is indeed damning, it has failed to stop politicians and bureaucrats from enacting land use regulations. And it has not deterred citizens from demanding such restrictions. Why? With so much economic evidence that land use regulations are destructive, why does a single city still have any regulations regarding land use?

The answer cannot be found in economics. It can be found in morality.

The premise underlying all land use regulations is that the individual must place the "public good" or the "general welfare" before his own interests. This premise holds that the individual is subservient to the community, and that the individual must sacrifice his values to others. This premise holds that service to others--altruism--is the standard of morality. According to altruism, land use regulations are moral.

While citizens may lament unaffordable housing, their actions are dictated by their moral code. Practical arguments like affordable housing fall on deaf ears, because at the end of the day, individuals do what they believe to be moral. Appeals to economic statistics are impotent compared to the power of morality.

Making the situation worse is the fact that defenders of property rights have shunned the only effective weapon--morality. They concede that altruism is moral, and thereby abandon the entire realm of morality to their enemies.

Harvard Professor Edward Glaeser, who has written extensively on the destructive consequences of land use regulations, is quoted in the survey:

Localities tend to put their own interests ahead of the national interest by restricting building in order to keep prices up and reduce congestion. The federal government should increase its efforts to counter this tendency. After all, stopping building in one area just leads to building and more congestion somewhere else.

In other words, let's expand the definition of community to include the entire nation. Rather than compel the individual to serve the community, we should compel him to serve the nation. Rather than allow the individual to pursue his interests, he should be forced to serve the "national interest".

I will agree with Professor Glaeser that the federal government should do something to counter the tendency to restrict building--it should declare all land use regulations unconstitutional. It should return to the nation's founding principles--the right of each individual to life, liberty, property, and the pursuit of happiness.

But before that can occur, those who profess to support those principles must reject the idea that the individual must serve anyone. More importantly, they must embrace a new morality. They must embrace egoism.


Brian Shelley said...

What I argue is that the most wealth producing, peace producing, health and happiness producing mechanism is freedom. Individual freedom is the utilitarian solution. How can we create a peaceful society through force? How can we create a wealthy society by destroying the incentives of effort by confiscating the fruits of one's labor? The report reinforces my view that what is moral leads to optimality.

I don't think it is utilitarianism that is so flawed, just its practitioners. So often they employ an ad hoc guessing game without principles. It's like creating a new physics every time you want to build something.

Brian Phillips said...

Your points are true about freedom producing wealth, peace, etc. But those arguments have been used for decades, and with little result. We continue to move toward statism. The reason is that utilitarianism concedes morality to the enemies of freedom. At the end of the day, people will do what they think is moral. The actual results are not as important as being moral.