Inequality Across U.S. States

A Bloomberg article by Virginia Postrel explores a discouraging trend in income inequality.  For decades, incomes across states in the U.S. converged — i.e. poor states caught up to rich ones — just as Robert Solow‘s growth theory predicted:

Poor places are short on the capital that would make local labor more productive. Investors move capital to those poor places, hoping to capture some of the increased productivity as higher returns. Productivity gradually equalizes across the country, and wages follow. When capital can move freely, the poorer a place is to start with, the faster it grows.

(Photo: Rakkhi Samarasekera)

That steady convergence, however, has stopped.  One possible explanation?  High housing prices in rich cities, caused by government regulation:

In a new working paper, [Daniel] Shoag and Peter Ganong, a doctoral student in economics at Harvard, offer an explanation: The key to convergence was never just mobile capital. It was also mobile labor. But the promise of a better life that once drew people of all backgrounds to rich places such as New York and California now applies only to an educated elite — because rich places have made housing prohibitively expensive.

The good news?  There’s still room for less-educated workers in states that didn’t increase regulations — places like Nevada, Florida, and Texas. “Places that didn’t have this increase in regulation still have the old process that worked,” Shoag says in the article, “where people move to the richer areas, human capital levels converge, incomes converge — the whole chain that used to exist for the whole country is still true if you focus just on the areas that haven’t had as large an increase in regulation.”

(HT: Marginal Revolution)

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  1. jonathan says:

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  2. Chuchington says:

    “High housing prices in rich cities, caused by government regulation.”

    How is high housing prices caused by government regulation? I think it is more due to supply and demand.

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    • Colin says:

      More regulations=higher costs=higher prices for housing. Here in DC, for example, getting permits to begin construction can take years. Plus, there are regulations that limit how high buildings can be built. All of these things serve to limit supply, thus driving up prices. It’s econ 101 really.

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      • Richard C Haven says:

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      • A house is a haven, but is it a home? says:

        Externalities are in-the-eye-of-the-beholder subjective judgments and reflect the viewpoint of those in power. They are not always universal agreed upon.

        When a government body institutes a new regulation, it is usually trying to internalize a perceived externality, but in the process it makes the market less economically efficient—regulations increase transaction costs (they act like a tax).

        Furthermore, adding liabilities to the code (or changing the party to whom liability applies) changes wealth distribution, which in turn affects demand and prices. The same applies to subsidies.

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      • Joe J says:

        “High housing prices in rich cities, caused by government regulation. How”

        Rent control is a big one (NYC), some love it some hate it, but looking at how rental prices have skyrocketed since it’s implementation, makes it clearly one example.

        You don’t want to know how much more a brand new 100 sq ft place is rented for, while the one next door which is 10 times the size, is rented for 1/20 th the price because they moved in years ago.

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    • Clancy says:

      “Regulation” in this case is not the usual conservative boogeyman of environmental protections and labor relations. What the authors are referring to are commonly known as Zoning Laws. These are in general laws which dictate what kinds of buildings can be built where. They mainly restrict density, building height and include mandates like set-backs, minimum parking requirements and aesthetic qualities. In many areas, the effect is to restrict the supply of housing, especially in areas of high demand, thus driving up the price and pricing many people out. Many cities try to paper over the problem with “rent controls” but that doesn’t solve the underlying supply and demand problem, and has problems of its own.

      When Detroit and other rust belt cities were boom towns, people migrated there not just for the auto industry jobs, but other jobs paid better too. You can earn more as a waitress if your customers have better jobs. Today, booming industries are in places like Silicon Valley or Boston. A barber in Detroit could do a lot better if he moved to Mountain View, but he would never find an apartment he could afford.

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      • BikerDad says:

        Actually, regulation in this case is:

        Environmental protection laws that raise the cost of land, and also make renovating and/or demolishing older structures cost prohibitive.

        Labor relations

        Zoning Laws

        Historical preservation laws.

        Permitting & Code laws.

        Whether the particular laws and regulations in question are “worth it” or not isn’t the topic for conversation. Do they exist, and do the raise the cost of housing?

        Yes, and yes. How much varies from jurisdiction to jurisdiction.

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      • Mike B says:

        The better question is would today’s booming industries settle in places without the sorts of “regulation” vilified in the article. If creative people drive current economic growth and creative people demand livable communities that restrict sprawl and provide high amounts of services then creative people will only settle in places that currently exhibit high housing costs.

        Perhaps the better response would be to increase the supply nice places to live instead of trying to make the current crop of livable locations less livable.

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  3. rageon says:

    The high cost of housing may well be the reason for the slowing of this convergence. However, I’m not sure that the article explains why it is that “government regulation” is the reason for the high cost of housing. At some point, a desireable location simply just runs out of room.

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    • static says:

      “At some point, a desireable location simply just runs out of room.”

      That happened to NYC a long time ago, so what did they do? They built up.

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    • Rick says:

      I agree. In fact the working paper says,
      “This proposition shows how different values of the land supply elasticity affect migration by skill type.When the land supply elasticity is high and land prices are low, all skill types migrate to Productiveville because of its higher productivity. When the land supply elasticity falls, land prices rise. As land prices rise,since land is a larger share of low-skilled consumption, low-skilled types are differentially discouraged frommoving to Productiveville”
      This is Economics 101 supply and demand. Infrastructure costs play a part also.

      What I am not clear on is why wages for all workers do not keep up with this increase.

      In my city, San Antonio, I have noticed that the same job at the same company, a local fast food restaurant, can differ by two dollars an hour between the north side and south side of town (my observations are based on the help wanted ads on their marquis” . The two dollar an hour difference does not make up for the difference in housing prices between the north and south side. It is barely a break even proposition for commuting in a car. Bus transportation is about an hour and half each way. Work is normally either part time or split shift for the lunch and dinner rushes which either makes it totally non economic or an extremely long day.

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  4. Colin says:

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  5. James says:

    It seems strange to try to do an analysis by states. Conditions in Manhattan are very different from those in upstate New York, Silicon Valley isn’t at all like Susanville, Eureka, or even Stockton, and Las Vegas exists in a completely different reality from the rest of Nevada.

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  6. Phil Zawa says:

    Is it regulation that makes housing expensive? Some specifics on which regulations would be interesting. Why not just mostly self-perpetuating supply and demand at this point? Many educated and/or wealthy people want to live in cities because cities have many cultural amenities that appeal to them. Cities have limited real estate space so prices rise…

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    • Clancy says:

      Zoning rules such as minimum lot sizes, maximum height and footprint, maximum number of units etc. all put a cap on supply. Demand rises, but supply is stuck, so prices rise. There’s plenty of room to build zillions more housing units all over the most high demand areas, but we just aren’t allowed to.

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      • James says:

        There may be room, but is there the infrastructure to support those zillions? Take Manhattan as an extreme case. If you doubled the population, would people even be able to move during rush hours? Would it be possible to import adequate water, and supply the additional sewage processing? Even it would be possible, it seems likely that the incremental costs would be much higher than simply duplicating the existing infrastructure, so do you saddle the existing residents with the costs (and what if they revolt?), or do you tack them on to the price of the new housing, thus increasing housing costs even further?

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      • Clancy says:

        James,
        The extra infrastructure would be paid for by the taxes paid by the new residents. Maybe the densest part of Manhattan is a bad example, but in most places the marginal cost of increasing infrastructure capacity per new resident is less than the average cost per current resident (partly due to the fact that increased density means people don’t have to travel as far)

        Even if our ability to build infrastructure is limiting density in Lower and Midtown Manhattan, it isn’t limiting everywhere else that’s less dense.

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      • James says:

        Where are we allowed to charge different tax rates on old & new residents? The closest I can think of offhand are the California Prop. 13-style laws that fix property taxes by sale price. Trying to charge different sales & income tax rates, or even utility fees, would be a legal and logistical nightmare.

        Roads and transport of people are only a small part of the infrastructure needed to support a city. In many places (particularly in the west, but it also applies to Manhattan) water supply is the critical factor. Las Vegas, for instance, is currently spending about a billion dollars to build an additional pipeline from Lake Mead (blythely overlooking the fact that the Colorado River is already heavily over-committed – I told you those people live in a different reality!), and plan to spend billions more sucking dry the mountains several hundred miles northeast.

        Almost every city in the west has similar problems with water supply. The pro-growth camp will ignore or gloss over these limits (if not always with the same insouciance as Las Vegas), but they do exist.

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  7. Neil says:

    This article is pure sophistry: Singles out government regulation as the cause of income inequality but doesn’t explain what regulations are specifically to blame and why.
    By this logic a highly regulated country like Denmark should have massive inequality. But quite the opposite is true.

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  8. colin says:

    Why are high housing prices supposedly a product of government regulation? It seems more likely that they are a product of congested living areas with limited desirable space (low supply, high demand…the beautiful free market at work.)

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    • Correlation, not cause, but still valid says:

      Are increased land-use regulations the cause of, or caused by, or merely correlated with rising housing costs? Though there are reasons that can be cited that land-use regulations both cause (by reducing supply at the margin without affecting demand) and are caused by higher housing costs (when governments try to better manage existing resources). But there is little doubt that they are correlated with higher housing costs.

      That being said, however, it should be noted that geography and demography have something to do with housing costs. Phoenix remains affordable because it is spread out and keeps expanding its boundaries geographically, at the same time that there is a higher rate of supply coming onto the market, as the death rate in Phoenix with an older population is higher than other locales. The same may also apply to Florida. Manhattan, on the other hand, has a younger population and no space to grow into. Political pressure is much greater to manage the existing resources to provide sufficient adequate housing and regulations are added and litigated more frequently.

      Some cities go through cycles of blight and recovery. Look at northern Philadelphia which used to be a decaying wasteland of block after block of old decrepit buildings, many torn down because of fire and safety reasons. The city has been razing and rebuilding new lower density tract housing to revitalize itself and attract a younger more vibrant work force back to the city. In the future, Detroit may recover in the same way. But, some less economic viable localities, such as Muskogee, Oklahoma may never recover the vitality that they had in their prime.

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