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)


A bit of a crock. I've skimmed the paper and can't follow the logic. The argument is about cross-state inequality, right? The Bloomberg article makes it sound like the focus is on within-state inequality, but the paper itself is about migration patterns across states.

First, when low-income states compete, that's good but high income states aren't supposed to compete? They're just supposed to get poorer? The subtext is that walls are bad because they keep poorer states poor but it's okay for poorer states to use subsidies and union-busting to take business from richer states.

Second, what is stopping the low-income states from increasing amenities, investing in education, investing in the kinds of things that high-income states have and do? Nothing.

Third, the argument for low-income states has been that their economic model of low cost, no restrictions, no unions is better. They've been saying that for much of my life, since the rise of the New South in the 1970's. In that time, entire nations have risen from poverty. And now the idea is that it's the high-income states' fault that low-income states haven't done better?

So let's say that restrictive housing policies are some sort of wall for high-income states. Why is that bad? Isn't that their right? They currently subsidize all those low-income states through massive wealth transfers in the tax code. And now they're supposed to emulate the low-income states, the ones that even by the wording are less successful just because of what? A hatred of restrictions?

This paper was weird to read.



"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.


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.

Richard C Haven

No, limitations on externalities is Econ 101 (which which, apparently, you are unfamiliar).

Limiting building and their heights can prevent one property owner from taking value away from other property owners (and the public) without compensating them.


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.


So if we want to reduce inequality, it looks like we need deregulation and -- per the New York Times ( -- fewer single mothers. I'm sure OWS and the rest of the left will start advocating for fewer housing regulations and against motherhood outside of marriage any minute now...


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.

Phil Zawa

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...


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.


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?


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.


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.)

Correlation, not cause, but still valid

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.



This article doesn't mention manufacturing once, even though it very correctly starts with the idea that "investors move capitol to those poor places". That stopped happening in the U.S. when companies started moving capitol to even poorer places, i.e. outside the country. The slow death of American manufacturing has much more to do with the divergence in incomes between rich and poor regions than housing regulations.

All Kaput

Gosh! Have we been moving our capitol out of the country? Whose silly idea was that? Oh . . . I see. You meant capital with an "a" as in Das Kapital.

For an argument in opposition to this see Virginia Postrel's review of University of Chicago professor D. McCloskey's most recent book, "Bourgeois Dignity," and the subject of how overemphasized capital is, at

" . . . many political intellectuals . . . in a diluted version of Marx and Polanyi (on the left) or Weber (on the right) . . . assume that economic growth depends, first and foremost, on some accumulated store of wealth."

But there's always enough capital.

What is more important is how people think about new ideas, expressed in such terms as "innovation, imagination, alertness, persuasion, originality" instead of endlessly uncreative harangues calling for citizens to live up to our "responsibilities" (i.e. duty to country---read government), etc.


The Mobile Blues . . .

The SITCOMs (single-income-two-children-outrageous-mortgage) of the past ten to twenty years have been cancelled.

Fact: 11+ million U.S. homes have an underwater mortgage, representing around 24 percent of all homes with a mortgage.

Rich or poor, it's hard to be mobile when you are stuck in your negative-equity house (underwater by between $50k to $90k average per house) that you can't sell without "taking a bath" (for a US total of over $700 billion of underwaterness).

Besides, even if you could move, there are no places available to rent. The share of empty U.S. homes for rent is at its lowest level in a decade.