Why Are Cities (Still) So Expensive? (Ep. 435)

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It isn’t just supply and demand. We look at the complicated history and skewed incentives that make “affordable housing” more punch line than reality in cities from New York and San Francisco to Flint, Michigan (!).

Listen and subscribe to our podcast at Apple PodcastsStitcher, or elsewhere. Below is a transcript of the episode, edited for readability. For more information on the people and ideas in the episode, see the links at the bottom of this post.

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Last week on the show, we asked if the problems caused by Covid-19 are so severe that New York City might be “over.”

Max ROSE: Over my dead body is New York City over.

Bravado notwithstanding, there are a lot of problems:

Dan DOCTOROFF: The city is projecting $6, $7 billion deficits

Jennifer DOLEAC: What appears to be an increase in homicide rates.

Jacob VIGDOR: Well, if we have people work from home, that home could be anywhere.

New York City’s problems are not unique to New York. Thousands of cities in the U.S. are looking at big budget shortfalls; 1.5 million city and state workers have already been laid off, with more cuts likely without federal aid. And while cities have become more and more popular over the past few decades — an urbanizing trend that no one saw coming, especially after so many cities suffered so badly during the 1970s — the data seem to show that we may have hit peak city a couple years ago.

Even before the pandemic, New York was losing some population; even though crime was still historically low, it had been rising. The wage premium conferred by New York and many other cities wasn’t such a premium anymore. The biggest reason? All those higher wages were being sucked up by higher urban housing costs. It is a familiar paradox: as a place becomes attractive over time, rising demand to live there drives up housing prices, which makes it less attractive for many people, or at least less viable. What happens to housing when a pandemic strikes? Well — a lot.

As we heard last week, some people have fled New York — although probably not nearly as many as feared. Prices have fallen — although probably not as much as many people hoped, at least not yet. And fewer people have been moving into New York City. After all, the benefits of city living have been diminished, for now, so why move to where the high-paying jobs are if the high-paying jobs can be done on your laptop, from anywhere? What happens next in New York and other expensive cities like San Francisco?

That is really hard to say. But if history is any sort of guide — and it’s usually a pretty good guide, much better than our own daily predictions, which tend to be hyperbolic and emotional — cities like New York and San Francisco will probably recover pretty well. Which means we’ll be right back where we were pre-pandemic: with not enough places to live in the cities where people most want to live. So, today on Freakonomics Radio: why cities got so expensive in the first place. Spoiler alert: it is not just about high demand.

VIGDOR: It’s all about the 1970s.

Also, we hear some ideas to undo the damage and make city housing more affordable.

DOCTOROFF: There is a new technology that can dramatically reduce the cost of construction. 

And we hear from a big-city mayor who, with all the disruptions thrown at her by the pandemic, is facing a seemingly impossible balancing act.

London BREED: I don’t think it’s impossible. I think that it’s hard.

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According to some analyses, San Francisco is the most expensive city in the world to rent a one-bedroom apartment. These analyses, we should say, were pre-pandemic. Anyway, in addition to those high housing prices, San Francisco also has a large homeless population: over 8,000 people as of 2019, a 14 percent increase from just two years earlier. London Breed is the mayor of San Francisco; we spoke a few weeks ago, when the West Coast wildfires were rampant.

BREED Okey-doke. I’m ready to go. 

Stephen DUBNER: Okay. And I understand that in addition to the pandemic, that the Bay Area right now is having some terrible air quality from the wildfires, yes? Does it feel a little bit like the world’s coming to an end there?

BREED: I was just having this conversation with someone earlier today with everything that’s been happening. It just seems like this is not even real. And we are doing everything we can to reassure the people we are on top of things.

DUBNER: So, as the reassurer-er-in-chief, how do you handle it emotionally? I don’t mean to go all Dr. Whoever on you. But it can’t be easy for you personally, can it? 

BREED: I really think about it from a perspective of someone who is not mayor. Like, how would I want to feel if I was a citizen of San Francisco and looking to my mayor for guidance of what is going on and what I need to do. And I would want my mayor to be confident, to be honest, to be clear about what I should or should not be doing. And that’s exactly what I’ve done every step of the way with this pandemic. Because I’m just a regular person. But I happen to be mayor. And I am just as anxious as anyone else to get back to normal. But sadly, it’s not within my control.         

DUBNER: You, personally, and others in your administration and your state have been praised for sounding the Covid alarm early. For shutting things down early even when things didn’t look so bad on the ground yet. So, congratulations on that. Although, plainly it hasn’t been easy still in San Francisco and California. Can you tell us how Covid-19 has affected San Francisco overall, not just in terms of illness and loss of life, but, particularly lasting effects to the economy and, let’s say, population loss?

BREED: I will say that making that decision was hard. Because it’s hard to make a decision based on information that you can’t necessarily see, but you understand is real. It wasn’t just about protecting public health. This was going to really significantly impact the economy and tourism and other things in the city. And I think now, in light of what we see, more people working at home. People are choosing to live elsewhere in places that are further away because they are working from home now. There has been a decline in the number of people who are renting, and rents are dropping. And people are breaking their leases and moving out. But I will say that people seem to be still interested in buying homes. They’re buying mostly single-family homes. People are seeing it as an opportunity.

DUBNER: I live in New York City. And some people — quite a few people, really — are saying that New York City is over as we know it. So, I have to ask, is San Francisco over?

BREED: No. I don’t think that any city is over. I just think that we are going through a very, very tough time. And none of us in our lifetimes could have ever predicted. But we will get to a better place and people will get back to things that they thought they wouldn’t be able to do again. You know, 9/11 changed our country as we know it in airports. What we’re able to bring onto airplanes and how we’re able to go through security is a lot different than what it was before 9/11. So, when you think about it, we are resilient people in general. So, we get through a challenging situation and we adapt. San Francisco, the ‘89 earthquake, I remember that. I was in high school and I thought, “Oh, my goodness.” You know, you saw the buildings had fallen, a lot of the freeways.

DUBNER: The world’s coming to an end.

BREED: It was like, it’s over for us. But, you know what, the fact is that we got through it. And so we will get through this as well.

In San Francisco, as in most cities, the huge drop in revenues because of the shutdown, coupled with the costs incurred to fight the pandemic, have left their finances in bad shape. Before the pandemic, San Francisco was running a $420 million deficit. Now, Mayor Breed is looking at a $1.5 billion shortfall.

BREED: We’ve had to dip into our reserves in order to address it. 

But those reserves are running out, and Breed has had to look for money elsewhere.

BREED: I’ve made it clear that there are tradeoffs to not preparing for the future with people working from home, with folks leaving San Francisco, with businesses leaving San Francisco. With tourism and everything that we’re facing. We can’t afford to just spend everything in our reserves in order to deal with this year and to also keep our workforce intact. But there are raises that we committed to and raises that our workforce expects. So, it’s really tough.

DUBNER: Now, you’ve asked some of your public-sector workers to forego their increases, at least. Yes? 

BREED: Yes, we did.

DUBNER: And how’d that go over so far?

BREED: They have not agreed to do that so far.

DUBNER: So, do you have the option then of furloughing or laying them off?

BREED: Unfortunately, that’s the option if they decide that that’s not in their best interest to do. 

DUBNER: So, no offense, your job sounds impossible.

BREED: I don’t think it’s impossible. I think that it’s hard. They believe, of course, that they should receive their raises. They do have a right to them. The city did agree to provide those raises, but that was before Covid hit. So, if we are forced to give you these raises, then I will have no choice. This is not a threat. This is just, I have to be responsible with the people’s money. 

DUBNER: So, I understand you are proposing to raise about $300 million via a business-tax increase. I’m curious about that because as you noted in San Francisco, it’s the same case in New York and many other places, so many businesses are already in trouble and so I’m curious how you think a business tax increase will play out during this pandemic? And aren’t you just inviting businesses to either not reopen or to leave San Francisco for someplace where they’re not going to encounter that kind of tax increase? 

BREED: Well, here’s the good news about what we’re proposing. It is a more fair tax structure in general. So, it completely gets rid of the payroll tax. It also provides for businesses that don’t exceed $2 million in revenue. They don’t pay this tax at all. So, this really helps our small businesses. And then for those that do, based on their industry, there’s a percentage that they pay. And what this has provided us an opportunity to do is, I think, fix an inequity that existed in our tax structure, because tech was not on the spectrum of where they should be. It allowed us to move that particular tax to a certain area. Whereas for arts and culture and other facilities that aren’t even able to operate, it allowed us to make some reductions there. So, the system has been set up in a way that is more equitable based on the industry and should be a better tax structure for San Francisco in general.

Since our interview, Mayor Breed reached a compromise on a budget that does provide pay raises as long as her tax measure passes in a November vote. “If that measure fails,” Breed said in a statement, “then we will now not only need to find a new way to close our general fund gap, but we will have to find a new way to fund these raises.”

DUBNER: So, let’s talk about living in San Francisco. You are famous for high real-estate prices and the difficulty of creating new housing. You’re also famous — or infamous, unfortunately — for homelessness, which are two sides of the same coin, really. Can you talk about how the pandemic has affected both of those issues?

BREED: So, first of all, San Francisco is expensive for not just purchasing a home, but also to rent. And San Francisco has become more popular, more people were working here. More people were moving here. And it also sadly pushed out a lot of people who were natives like myself and my friends and people that I grew up with. They can’t afford to live here, especially the ones who have kids if they’re not already in affordable housing to go to that next level. It’s just not possible. So, many of those folks have moved outside of the city. I think the problem we have, and why we are seeing even more homeless people than we have in the past has a lot to do with the fact that we have not kept up pace with building more housing.

DUBNER: Are you or anybody using this disruption to the real-estate market to try to change anything about regulations on housing? Change anything about public financing of housing? To use this crisis as an opportunity to create more affordable housing?

BREED: Well, unfortunately here in the city we don’t necessarily have a Board of Supervisors who’s cooperative as it relates to policy changes to getting more housing built. Something as simple as trying to allow 100 percent affordable housing as a right without going through this lengthy process, the board can actually pass legislation to do that. But they won’t. San Francisco has a very, very extremely left group of people on the Board of Supervisors. And I think, in some instances, their focus is to not necessarily do what’s best for people in San Francisco, but do what’s best to stay in the good graces of this whole lefty movement. Rather than trying to work with me as the mayor, it’s mostly trying to undermine the things that I push forward that would allow the city to move forward in building more housing. 

Mayor Breed is herself a Democrat, and her standoffs with other Democrats is not an anomaly for San Francisco politics. She did, as she mentioned, grow up in the city, in public housing.

BREED: Especially at this time, I think about it more than anything else. Growing up in public housing, living there over 20 years. And sadly, feeling hopeless at times and frustrated and just upset that the situation would never come to an end. And wondering why me? Why my community? Why is my family in this situation? Why are we poor? Why do we have to always lose somebody? 

DUBNER: Did you ever come up with a satisfying answer to that question? 

BREED: Not until I start to get a little bit older and start seeing education as a way to improve my conditions. And so that had a lot to do with friends and teachers. And also my grandmother, who really said to me, you can do anything you want to do. You just have to study and work hard. 

DUBNER: So, education is a proven route to prosperity and yet cities around the U.S. — if you look at what cities generally do well, and what they do poorly. One thing that they almost uniformly do poorly is public education, especially. And it’s not for lack of effort or money, plainly, because plenty of people care, or say they care, and plenty of people spend billions of dollars on it. Why is it not working still in most cities? 

BREED I would say that I don’t completely know. But I do know that consistently since I was a kid, it has mostly failed African-Americans and in particular African-American boys. There seems to be a real disconnect in terms of treating all kids of different backgrounds the same in our educational system. I do believe that kids learn differently. And there’s not a one-size-fits-all, and if we see that in our educational system, that one group in particular seems to be the lowest-performing and the highest dropout rates and the biggest disciplinary issues, then we need to start to redirect what we do for that particular population differently than what we do for other kids.

So, I think part of the reason why we fail is because we set up a school system that everyone is supposed to adjust to. We’re not adjusting to the kids. And I think that’s where we fail because just think about it: I’m mayor and sadly, my brother is incarcerated, and he never finished high school. And I ended up in a completely different situation. 

During her time in city government, Breed has pushed for affordable housing policies that address families like hers, people already living in San Francisco. One such policy is known as neighborhood preference, which is applied when new housing units are built.

BREED: Well, in fact, it was my brainchild.

And how does that work?

BREED: So, what the neighborhood preference does is it provides an opportunity to set aside anywhere between 25 and 40 percent — depending on the state as well, because the state is involved — set aside those units in the lottery that would give a preference to people who live in that particular neighborhood, within a certain range of the neighborhood as well as the specific district.

Neighborhood preference went into effect in 2016.

BREED: I fought for that legislation with the federal government who initially denied our ability to use it when we used federal tax credits and subsidies. I actually flew to Washington, D.C., at the end of Barack Obama’s administration to get HUD to change their minds.

DUBNER: How’d you do that?

BREED: I talked about my experience of growing up in public housing. And what was happening when there were promises made to the community that when we build new affordable housing, that those opportunities would be made available to them. But that did not happen.

So, for example we had a lot of seniors in our community. Mr. Hawkins grew up, born and raised, was living on the streets for five years. And we had situations like that with people from the community. And they didn’t have a fighting chance without some level of preference to get access to this affordable housing. And in fact, he was one of the first — I helped him fill out the application. And he was one of the first residents. I’m just, I’m so happy for him. And also that’s exactly why I fought for it, because there is no way he should have lived and died on the streets in the community that he was born and raised in. 

Even with housing prices depressed for the moment by the pandemic, the problem hasn’t gone away. If you are an economist who studies cities, San Francisco stands out as an extreme example of the shortage of affordable housing. For many reasons:

GLAESER: It’s constrained by historic preservation. It’s constrained by earthquake risks. It’s constrained by sightlines and all sorts of beautiful things. 

That’s the Harvard economist Ed Glaeser.

GLAESER: So, it’s a very difficult area to build in. Now, it does have startlingly good weather. It does have fantastic educational institutions. But I would not want Mayor Breed’s job.

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If you want to live and work in or near a place where a lot of other people want to live and work, you’ll have to pay for the privilege. Housing markets, even though they are more complicated than many other markets, still adhere to the laws of supply and demand. So, many of the most desirable cities in the U.S., and around the world, have been expensive for quite a while.

VIGDOR: In the decades before Covid, there was this growing affordability problem in many American cities. 

That is Jacob Vigdor, an urban economist.

VIGDOR: If you go back to 1960 or 1970 the typical renter paid somewhere around 15, 16 percent of their income in rent. If you look at the most recent data, the median renter is paying more around 24, 25 percent of their income in rent. And in a lot of places, you have renters that are paying more than a third and sometimes more than a half of their income.

While cities like New York and San Francisco are particularly expensive, even when adjusting for the higher wages in those cities, the problem is not confined to superstar cities.

VIGDOR: When you actually look at the data, the housing affordability problem is more of a nationwide phenomenon. There might be some cities in, say, the Midwest, the Great Plains, or parts of the South where the housing is less expensive. Incomes tend to be lower in those regions as well. 

Vigdor teaches at the University of Washington in Seattle, which has had its own affordability crisis.

VIGDOR: So, on the one hand, Amazon has brought 50,000 high-paying jobs to this city. And I don’t think you could find a city in the world that wouldn’t love to have 50,000 high-paying jobs just sort of march right in. But while the prosperity has been great, there have been some downsides. So, Seattle’s expensive and it’s only gotten more expensive over the past few years.

When a city like Seattle undergoes a big rise in housing demand, why can’t supply keep up? Adding new houses and apartment buildings clearly isn’t so simple, but still — what are the causes of this failure?

VIGDOR: So, zoning laws are preventing cities from increasing their density.

This is one obvious cause.

VIGDOR: Once upon a time, you might have read a book when you were a kid where there was a house in the country, and then the house was surrounded by other houses, and then eventually the house was surrounded by these tall apartment buildings and there was an elevated train in front of it and all this kind of stuff. 

The book Vigdor’s talking about is The Little House, by Virginia Lee Burton. I would recommend it.

VIGDOR: Reality has turned out somewhat differently than that book. In the later part of the 20th century, what we see is that the little house gets surrounded by other single-family houses and then it remains surrounded by single-family houses forever.

DOCTOROFF: One of the ways to correct the supply problem is to rezone — replan, if you will — permit significantly greater density in the city than we have historically. 

That’s Dan Doctoroff, a former deputy mayor of economic development in New York City under Michael Bloomberg.

DOCTOROFF: We did, I think, 140 rezonings during the Bloomberg administration. And I think, in retrospect, we didn’t do nearly enough in terms of increasing density. The fact is, the more land you make available for housing, the cheaper the land will become. And therefore the less expensive the housing actually should be.

DUBNER: Now, the cities that don’t do that well tend to be the most, I guess, progressive/liberal/Democratic cities — New York, San Francisco, and so on. So, is that a feature of progressive politics? Is this kind of high-minded NIMBYism?

DOCTOROFF: Well, the cities also tend to be older cities where there is a lot more historical character and other things that need to be protected. So, there clearly is a correlation between permissiveness in terms of land use and the general resistance to government. But I think we’re gonna have to get over that with respect to zoning if we’re going to solve the affordability problem. Now it’s not just about zoning. There’s a question of when you rezone and you upzone property, who gets the benefit that upzoning? 

DUBNER: And I think that the typical, let’s say, voter in a big city, the knee-jerk response — and maybe it’s 100 percent correct — is the advantage mostly goes to the developers and their friends. 

DOCTOROFF: I think that’s been true, to be honest. And I think we need to rethink that. 

DUBNER: Okay, so how do you rethink that? How do you actually divert a large share of that benefit to the citizens of a city? 

DOCTOROFF: Through legislative action, basically, where you say we’re going to upzone it so you’re going to get a lot more density. But the benefit of that will actually go to the city. So, if we say, you could build 10 units on a plot and now you can build 20, why don’t we capture that additional land value, largely for affordable housing.

DUBNER: And so the standard economist might say, “Well, yeah, but then you’re starting to degrade the incentives for developers to build.” So, can you point me to an example of where that balance has been well-struck? 

DOCTOROFF: Well, we have something that we call inclusionary zoning. It’s across the country, we did it in the Bloomberg administration, and essentially what that is, is developers are incentivized, to basically build more affordable housing for the right to build up higher. That’s one mechanism. But you have to make a distinction between the owners of land and the developers of land. If I capture, as government, the benefit of that upzoning, I then have the right to go ahead and help to encourage new developers to build more affordable housing. There’s lots of mechanisms that we can create.

Lots of mechanisms in theory at least. But in practice, New York hasn’t gotten any more affordable since the Bloomberg rezoning. Adding a modest supply of new housing has not proven sufficient. Why not? Well, there are a few historical reasons to consider. Jacob Vigdor again:

VIGDOR: So, up until the ‘60s, people would just come in with bulldozers and what had been a low-rise neighborhood or a single-family neighborhood, it would get redeveloped at higher density. 

Voila! Instant density. Meaning more housing supply. But:

VIGDOR: There is a turning point that we see around the 1960s, maybe even into the ‘70s. And you can associate this with what you might call a historic-preservation movement. Once you get people standing in front of the bulldozers and saying “You can’t change the character of this neighborhood,” that is when you start to see an inflection point in the trajectory of housing prices in some of the older cities in the U.S. 

GLAESER: It is certainly true that every time you have an empowered local homeowners’ group who says they don’t want this apartment building rising next door, they’re saying no to outsiders.

And that, again, is Ed Glaeser, the dean of urban economists. Before this era of housing incumbency, Glaeser says, the power lay with political machines, like the famously corrupt Tammany Hall in New York.

GLAESER: Now, there are a lot of things that were wrong in the way machines ran things, but you had a lot of political entrepreneurs who saw a profit in urban growth and urban change, and they tended to make that happen. Whereas what happened over the last 50 years is neighborhood groups learned how to organize. They blocked highway projects. They blocked housing developments. And they became very empowered at stopping change.

To be fair, this wasn’t the only kind of activism focused on stopping change. Tenants’-rights groups also promoted rent control, with the goal of keeping housing affordable. Although, as we’ve discussed in an earlier episode — it’s called “Why Rent Control Doesn’t Work” — rent control, well, it doesn’t work, at least not as intended. Yes, it is good for the incumbent tenants who get to hang onto their underpriced apartments. But it’s bad for the next crop of would-be renters, since the incumbents don’t move out; and it’s bad for overall housing supply. Because if developers and landlords can’t make enough profit, it diminishes the incentive to build more apartments — except perhaps at the high end, which is what New York and San Francisco have both seen a lot of. But there’s another historical contributor to high housing prices in cities that most of us don’t know about. Even Jacob Vigdor didn’t know about it when he first started studying why cities are so expensive.

VIGDOR: So, the first thought that I had was, “Well, this is a story of zoning laws. This is a story of not enough housing being built.”

Okay, as we’ve discussed, that is part of the story. But there was more.

VIGDOR: So, this is sort of like a detective story. One of the clues that came in in this mystery was Flint, Mich. And what the data show is that the affordability problem in Flint, Mich., is just as bad as it is in San Francisco. And Flint, Mich., is not a high-tech town. You know, Flint, Mich., is a Midwestern Rust Belt city that has suffered abandonment and it’s got a high vacancy rate, but still, the housing is not affordable. 

Unaffordable housing in a city that’s best known for not even having drinkable water? That’s pretty strange.

VIGDOR: Then the next clue to come in was, I looked at the trends in prices over time for brand new apartments versus old apartments. And it was kind of surprising that the rental rate for a newly constructed apartment unit across the United States has pretty much tracked inflation. But the price index for older apartment units, that is where you see rents are rising much faster than inflation.

That too seemed very strange. And then came the third and final clue:

VIGDOR: This final piece of the puzzle, it’s all about the 1970s. Because housing looks like it’s fairly affordable in 1960, in 1970, but then it really jumps between 1970 and 1980. And so, you look around and you say, “Well, what happened in the 1970s that would have made apartments a lot more expensive?” And the answer is landlord-tenant law reforms. So, up until about the mid-1970s in most states, when you rented an apartment, you rented it as-is — which is to say, the landlord didn’t guarantee that the heat worked. The landlord didn’t guarantee anything. The landlord’s only obligation was to give you a key. “Quiet enjoyment” was the legal standard. 

But in the 70s, new laws were passed to protect tenants against uncooperative or unscrupulous landlords.

VIGDOR: We moved to a standard called “the warranty of habitability,” which is to say that apartments are no longer rented as-is. Now, if you rent housing to someone, the landlord needs to assure that it is up to code, that it has functioning heat and electricity and running water and all these things. 

For newer apartments, whose rents were keeping pace with inflation, this meant changes in construction. But older buildings had a lot of new costs imposed on them, to bring things up to code.

VIGDOR: What’s happened over time with these additional tenant protections and new regulations about the quality of existing housing units, that supply of affordable housing in many cities has really dried up because landlords now have to charge rents high enough that they can defray the costs of keeping the unit up to code, which is creating affordable housing problems even in cities that have experienced no population growth. 

Jacob Vigdor was pretty sure he’d solved the mystery of the disappearing affordable housing. But he still had to show causality.

VIGDOR: Yeah. So, to do this study, my co-author, Alana Williams, and I were looking at United States census data. What we did with the analysis was to compare the trends in states that enacted these laws in the 1970s. There was a handful of states that had a warranty of habitability much earlier in time, and then there are quite a few states that didn’t adopt this new standard until much later. 

In other words, a perfect natural experiment.

VIGDOR: And so that’s where we see the smoking gun. We see that the affordability problems really start to hit in the states that adopt this new legal standard at the time that they adopt it. 

As a result, old housing became nearly as expensive as new housing. Which means that even as new housing supply came on the market, the cost of housing generally kept climbing. And there was a lot of old housing in need of extensive maintenance: in 1960, an estimated 25 percent of the rental stock in the U.S. was considered dilapidated or deteriorating. Now, from a humanist perspective — not an economic perspective — shouldn’t we be cheering the fact that slums were no longer acceptable housing?

VIGDOR: Well, a lot of people will tell you that, as a society, everyone should be entitled to have a home that is safe, decent, and affordable. If you go back before the 1970s, we had a lot of housing that was affordable, but it wasn’t safe or decent because there was no requirement that it be kept up to code. So, with the reforms of the 1970s, we moved into a world where the housing was much more likely to be safe and decent. The problem was, it wasn’t affordable anymore because requiring landlords to keep up the housing, they’re going to pass those costs along to the tenant. So, if you think about it, if you want to have all three — if you want housing to be safe, decent, and affordable — we have to kind of realize that, look, that costs money. 

And expensive housing — whether it’s old or new — tends to beget more expensive housing in cities.

VIGDOR: The zoning makes the land expensive. When the land is expensive, the housing becomes expensive. When the housing is expensive, you need to pay the construction workers a lot so that they can afford housing. 

Think about construction workers in Seattle. They’re competing for housing against Amazon and Microsoft employees.

VIGDOR: You can’t have your house built in Southeast Asia to take advantage of the lower labor costs the way that you can with your shoes or your clothing. It’s got to be built on-site and it’s labor-intensive and the labor is pretty expensive. 

So, you’ve got high labor costs, brought on in part by the high capital costs, brought on in part by inefficient zoning. But, you may be thinking — shouldn’t technology be making housing cheaper like it’s made everything else cheaper?

VIGDOR: There’s not a whole lot of technological development that has been relevant for the construction industry. We’ve had some advances in materials, but we’re still making houses with the same two-by-fours that we were making them with 50 years ago. 

But shouldn’t productivity be rising in construction the way it’s risen in so many other sectors?

DOCTOROFF: Construction is probably the industry — maybe other than government — that has had the least amount of productivity improvement over the last three or four decades. 

That, again, is Dan Doctoroff.

DOCTOROFF: I mean, literally, there’s been almost none. 

Doctoroff is looking to change that. He’s C.E.O. of an Alphabet subsidiary called Sidewalk Labs, which calls itself an urban-innovation company. Its flagship project was a new, built-from-scratch “smart city,” in Toronto. We did a previous episode on that, too: it’s called “How to Build a Smart City.”

DOCTOROFF: The Toronto project was literally to build a new district on the waterfront that would incorporate a whole range of innovations across almost every sort of urban system — you know, mobility and sustainability/infrastructure, buildings, the public realm, digital infrastructure.

All that sounds pretty promising. But the project didn’t happen.

DOCTOROFF: We did end up terminating that project in part over economic issues that came about as a result of Covid.

DUBNER: But only in part, right? There was friction with the citizenry or no? 

DOCTOROFF: Yeah, I mean, there was but we’d actually worked our way through the vast majority of it. Most of that friction was over concerns about privacy. 

DUBNER: I mean, if I think I’m living in a city that’s essentially run by Alphabet/Google, I’m thinking about how much of my life is being recorded and acted upon in some way I don’t know. Was that essentially the main objection? 

DOCTOROFF: I think it was an objection. I don’t think it was a fair objection. I don’t think our goal was ever to use, for example, personally identifiable information in almost anything that we did. So, I think that became a very convenient reason to attack the project from people who were otherwise opposed to it for lots of different reasons. Overall, though, a large percentage of Torontonians, an overwhelming percentage who knew about the project, were actually in favor of it. At the end of the day, it really came down to economics and—. 

DUBNER: Economics driven primarily by the pandemic? 

DOCTOROFF: Well, we had agreed on a price, essentially, for the land. And in the wake of the pandemic, the purchase price that we’d agreed to just wasn’t feasible anymore. At the end of the day, that was the proximate cause of why we decided to withdraw. 

I don’t know about you, but it strikes me that if the price of land for a new experimental city is too expensive for Alphabet, that doesn’t bode well for the affordability of cities in general. Dan Doctoroff, however, is an optimist. He’s also a New Yorker. And seeing New York in trouble — battered by the pandemic and struggling for decades with housing supply — he believes that what he’s been learning at Sidewalk Labs will ultimately pay off for all of us. Doctoroff says there are big gains to be made in new technologies and productivity that will make building more affordable going forward.

DOCTOROFF: There is a new technology, relatively new, called mass timber, and it uses wood, which is not a new technology, but the way the wood is, in effect, manufactured and laminated gives it really powerful properties that we think with factory automation can dramatically reduce the cost of construction. But at the same time, they’re significantly more sustainable than traditional building methods. Think about it as Lincoln Logs or something like that, where you could develop a kit of parts that could then be assembled partially in a factory, partially on site with dramatically less time and effort. 

DUBNER: And cost, I assume. 

DOCTOROFF: And cost. So we’re quite excited about that. Here’s another example, which we think is really compelling, which is a new technology called digital electricity. It’s essentially electricity that is delivered over Ethernet cables. Now, there’s a lot of advantages to it. One is it effectively works as sort of a communications backbone in the building itself. But more importantly, it’s much safer than traditional electricity. And as a result, you don’t need to put wires and conduit in walls. You can put them in the baseboard.

Why does that matter? It matters because that gives you the ability to make buildings a lot more flexible going forward. You can design wall systems that actually don’t need wires in them, that can be moved more easily. Now, let’s take an example of retail. So, we know in urban environments — this was happening before the pandemic and it’s only been accelerated now — that the retail environment is horrible. Right? That’s threats from e-commerce. So, there’s a lot of potential new ideas for retail.

Rents probably will be coming down. That’s going to be an important thing to encourage new people. But they don’t want to enter into long-term leases, which is what landlords typically require. Well, the reason landlords want long-term leases, among other things, is renovation costs are so high. So, if we can create buildings that are a lot more flexible, and digital electricity is a key component to that, then you know what? Maybe what we can do is really help to accelerate the retail revival.

I don’t know. Maybe I’m just worn down by the pandemic, desperate for any wisp of encouraging news. But I find Dan Doctoroff’s construction techno-fixes — and his optimism — rather uplifting. It’s a hallmark of humans that we like to complain. But complaining also serves its purpose; it shows our dissatisfaction with the status quo and our desire to do better; our desire to repair the world (at least your corner of it) in some way large or small. So, here’s to more repair, more rejuvenation, more out-with-the-old, in-with-the-new. Here’s to mass timber and digital electricity and, while we’re at it, smarter housing policy from top to bottom. That’s not too much to ask for, is it?

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Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Zack Lapinski. Our staff also includes Alison CraiglowGreg RippinMary DiduchCorinne WallaceDaphne Chen, and Matt Hickey. Our intern is Emma Tyrrell. We had help this week from Nellie Osbourne. Our theme song is “Mr. Fortune,” by the Hitchhikers; all the other music was composed by Luis Guerra with additional music this week by Stephen Ulrich. You can subscribe to Freakonomics Radio on Apple PodcastsStitcher, or wherever you get your podcasts.

Here’s where you can learn more about the people and ideas in this episode:

SOURCES

  • London Breed, mayor of San Francisco.
  • Ed Glaeser, economist at Harvard University.
  • Jacob Vigdor, urban economist at the University of Washington.
  • Dan Doctoroff, C.E.O. of Sidewalk Labs and former New York deputy mayor for economic development.

RESOURCES

EXTRA