
The paradox of soil: Land has returned as a constraint on growth - bootload
http://www.economist.com/news/briefing/21647622-land-centre-pre-industrial-economy-has-returned-constraint-growth
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roymurdock
Summary: Building & land-use regulations are creating an artificial scarcity
of land in large cities, driving prices up and creating an artificial "shadow
tax" that distorts labor markets.

According to a recent study, if the Bay Area got rid of its building/density
regulations, the local economy would be able to support 5x the area's current
population, which would boost the US' yearly GDP by $2tn. In 2009, the US GDP
was 13.5% lower than it otherwise could have been if land-use regulation had
been abolished in 1964. [1]

The solution? Dissolve land-use regulation, pay residents to allow developers
to build new structures, and distort the market in favor of the renters by
levying a land-value tax. Theoretically, this would allow for an increased
supply of housing while penalizing the owners of the least-productive parcels
of land, such as those who squat on empty plots in New York.

The author hints at the political problem of adopting a land tax near the end:
_But there are practical problems with a land tax — perhaps the largest of
which is that by its very nature it hits the well-connected rich hardest._ So
we may very well never see this regulation brought up or passed given the
current, money-greased machinations of the political machine.

I was disappointed that the author of an otherwise well-researched and
informative article did not get to the heart of the issue: _who owns the
land_? Yes, it is obvious that urban landlords are making a killing in this
market, but who exactly are these landlords? What percent of real estate in
London, SF, NY is owned by actual residents vs. holding companies vs. foreign
interests vs. the government? Is it a small, concentrated number of buyers in
each city? Is collusion possible?

Also, how are we going to induce growth in sectors other than tech,
consulting, and finance? Or do we not care if young talent continues to
accrete in these fields, driving the (currently extortionate) growth of the
city? Is this the best plan for long-term growth and prosperity?

[1] Perhaps this paper assumes that there is an infinite supply of highly-
skilled tech workers who have taken jobs elsewhere due to high costs of rent?
Seems a bit far-fetched to me.

~~~
fweespeech
> The author hints at the political problem of adopting a land tax near the
> end: But there are practical problems with a land tax — perhaps the largest
> of which is that by its very nature it hits the well-connected rich hardest.
> So we may very well never see this regulation brought up or passed given the
> current, money-greased machinations of the political machine.

That isn't the actual problem. Its the problem the author imagines.

The real problem with land [and property taxes] is the fact it tends to flow
into the cost of rent and homeownership. Everyone in this country is impacted,
it is just a question of degree. Similarly, the vast majority sees an item in
their basket of purchases goes up by $X and gets angry.

Case in point: The gasoline tax. The vast majority of economists thinks it
should go up to cover infrastructure but there is no political will to do so
precisely because of how angry it makes their constituents.

People are far less rational than you think they are and if their entire tax
burden was shifted into the rent for their house, they'd flip the fuck out.

~~~
roymurdock
Good point, the author never discusses what percentage of a tax increase would
simply be passed on to the renters of the property. Since demand for these
units is so inelastic, it would probably be near 100%.

What to do then? Subsidize construction? Force higher densities?

~~~
nwah1
A tax on improvements is always passed on to renters, but a tax on the
unimproved value of land cannot be passed on, because the land rent is a pure
economic rent.

"A tax upon ground-rents would not raise the rents of houses. It would fall
altogether upon the owner of the ground-rent, who acts always as a monopolist,
and exacts the greatest rent which can be got for the use of his ground."

– Adam Smith, Wealth of Nations

"A tax on rent would affect rent only; it would fall wholly on landlords, and
could not be shifted to any class of consumers. The landlord could not raise
his rent, because he would leave unaltered the difference between the produce
obtained from the least productive land in cultivation, and that obtained from
land of every quality."

– David Ricardo, On the Principles of Political Economy and Taxation

~~~
roymurdock
Again, both of these classical economists are assuming perfect markets and
non-sticky rent. In a perfectly rational world where prices are constantly
updated as the landlord and tenant are perfectly rational beings who evaluate
how much the land is worth to them on a minute-by-minute basis, then yes this
theory holds.

In a world where there are significant search and movement frictions, where
subsidized housing exists, where landlords and their tenants have
relationships beyond renter/rentee, where a home/building has value beyond its
ability to be slept in, these theories will not hold.

My hypothesis is that if an LVT was levied in SF, rent would go up by at least
50% of the value of the LVT as a direct effect of the tax.

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cryoshon
Overall I think this is a good article, but there were two things which caught
my attention.

Isn't this article just taking a roundabout way of commenting that landowners
in highly productive areas are choking growth and more productivity by
siphoning too much money off of the non-landowners for use of the land? I
understand that they're the Economist so they can't outright say that the rich
are hurting the economy by hurting the poor, but come on, at least be a little
more clear.

Also, a fallacy: "Where workers can be put to use at high levels of
productivity labour scarcity will lead to fast growing pay packets. Those pay
packets will attract workers from other cities. When they migrate and find
new, high-paying work, the whole economy benefits." This is a theoretical
economic concept which doesn't really apply to the macroeconomic reality of
today, in which worker productivity and time commitment increases but wages
stagnate and later decrease, all as a result of a race to the bottom. The
exception is probably the software industry, but I'd argue that in light of
the anticompetitive no-poaching agreements from the likes of Google and Apple,
software industry wages are still actually much lower than they should be,
despite the "labor shortage" and "high levels of productivity". Then there's
the bit where they claim that the whole economy will benefit from this sort of
behavior, which may be true. Keep in mind that from another perspective, this
same action is highly destructive brain drain, leaving destitute cities
bleeding their talent to more prosperous ones.

~~~
crpatino
> [the Economist] can't outright say that the rich are hurting the economy by
> hurting the poor,...

I don't think that's what the Economist wanted to say in the first place.
Rather, it's more a conflict between the capitalist/industrialist rich vs the
landowner/aristocratic rich. The poor just find themselves ducking in the
middle of cross fire.

According to this world view the landowning rich do not produce any Value
Added, they just arbitrage the [arguably artificial] scarcity of real state to
bleed the capitalist rich both directly (office space) and indirectly (since
employees must demand higher salaries for the same work done just to be able
to put a roof over their heads).

~~~
roymurdock
These two classes of rich that you are describing probably intersect a lot.
Once you make money in business, you need to invest it somewhere that will
make you a return. Land is a popular choice.

~~~
crpatino
That's right, this is not about making a witch hunt (you would not expect
economists to do that, I think).

But if you think about, let's say, competing aspects or strategies for money
management... I think a point can be made that one is more beneficial to
society at large than the other. So, it is the same rich people at the end,
but maybe you want to incentivize them to put investments in ventures that
actually do something, and to tax the arbitraging away.

------
jseliger
_The issue is not overall scarcity, but scarcity in specific places—the cities
responsible for a disproportionate amount of the world’s output. The high
price of land in these places is in part an unavoidable concomitant of
success. But it is also the product of distortions that cost the world dear_

The article is good but the title isn't great; the real story isn't about land
per se, but about _land-use regulation_ : the topics are related but quite
distinct (and indeed the article says, "The spread of land-use regulation is
not hard to understand"). As Matt Yglesias is fond of pointing out, steel-
framed construction and elevators are well-understood, century-old
technologies
([http://www.slate.com/blogs/moneybox/2013/05/03/silicon_valle...](http://www.slate.com/blogs/moneybox/2013/05/03/silicon_valley_housing_boom_there_s_no_such_thing.html)).

But laws against deploying them have become important constraints on growth.
The problems are really legal and political. The solutions will be (or won't
be) as well.

~~~
creshal
Both land-use regulations, and land owners (ab-)using their oligopoly to drive
up rents to insane levels, which combined cripple the rest of the economy by
preventing growth.

~~~
deelowe
Where has rent control ever worked favorably for the cities that have
implemented it? It's simple economics, as value is derived from a city, the
city itself becomes more valuable. A more valuable city has more valuable real
estate. More valuable real estate costs more to purchase and develop.
"Location, location, location" isn't just some cliche realtors like to use.

In the majority of cases, there's no conspiracy. Rent goes up, because the
real value has gone up. It really is that simple.

~~~
srtjstjsj
Define "real value". Prices are driven my many-to-many auctions, and each
market (housing) interacts with its supplements (transportation, food, energy,
finance,...). The value varies from person to person, and much of the value is
parasitic: I derive value from getting paid by my job, and my home, transport,
etc enable me to do that job. If I make $100K/yr, is my home providing $10k/yr
of value? Or $40k/yr? If I get a raise, is my home more valuable because it
supports my higher income? Or is my transportation more valuable? Or is my
food more valuable, as it keeps me healthy?

~~~
deelowe
Did you skip macro economics? None of this really makes much sense when
talking about rent prices in a market driven economy.

------
graeme
Are there any examples of new, dense construction in North America that aren't
ugly or dispiriting to live in?

Serious question. I live in a very dense neighborhood by North American
standards. About 32,000 people per square mile, and it's self contained:
people don't have to travel elsewhere to go out, shop, relax, etc. Some leave
for work, but a high proportion are here during the day too.

It was built around 1900, and lots of people visit just for the atmosphere.

If we could clone this neighborhood and built it elsewhere, it would be a good
thing. But we don't seem to be able to build neighborhoods in this style
anymore.

Are there any new developments that are both dense and nice?

~~~
eli_gottlieb
>If we could clone this neighborhood and built it elsewhere, it would be a
good thing. But we don't seem to be able to build neighborhoods in this style
anymore.

It's not that we're unable, it's that North Americans have chosen not to. Nice
dense developments are bad for cars, and car-lifestyles are what North
Americans have culturally designated as the marker of success. Therefore you
see a false correlation: dense developments are only built to house those too
poor to participate in car culture.

~~~
yourapostasy
> ...and car-lifestyles are what North Americans have culturally designated as
> the marker of success.

This is no longer uniformly true. Some of the hottest, highest-priced
residential real estate in the US is explicitly tied to more walkable
environs. In the urban cores of cities like Portland, OR, Boulder, CO, and
Austin, TX, there are definitely extraordinarily expensive ("marker of
success") residences that are impractical (or at least very time inefficient)
to live in unless one eschews a car-centric lifestyle. The developers have
noticed, and there is a boom going on right now in those and similar cities by
the developers to increase density; however, often neighborhood associations
and land-use regulations tend to hold back the density of the proposed
developments.

~~~
graeme
Yeah, this is what I was getting at. The old, dense neighborhoods are getting
expensive. But we can't seem to build them anymore.

------
jcfrei
I feel like land is such a good example of the destructive powers of a good
with a heavily deflationary value (deflationary due to policies and not by
nature). It just leads to hoarding and benefits the early buyers, while at the
same time hindering innovation because people who can make better use of the
land cannot afford it. Land use regulations are probably one of the biggest
blunders in modern capitalist economies. And the worst of it: The problem is
not even visible to a lot of people: Very restrictive building codes in
European city centers are rarely ever questioned - this wouldn't be of much
concern if we talked about single digits km^2, but usually they affect huge
districts. Incidentally land ownership was for many historically despised
"capitalists" the goto way of acquiring wealth: If you have an emerging
company which requires lots of labour, the best investment you can make is
building company housing for your employees, that way a part of the salary you
pay ends up right back in your pocket. All you have to do then is lobby for
restrictive building regulations and your family's wealth and estate is
secured for centuries to come.

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massysett
> But for the tight limits on construction in California’s Bay Area, they
> reckon, employment there would be about five times larger than it is.

This is farcical. One reason people flock to the Bay Area is precisely because
of the tight limits on construction. People like sprawled-out, low-density
development. They like to have yards. They like spacious homes. They like to
see the sky and the mountain vistas and the water.

You could lift the limits on land use and densify the area like Manhattan. But
there are only so many workers who will flock to a Manhattan-like locale...and
those workers are already flocking to Manhattan itself. Many American workers
simply do not want to live in dense environments like Manhattan.

Like an earlier Economist article I think this one misses the possibility that
tight controls on land use can make those places more desirable while driving
some jobs elsewhere. Maybe some jobs simply do not exist due to tight Silicon
Valley land controls. But other jobs simply move elsewhere, just as all
finance jobs are not in NYC and London.

~~~
ejdyksen
> They like to have yards. They like spacious homes. They like to see the sky
> and the mountain vistas and the water.

People flock to the Bay Area to have a yard and a spacious home? The lack of
those things is the reason I _left_!

Maybe the very wealthy have yards and large houses in the Bay Area, but most
everybody else is living in Manhattan-sized apartments without the benefits of
living in a high density area like Manhattan (more walkability, public
transit, etc).

~~~
massysett
You are making my point. If you left to get more space, why would the
Economist think that the place could have five times more workers if they
lifted building restrictions? The Bay Area with no building restrictions would
be even less desirable.

~~~
ejdyksen
The Bay Area with no building restrictions turns into Manhattan. I'd rather
live in Manhattan than the Bay Area. If I'm not going to have much space, I'd
rather the city be designed for that kind of life.

------
legulere
I wonder why cars don't come up in this debate. A typical car space is 20 m².
Usually the amount of parking spaces needed is greater than one (parking at
several shopping locations, at work, ...). Parking often uses vertical space
just once. So with a multi-storey house these 20 m² become enough for a flat
housing a few people. And this still ignores public and non-public (like
driveways) roads.

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hyperion2010
The only way out is up. Don't forget that urbanizing populations is also the
most effective way to lower their carbon footprint!

------
rm_-rf_slash
Shockingly absent from this essay was a consideration of the effects of
climate change. In a hundred years or so, Miami will be a fairy tale. Where is
the factorization of costs associated with high value land that's here today
and gone tomorrow?

~~~
Symmetry
Interestingly denser growth is one of the most effective means we have of
reducing the carbon footprint of our cities. Shorter commutes mean less
driving. Shared walls mean less heating and cooling energy use.

------
milspec
The really sad thing is that we build on our best farmland. If you want to
grow apricots, the best place is San Jose. That whole area in fact is mighty
good for farming.

People need to eat! Californians ought to be living in the foothills of the
Sierra mountains. This puts them close to water and saves the more farmable
land for farming.

Good farmland is flat, is not full of annoying boulders, and has nice weather.
We thus pour slab foundations for giant 1-story McMansions and dig holes for
giant swimming pools. Doing that in the foothills would be a short-term
expense, so instead we'll destroy our best farmland forever.

~~~
13thLetter
Well, farmland exists to support the population, not the other way around. If
farmland exists in adequate and sustainable quantities now, which it does,
there's no need to push people to live in less pleasant locations to make room
for more of it.

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huherto
Oh yes. A big mystery to me is why New Hampshire (and I suppose the rest of
New England) is so expensive. We are in a rural setting, and there is plenty
of land, we are an hour from Boston, but even if you go farther a way, the
house prices are very high. The problem are the lot sizes. Houses are around
1,200 square feet, but the lot sizes are 20,000 square feet. Compare that to
cities like Austin where the lot sizes are around 3,000 square feet. The land
is clearly underutilized; many houses are old; and people just keep going
farther and farther away. The high house prices also drive up the rest of
prices. It is a lose, lose for every body, and the problem has existed for
generations. It even destroys the forests, because big areas are cut down to
build just one house.

~~~
douche
New England is more forested now than it has been in at least 100 years,
possibly since before the Civil War. Between the industrial revolution and the
shift of agriculture westward to the Mississippi and beyond, due to railroads,
industrial food processing and refrigeration, the vast majority of the land
that used to be cleared for farming has grown back up as woods.

~~~
huherto
That is a good point. Still, If we used the land more effectively we could
have more trees.

------
gizi
Why do innovators like to congregate in Silicon Valley? Because other
innovators like to congregate there. VCs and other people feeding off the
phenomenon end up there because they can find innovators there. In other
words, there is no resource whatsoever that attracts anybody there. They are
only attracted by each other. The inclination of congregating there costs a
lot of money. Housing prices and rents are very high in the area. In other
words, these innovators are forking over way too much money to other people
for no good reason at all. At the same time, they are not stupid either. My
take is that at some point they will start moving elsewhere.

------
_red
So laws which create artificial scarcity lead to an increase in prices.

Wow, color me surprised.

------
falcor84
The final paragraph mentions "Virtual reality and social networking" as
something that might eventually abolish the problem, and this rings true to
me. Several years ago, it seemed that perhaps Second Life would accomplish
this, but I suppose it wasn't immersive enough.

Perhaps next year's commercial launches of the Oculus Rift and Vive would
finally allow for sufficient presence to begin making daily VR telecommuting a
reasonable option.

------
tiatia
Buy land. They've stopped making it. - Mark Twain

~~~
nwah1
Yep, land has a vertical supply curve. Although, valuable land is what is
truly in high demand. There's lots of land, but not a lot of valuable land.
But the lack of a commons of any quality is quite concerning. One cannot just
exist without owning land or paying rent.

We pay the biggest chunks of our income to the gatekeepers over that valuable
land, which you need access to in order to get a job or do business.

Let us just be thankful that these landowners worked so hard to produce this
land, ex nihilo.

------
ommunist
Fertile soil was always a limited resource. I assume this is one of the
reasons of the current civil war in Ukraine. Someone wants that soil.

------
exabrial
Visit Kansas!!!

