NIMBYism and the Externalities of Non-Development

Local control of zoning creates regional and national problems that demand non-local solutions

It’s conventional wisdom that land use regulation, like zoning, is a “local issue.” It isn’t, really.

As David Schleicher and I recently discussed, restrictive zoning regulations in cities across the country have an enormous macroeconomic impact. An excess of red tape in our most innovative and economically productive cities has pushed housing prices far above the cost of construction. This introduces massively costly inefficiencies into national labor markets by shunting workers into places where they will be less productive, but where it is easier to build.

Crazy regional variation in housing costs undermines the effectiveness of federal monetary and fiscal policy, compounding the massive macroeconomic cost of our systemic, zoning-driven misallocation of labor. Moreover, restrictive zoning in America’s superstar cities effectively subsidizes the growth of hotter, more sprawling (but less productive) runner-up cities, such as Phoenix and Austin, increasing greenhouse gas emissions and climate risk thanks to their heavy reliance on air conditioners and cars.

All of which is to say, the fact that zoning’s locus of control tends to be local doesn’t mean that it’s a “local issue.” This is important to emphasize because the most promising path to the amelioration of our deepening housing affordability crisis involves a rebalancing of authority over land use regulation in the direction of state and even federal government. The profound regional and national effects of local land use decisions justify this reallocation of authority.

Among YIMBY types, it has become standard to see local control as a problem — as the key to the intractability of the issue. The idea here is that the zoning and land use planning process tends to get captured by a cartel of risk-averse local homeowners anxious about the value of their largest financial asset. The economist William Fischel calls them “homevoters.” They dominate public zoning and planning commission meetings (and often local government generally) where they vehemently oppose and usually successfully block new construction or housing development deemed threatening to their “neighborhood character” and property values.

“The dominance of home-owners and their touchiness about their main asset,” Fischel writes, “explain why nearly every suburban zoning ordinance puts the single-family, owner-occupied home at the pinnacle of uses to be protected.” Fischel’s “homevoter hypothesis” offers a credible explanation for the all-but-insuperable obstacle of NIMBYism and why it’s nearly impossible to get anything built.

Having pickled for two decades in libertarian-ish, public choice, rent-seeking lore (I’ve been personally ridiculed by Gordon Tullock!) the economic/political logic of the homevoter hypothesis strikes me as so obvious that I’d be shocked if something like it weren’t true. (And it is!) But it’s not actually obvious — not even from a public choice regulatory capture perspective. The conventional wisdom that the homevoter hypothesis displaced was that land use is dominated by the so-called “growth machine” — politically connected developers, real estate moguls (like the Trumps and Kushners), construction companies and their attached unions — who will literally and figuratively bulldoze community opposition to new development.

That’s plausible enough, but it turns out that homevoter cartels have developers’ balls in a vice. Indeed, housing is so badly undersupplied in part due to withheld or underutilized development capacity; developers are hesitant to even consider buying and building on parcels in places where they lack allies and inside connections in homevoter-controlled local governments. There’s too much risk of wasting time and money navigating an idiosyncratic and sometimes oddly personal process on behalf of a project that you couldn’t tell was always doomed from the start.

Now, you might assume that Fischel thinks the homevoter stranglehold on the zoning process is bad, but he doesn’t. He sees the exercise of homevoter authority in discretionary, one-by-one, parcel-by-parcel permitting negotiations as a way to ensure that incumbent residents are duly compensated for the negative spillover effects of nearby development — stuff like construction noise, increased traffic congestion, higher student-to-teacher ratios at the local elementary, risk of getting priced out by gentrification, increased demand for public goods/services that won’t be fully paid for by the proposed addition to the property tax base, etc. If a development is blocked—if developers can’t manage to hammer out some scheme of side-payments with the homevoter cabal—then we ought to assume that the proximate social cost of the proposed project exceeds its economic value.

I don’t think Fischel’s Coasean logic works. We shouldn’t expect Coasean deal-making to lead to an efficient allocation of rights unless transactions costs are zero, but transactions costs are far from zero in these circumstances. As the example of developers who fear to tread on unfamiliar ground suggests, the cost of overcoming asymmetries in information can shut down deal-making before it starts. Relatedly, Berkeley political scientists David Foster and Joseph Warren supply evidence that the expense of navigating the thicket of regulations that apply to new development (environmental impact studies, parking minimums, affordable unit requirements, etc.) deprives developers of resources they would otherwise use to compensate local residents who might be harmed or inconvenienced by a proposed project. Coasean bargains are thus left on the table.

Suppose they’re right. Because these standing regulations are themselves set in place by homevoter-dominated local governments, it may be that preventing deals that grease the skids of unwanted development is the point — or at least a part of their intended function. The outcome of the discretionary approval process in any particular case is unlikely to reflect an efficient allocation of rights if the standing scheme of onerous, expensive regulation functions as a city-wide commitment mechanism to reduce the risk that the incumbent homeowners directly affected by a given development will be bought off by developers.

What’s more, Fischel’s plausible contention that homeowners are driven primarily by financial self-interest implies that we should expect them to use their control of land use decision-making to maximize rents by choking off new supply whenever possible. Why think they’d ease off once the risk of losing money on their investment had become negligible? We ought to expect economically self-interested homeowners to treat each rise in value as a new baseline that needs to be defended against erosion. There’s little reason to believe that this kind one-way rent-protection ratchet would ever settle on the efficient allocation of development rights or the best set of deals to internalize the social cost of development externalities. But let’s set all this aside.

Even if we accept the applicability of an idealized Coasean framework to the question of the best local allocation of development rights, we’re still saddled with the problem that (a) the aggregate social cost of the pattern and practice of homevoter NIMBY-ism is mostly borne by people who aren’t local and (b) the size of the non-local cost dwarfs the aggregate benefit that accrues to the relatively paltry set of households directly affected by individual zoning and permitting decisions. Let’s grant, for the sake of argument, that homevoter interventions in the local political processes does lead to a locally efficient allocation of development rights and the internalization of local externalities. It remains that homevoter activism leads to a regionally, nationally, and even globally inefficient allocation of development rights and generates ruinously negative spillover effects that leave most everyone worse off.

That’s why I think California, to take the most prominent example, is on the right track by shifting some land use authority to the state level in order to make the construction of accessory dwelling units (ADUs) a right of ownership or to encourage the development of new housing near mass transit by denying local homevoter cartels access to their full roll of red tape in these cases.

The precedent of local (and often hyper-local) control over zoning and permitting is so entrenched that most people aren’t aware that municipalities don’t have this authority by divine right or because James Madison wanted them to, but because state legislatures give it to them through zoning enabling acts.

Counties, cities and towns are jurisdictional subunits of the states that grant them legal personality and political authority. The relationship between cities and states they’re in is fundamentally different than the relationship between the states and the federal government. Des Moines is in Iowa, but Iowa is not really in the United States. It is one of the states united under a common constitution and government. Cities are not semi-sovereign entities with inherent, imprescriptible constitutional powers separate from those of the states that contain them. And states aren’t federations of legally prior and independent counties and cities. Counties and cities are creatures of their states and have no powers beyond those their state give them. All of which is to say, homevoter dominance of local land use decisions depends on borrowed state authority. But what state legislatures giveth, state legislatures can taketh away.

Of course, the homevoter hypothesis straightforwardly predicts that homeowners will jealously guard this borrowed authority, treat it as an inherent right, and go totally apeshit should the state propose to reclaim even a little of it. And, oh man, do they ever.

Now, the extent to which NIMBY homeowners are driven by purely pecuniary motives is hard to divine. Opponents of new development are much more likely to couch their objections in terms of traffic, parking, or zucchini-destroying shade than narrow financial self-interest. Similarly, objections to adjusting the jurisdictional balance of land use regulatory authority to better align with the scale of the consequences that flow from its exercise aren’t going to be couched in terms of avaricious control of the home value rent spigot. Rather, they will be couched in terms of democracy, Tocquevillian localism, subsidiarity, rights of community self-determination, and the inviolable sanctity of established practice. And this is indeed what we see.

This is long, so I’m going to break it up. In my next post, I’ll show that homevoters and their apologists do indeed argue that limiting the scope of local discretion over zoning amounts to tyrannical encroachment on the sacred right of communities to popular self-determination. I will then proceed to turn a jaundiced eye to the claim that maximally local control over land use is required by a commitment to democracy.

Now, I don’t want to give away the game, but it might turn out to be the case that the homevoters who dominate planning boards and public meetings are not representative of their communities. And maybe it’s not actually undemocratic if majorities of the folks we’ve elected to represent us in state legislatures choose to make some tweaks to the authority they’ve delegated to cities — especially when the way cities have been exercising their borrowed authority is causing profound problems for the state and its residents. We’ll see!

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