New York and San Francisco’s insane housing prices are dragging down US growth

Should the buildings on the edges be as tall as the buildings in the middle?
Should the buildings on the edges be as tall as the buildings in the middle?
Image: Reuters/Andy Clark
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What’s holding the US economy back? According to new research by economists, a big part of the problem is that when people living in New York City, San Francisco, and San Jose say “not in my backyard,” it turns out what happens in their backyard affects the rest of the United States.

For background, it’s important to understand how rents are going up around the US. As Quartz’s Matt Phillips discusses in this video, a combination of low housing production and a boost in new households is making living space dearer for everyone.

But what if we could make more houses? Seems like that’s a good idea to get cheaper rent, but it also has knock-on effects. One thing economists understand but struggle to explain is that place matters a lot in the economy, especially if it’s an urban place. That’s why maps purporting to show economic activity often just show where cities are. The dense clusters of people lend themselves to productive interactions, especially in the high-falutin’ tech and service sectors.

But fewer people can move to places where the housing is really expensive, and as you can imagine, places that are really productive—like these big three cities—tend to also have high housing prices. Everyone’s heard stories of the billionaires taking over Manhattan high-rises and not living in them, or seen how the booming tech sector has driven up rents in the Bay Area, making it harder for new people to move there.

What the economists behind this new research—University of California, Berkeley’s Enrico Moretti  and University of Chicago’s Chang-Tai Hsieh—propose is finding a way to get more workers into these special places to boost the economy, even if we’re not quite sure what makes Silicon Valley so productive.

“If some workers were moved from Brownsville to San Jose, aggregate GDP would increase because more workers would have access to whatever productive factor generates high productivity in San Jose,” they write.

Right now, when people move to these cities, they get paid high salaries, but a lot of that high salary goes into their landlord’s pocket—a classic rent income that doesn’t really benefit workers or the companies paying the salaries. Nor does it maximize growth in job opportunities. So how do you lower rents? You need to build more, and that, as Annie Lowrey describes it, means getting rid of cute three- and four-story townhouses. Sure, they’re pleasant to live in, but they’re incredibly wasteful.

How wasteful? The authors estimate that if New York, San Francisco, and San Jose had housing regulations—rules about where you can build, how tall you can build, how much parking you need, and so on—that didn’t protect cute houses and instead were equivalent to the median US city in the period between 1964 and 2009, the US economy would be 9.5% bigger right now, or grow 0.21% more annually. That’s would be a big deal for wages, for the public debt, and for prosperity in general.

That’s not a precise estimate, the researchers caution, but rather an indicator of the order of magnitude of economic losses these cities generate for the whole country by not letting more people in. They say the broad effects of these local decisions suggest that national legislation on zoning might make sense, since the private interest of each city’s homeowners to drive up their housing values contradicts the commonweal.

But they also note that there’s another way to bring more people to a productive place, and that’s with a boosted transportation grid. The high-speed rail that California is currently embarking on may be derided as a boondoggle, but if it can connect the “low wage cities” surrounding the Bay Area—like Sacramento, Stockton, Modesto, and Fresno—to the productive jobs there, a similar boost to prosperity is possible.