Zoning out the poor

In a recent study for the Mercatus Center at George Mason University, economist Steven Horwitz points out that restrictive zoning laws impede social mobility by making it difficult or impossible for the working class and poor to establish home-based small businesses:

Another category of economic policy that can hinder the opportunities of those with less income and fewer skills includes regulations that make it difficult to operate home-based and other very small businesses. These restrictions include zoning laws, limits on the kind of businesses people can operate out of their homes (and the number of customers who can visit those businesses), and limits on mobile businesses such as food cart and other street vendors. Such businesses do the kind of work that people with limited skills and not much capital could perform, but legal restrictions, normally at the municipal level, often make such options prohibitively expensive and thereby remove an important path out of poverty.

The idea behind zoning laws is to restrict certain kinds of economic activity to specific geographic locations so that they do not interfere with other forms of activity. For example, one can understand why putting an industrial plant in a residential neighborhood might create problems. By zoning areas as residential, industrial, or commercial, urban planners hope to avoid these kinds of negative externality problems. Despite these good intentions, however, zoning laws, like occupational licensure laws, are often used by those with better access to political power as a way to reduce competition from lower-cost rivals. In Chicago, for example, all businesses have to have a basic business license that costs $250 for two years, and violating that law can cost hundreds of dollars per day. Almost any attempt to renovate a building or operate a business out of one’s home requires a variety of forms—as well as an application process—that are controlled by the Department of Zoning. Even changing a sign can require dozens of hours and forms to get the necessary approval.

This is just one of several ways in which restrictive zoning policies harm the poor. An even more significant one is the way in which restrictions on new development artificially inflate the price of housing in many cities, thereby pricing many of the poor and working class out of the market. Economists have been criticizing such policies for many years. It isn’t just libertarians and free market advocates like Horwitz and Edward Glaeser of Harvard. Leading left-wing economists and policy analysts, such as Paul Krugman and Matthew Yglesias, have decried restrictive zoning as well. In some of the most desirable coastal cities, zoning inflates the price of housing by as much as 50 percent. When the poor are priced out of the housing market, they lose not only the housing itself, but the opportunity to seek out employment opportunities in the areas in question.

Unfortunately, the pleas of both left and right-wing analysts alike have largely fallen on deaf ears. Ironically, despite the harm they inflict on the poor and disadvantaged, the nation’s most liberal cities also tend to have the most restrictive zoning laws. Cynics might argue that this is because the residents of these areas are actually “limousine liberals” who only pretend to care about the poor, but in reality support whatever policies put more money in their own pockets. In my view, the main culprit is not malevolence on the part of liberal voters but political and economic ignorance. The problem is not that voters are indifferent to the plight of the poor, but that most of them simply don’t realize that restrictive zoning exacerbates it.

Restrictive zoning policies also persist in part because they advantage politically well-connected developers who are often the only ones who can get construction permits in such an environment. If building new housing requires going through a byzantine permit process, the politically connected will have obvious advantages over newcomers who lack such clout. To be a success developer in a city like that requires getting in bed with the political class. As Donald Trump put it, “[l]ike all developers, my father and I contributed money to [then-New York Mayor] Beame, and to other politicians. The simple fact is that contributing money to politicians is very standard and accepted for a New York City developer.” Those with less political influence than the Trumps of the world often find it difficult to get building permits. The implicit alliance between well-meaning, but ignorant voters and politically connected developers is a classic “baptist-bootlegger” coalition, in which harmful policies are perpetuated by a combination of idealists and unscrupulous interest groups.

The harm caused by zoning is partially mitigated by the opportunity to vote with your feet for jurisdictions with better policies, including many in the south and southwest. Even so, restrictive zoning is a massive burden on the poor and working class, and deprives many of what would otherwise be their best housing and employment opportunities.