John Kroencke: Competing Institutional Solutions to Housing Supply Restrictions

In the last few years, increasing numbers of people across the political spectrum and across the developed world have begun to recognize the effects of restrictive housing rules on high housing prices in many global cities. In these cities, the physical cost of producing an additional unit of housing is lower than the value at which one could sell it for, but people do not produce more because of regulations. And importantly, the implications of restricted housing development don’t end with elevated prices, as those prices create economic and social ripples

Cities are many things, but they are primarily labor markets. As successful cities become more expensive, prospective employees and founders are prevented from moving there. Because there are agglomeration and other network effects, firms want to locate near one another and related businesses. Compared to the counterfactual where moving to successful cities was easier, we are both poorer and growing slower. 

Too often analysis of this problem stops there and assumes by some magical thinking that pointing at the issue is the same thing as solving it. Once the basic problem is outlined, questions of political economy become central. Why is housing restricted? What can be done about it? How do places without housing shortages operate? Thankfully, a number of activists are engaged in the difficult task of reform. 

The purpose of this essay is to assess the two major approaches to reforming housing policy: one which seeks to use political power at a higher level to disempower locally imposed restrictions, and the second which seeks to use higher-level power to bypass mid-level veto players and let small groups upzone themselves. 

Logic of blanket decisions from above 

YIMBY is an acronym standing for “Yes, In My Back Yard” and designates a pro-housing movement supportive of increasing the housing supply in cities. It’s often contrasted with and sets itself in opposition to NIMBY-ism (“Not In My Back Yard”) where residents oppose proposed development in their local area. The YIMBY position supports increasing the housing supply as a response to escalating and unaffordable housing costs. 

Many of the recent YIMBY successes in the United States have relied on state preemption to upzone large swathes of the state. Urbanist Nolan Gray made the case for this approach in a 2017 article where he argued that local policymakers are biased in favor of narrow interests that ultimately harm the aggregate. On the other hand, “State policymakers are often removed from the parochial interests of NIMBY neighborhoods groups… They are also judged on the performance of the state as a whole. This means that they can take a broader view.” Unlike more legally complex issues of federal preemption, state level preemption is conceptually clear: “given that local governments are ‘creatures of the state,’ state policymakers can, in a sense, regulate the regulators, determining how local governments can and cannot operate.” 

This approach has had legislative success in California, Minnesota, and other states that have sought to force municipal governments to allow more houses. One of the most successful elements of these reforms has been related to accessory dwelling units (also known as granny flats or casitas). Additional reforms have targeted increased density near existing public transit, minimum lot size requirements, and floor area ratios (FAR). 

On the other hand, this approach relies on the ability of NIMBYs not to collectively organize and limit the imposed liberalization, whether through their state legislator or by amending the state constitution. In recent months the latter has received more attention after the continued success of YIMBY bills. 

In the rest of the world, much planning is done at the national level. In Japan, for example, this seems to have a positive effect, but there are a number of other differences in political economy that may limit the lessons that can be derived. Additionally, planning in the United Kingdom is mainly national, and the situation is if anything worse there than in the United States. This is in part due to the discretionary nature of the UK system, which state action has been unable to remove.

Logic of allowing opt-ins or opt-outs

In the UK, another approach has had more political traction but is also receiving attention in the United States. Rather than shifting the level of decision making up, advocates of hyperlocal zoning argue that the city or block level is more appropriate. The argument is rooted in both the political economy literature (Ostrom, Coase, Ellickson), law in other sectors, and pragmatic political concerns. The latter was strengthened with the recent failure of the UK government’s attempt to engineer planning reforms from the national level and the departure of former Housing Secretary Robert Jenrick. His replacement Michael Gove has signaled support for allowing hyperlocal upzoning. 

The details of any policy would likely be based on the Strong Suburbs report from last February in which it was proposed that residents of streets (not homeowners) would be allowed to vote on whether to expand the buildable space on their street. Should a supermajority of 60% of residents vote to approve the change, homeowners could expand their homes in line with an architectural design code submitted prior to the vote. Beyond the protections determined by residents, the proposal itself places limits on densification and alteration. For instance, it only would apply to buildings erected after 1918, and the max number of floors residents could allow would be determined by existing density. 

Homeowners would be incentivized to liberalize their neighborhoods through the direct financial benefits that would accrue to them because the market value of added space is higher than the physical cost of the extension. Furthermore, the rules set by them and limited by the proposal itself limit the spillover effects of neighboring development.

Other empirical support for this type of approach can be found in existing examples from the United StatesKorea, and Israel. In each of these cases, locals’ concerns were taken seriously (or at least more seriously than in the competing approach), and there was an ability for hyper-local districts to vote on rule changes and/or opt out. The idea is that allowing the most resistant subset the option of not opting in–as well as the option of opting out–will make it easier to form a winning coalition for reform without exciting the blocking activity of veto players. Still, John Myers argues that in the examples of Korea and Israel, insufficient attention was paid to local concerns, which gave rise to political resistance and the limitation of the reforms. 

This article was originally published in Metaculus Journal.

 


John Kroencke is a Research Fellow at the Centre for Enterprise, Markets and Ethics. For more information about John please click here.

John Kroencke: Long a political target, big business polls better than you might think

Despite criticising the actions of big business being a favourite pastime of many a business minister, John Kroencke writes that wider opinion of big business is actually more favourable than we might expect. 

Like many I rely on Amazon. In fact, there is rarely a week where a package doesn’t arrive on my doorstep. While I feel compelled to keep this quiet among certain Guardian-reading crowds in London, recent polling conducted for the Centre for Enterprise, Markets, and Ethics has found that clear majorities of the British public trust big British businesses and even multinational firms.

A whopping 69 per cent percent of the British public tends to trust big UK businesses. A slightly smaller 61 per cent of the public tends to trust multinational businesses. Despite well founded fears that younger generations are turning away from the market, for those between 18 and 34 years old this measure rises to 73 per cent (72 per cent for large domestic businesses). Perhaps surprisingly only 52 per cent of those 55+ trust multinationals. For cosmopolitan London this measure rises to 71 per cent over the 62 per cent for England as a whole. While there is a sizable difference between the 61 per cent trust in for multinational business and 88 per cent trust in family businesses that does not diminish the results.

This polling conducted for the Centre for Enterprise, Markets and Ethics by Savanta ComRes polled six audiences between 10th May 2021 and 5th August 2021 to secure their findings: the general public, regular churchgoers, business leaders, Muslim and Jewish people, and Church leaders. They also conducted in-depth interviews between 10th May 2021 and 5th August 2021 with ten Anglican and Catholic bishops. The total sample size was just short of 3,500 people.

Why might the public support multinationals and big business more than many journalists, church leaders (only 30 per cent of whom tend to trust multinationals) and politicians? One reason is that while they may love to support their local businesses, the convenience, reliability, and price offered by larger businesses is simply difficult to deny. We may pick and choose what we are willing to pay more for whether it is a local café or butcher, but we do so in the context of relying on big business for the heavy lifting. Even Meg Ryan’s character, Kathleen Kelly, in 1999’s You’ve Got Mail buys her coffee from Starbucks while watching her small bookstore lose out in competition with a larger chain retailer.

Interestingly although once mainly the product of people on the left-wing like small bookstore owners on the Upper West Side, multinational and big business bashing has increasingly been advanced by right-wing politicians as well. In the United States, there is an active effort to regulate Big Tech and Amazon, in particular, is the target of scorn. In the UK, the concerns of multinationals were dismissed with the Prime Minister’s infamous “f*** business” comment in 2018. And more recently it was floated that Amazon and other online retailers may be the target of future policy in a misguided effort to ‘save the high street.’

It is perhaps worth distinguishing between big businesses of the regulated sort and those that maintain their edge despite competitive pressure. While anti-tech claims are becoming louder, tech concentration seems to benefit consumers and there is obvious dynamism in the field. Previous market leaders like Myspace and Nokia faded away at great speed when the product they offered was outclassed by new entrants. The quality of these new products was not a direct result of their funding as we can see in the failure of some high-profile products released by big firms. For instance, when Amazon released its smartphone, it went nowhere for the same reason. Coronavirus drove many new users to Zoom and not just to previous leaders like Skype and Microsoft Teams.

While politicians may inveigh Amazon for its supposed harms, a poll from this summer found that Amazon was more popular than the Supreme Court, NATO, the Center for Disease Control and other major American institutions excepting the armed services. More than just being unpopular, however, efforts to go after Big Tech risk reducing competition by limiting the ability of mergers and acquisitions that allow firms to compete with one another. The bipartisan bill introduced by Amy Klobuchar (Minnesota) and Tom Cotton (Arkansas) doing just that in the United States conveniently allows the large retailers Target (Minnesota) and Walmart (Arkansas) to engage in the practice while limiting their competitor Amazon and other Big Tech firms.

While they may be more popular than expected, multinationals shouldn’t feel too secure in popular opinion saving them from efforts to regulate them. The efforts to regulate them are increasing and trust of the public is tepid. While a majority trust multinationals just 8 per cent say that they trust multinationals a great deal and 11 per cent for large UK businesses compared to 23 per cent for family firms.

This article was originally published on Comment Central.

 


John Kroencke is a Research Fellow at the Centre for Enterprise, Markets and Ethics. For more information about John please click here.

John Kroencke: Environmentalism, Degrowth, and the Moral Case for Economic Growth

Those following the news in the U.S. and U.K. have strained to find much of intellectual interest in contemporary policy debates. Sure, there are ever-widening cultural battles and an array of topics on which one can admire the slogan-jousting of a few hired hands, but there is a seemingly small market for reasoned discussion about the nuts and bolts of policy. Even worse, there is little desire to think beyond direct, intended consequences. In this context, Ezra Klein’s recent article in the New York Times about supply-side thinking was a breath of fresh air. In the article, Klein argues that the American Left should concern itself more with economic growth and supply side issues rather than just redistribution or subsidies for those with low incomes. He sees in both federal and state policies a nascent transformation that he dubs “supply-side progressivism.”

It is worth quoting his argument:

progressives are often uninterested in the creation of the goods and services they want everyone to have. This creates a problem and misses an opportunity. The problem is that if you subsidize the cost of something that there isn’t enough of, you’ll raise prices or force rationing. You can see the poisoned fruit of those mistakes in higher education and housing. But it also misses the opportunity to pull the technologies of the future progressives want into the present they inhabit. That requires a movement that takes innovation as seriously as it takes affordability.

While Klein presents an optimistic case for a pragmatic left, there are many worrying trends. For one, some on the political left are drifting towards dangerously radical environmental thinking seen in groups like Extinction Rebellion. These individuals damage their purported cause by diverting attention from appropriate responses to the challenges of environmental degradation. While the dangers of environmental damage including climate change are obviously real (and the precise nature of some of the tail risks are difficult to calculate), the carbon-intensive economy is not something that can just be abandoned without consequences. Trade-offs exist and must be navigated. Innovation is needed to find the supply-side alternatives to damaging fuel sources.

While extreme ideas like degrowth may provide an attractive cause for many on the environmental left it is a clear example of a scenario where the medicine is far worse than the disease. Advocates often fail to deal with obvious problems in their moral thinking. As Kelsey Piper writes in a piece evaluating degrowth and prominent proponent Jason Hinkel, “The things degrowthers care about — leisure time, health care, life expectancy — are strongly correlated with societal wealth. The generosity of a welfare state and the availability of transfers to a state’s poorest people are also strongly correlated with societal wealth. Innovation, discovery, invention, and medical technology improvements are also strongly correlated with societal wealth.” The standard pro-market moral case against redistribution or other interventions that may threaten future growth, is that they are more morally complicated that advocates think because they risk future gains for the intended beneficiaries. This argument is even more important in the case of degrowth where the purported moral case is focused directly and explicitly not just reducing the rate of future economic gains, but on reducing the size of the economy and the myriad benefits it brings.

Almost as troubling as the core proposals of degrowthers are their critiques of other widely held benefits of a dynamic, forward-looking, enterprise economy. For instance, while the role of innovation in contributing to better outcomes including reducing climate change and mitigating its effects may seem obvious, many committed degrowthers decry “solutionism” or the idea that technology offers a way out of the problems. This concept allows them to discount any proposal short of their extreme ideas, sometimes with clear negative effects on their purported cause. For instance, a former member of Extinction Rebellion Zion Lights emphasizes the anti-nuclear mindset among other things that led her to leave the group, recognizing that to deal with climate change might entail embracing nuclear. Even Angela Merkel, a physics Ph.D., was persuaded to end nuclear power in Germany in the wake of the Fukushima meltdown. The consequence of this decision was that one of the most environmentally-minded countries emitted more greenhouse gasses.

While I’ve mostly written about the political left it is worth stressing that many of the same critiques apply to the contemporary right. The government under Boris Johnson has shown little interest in thinking about serious reforms to the underperforming National Health Service or other types of regulatory changes that led many on the right to support Brexit. Instead, governments and politicians both here and in the US are interested in a politics of increased spending, borrowing, and taxes. Many across the political spectrum are unhappy with the performance of the status quo and desire a return to supply-side thinking. I hope they all succeed.

 


John Kroencke is a Research Fellow at the Centre for Enterprise, Markets and Ethics. For more information about John please click here.

John Kroencke: Mutually Beneficial Solutions to the Housing Crisis

Housing reform efforts in both Britain and the United States have tended to get caught in the quagmire of fractious politics. For years, figures on the left have called for below market rate or social housing. Those in the free-market camp have called for easier private market development rights. Renters have emphasized the outsized returns that homeowners have benefited from over the last decades. Homeowners have emphasized their rights (perceived and real) to control the nature of local new development. The sound and fury of competing claims has meant that the status quo has continued to rule the day and every year the total shortage is exasperated as fewer housing units are built than they would be under less restrictive rules. Despite these familiar arguments there are in fact many reforms which both allow new housing and benefit existing homeowners.

Accessory Dwelling Unit Reforms in the United States

In the United States— where land use planning is done at the municipal and state level- multiple accessory dwelling unit reforms have passed in recent years. Under these rules homeowners can build an additional unit in their back garden, convert a garage, or subdivide an existing home into two or more units. While the laws impose limits on things like the size of the units and their distance from neighboring plots of land, they have been a huge improvement on the status quo.

Data from recent years in California shows that thousands of homeowners have taken advantage of this change with about half of them retaining the living space for their private use and the other half renting the newly created spaces out on the market. Additionally, many of those who choose not to rent out the space on the market use it for elder relatives, siblings, children, or friends.

The housing shortage means that as more and more people desire to live in places with little ability to build, the prices are bid up above the construction cost. Because of this, newly permitted space can be incredibly profitable for homeowners both as a stream of new revenue for those who choose to rent out the space but also in the resale value of the home.

Potential Reforms in the United Kingdom

While there haven’t been reforms of exactly this type in the UK, there is great potential for mutually beneficial reform. Unlike much of California, London and other cities in the UK were developed far before top-down planning systems emerged. As such, one useful starting point for thinking about these types of reforms is to look around at the type of development that was allowed in past decades before researching which factors stop current contemporary markets from responding in similar ways.

In a recent briefing paper for Create Streets, Dr. Samuel Hughes does just this for mansard roof storeys. Mansard roof storeys are distinct from a standard loft conversion because they feature a roof line with two slopes. The steep lower slope of the roof allows most of the added interior space to be unrestricted in height while the shallow upper slope limits the added height to the exterior. The general effect of this ingenious architectural feature is to provide the most increased interior volume within the smallest envelope.

While in the Georgian, Victorian, and Edwardian eras it was entirely natural for residents to add additional space as land prices rose, this practice has been stopped by subsequent regulations. With these changes some streets were ossified in transition: some terrace homes had already built mansard roof storeys while others hadn’t, leaving what Hughes calls a sawtooth effect. Hughes proposes that residents on streets already exhibiting this sawtooth effect should have the right to add mansards of their own. Perhaps more importantly he proposes a rule that would allow the residents of parapeted houses built between 1700 and 1918 decide by simple majority at the street level if they wish allow mansards on their street. As part of the proposal, Hughes provides a basic design guide that would limit the pitch, height, and other aesthetic aspects of any mansards allowed by the two mechanisms.

While this proposal would make new mansards much easier, the system does occasionally allow them. For instance, as Hugh Graham describes in the Times the residents of Fitzroy Road in leafy Primrose Hill London were allowed to eliminate the existing sawtooth effect on their street in the last decade. The additions were only approved in joint- every one of the remaining eleven freeholds had to agree to build additions matching the preexisting mansard on the twelfth terrace house.

As a result of this permission, thousands of square feet were created in an expensive part of London with no downside. For places like Primrose Hill where the floor space is valued so highly, the construction costs of the additions yielded a return of around one thousand per cent.

This recent briefing paper follows up on a February 2021 Policy Exchange proposal from Hughes and Ben Southwood which allow even more street level based bottom-up planning for post-1918 structures.

While the oppositional politics of housing reform dominates the pages of newspapers, there is great hope for mutually beneficial housing reform in both the US and the UK. 

 


John joined the Centre in 2021 after finishing his Ph.D. in Economics at George Mason University. He spent the 2020-21 academic year as a Final Year Fellow at the Center for the History of Political Economy at Duke University.

His role involves research on family business as part of the Centre’s Ethics and Theology project and contributions to the wider work of the Centre. As part of this, he will complete research on the role of the great estates in the private provision of land planning and other work on the role of markets in housing and environmental issues. John’s past research has focused mainly on the history of economics and housing.

A native of California, John looks forward to travelling around the U.K. and Europe.