The Bay Area of California is ground zero of NIMBYism. Daniel Herriges has a very good article on the issue:
A few months ago, I wrote about San Bruno, California’s rejection of a 425-unit apartment complex, even after the developer jumped through an insane series of hoops. To get the project approved, Mike Ghielmetti’s Signature Development followed San Bruno’s own voter-approved downtown vision to the letter. The project was near mass transit. It would have had 64 affordable homes, a grocery store, community space, and Ghielmetti would also have paid $10 million into the city’s general fund—a concession that feels like a bribe in all but name.
The rejection, by a single vote and two abstentions on San Bruno’s city council, was easy to treat as a symbol of California’s utter dysfunction when it comes to housing: in a county with a universally recognized housing crisis, which added 19 jobs for every one new home from 2010 to 2015, someone wanting to build housing could do everything the city asked for and still be capriciously turned down (in part due to a bizarre procedure in San Bruno in which abstaining council members’ votes were counted as “no” votes).
Well, now there’s an update on the story: predictably, the developer is taking advantage of a state law to move ahead anyway with a *larger* project with *fewer* concessions! . . .
There’s a much deeper source of dysfunction here, and that is that it’s so onerous to develop in San Bruno (or virtually anywhere in coastal California), and there are so many costly regulatory hurdles and delays involved that it’s virtually only viable to do so at an enormous scale like 425 or 600 apartments. Imagine jumping all those same hurdles just to build 20 or 30 apartments on a much smaller piece of land. Who would be crazy enough to try?
This is a system designed to turn each individual development proposal into a high-stakes battle. And when that’s the case, the only developers in the arena will be the ones big enough to throw their weight around.
A new Cato study of wealth inequality (by Chris Edwards and Ryan Bourne) also points to the role of regulation:
Section 4 looks at cronyism, which refers to insiders and businesses securing narrow tax, spending, and regulatory advantages. Cronyism is one cause of wealth inequality, and it has likely increased over time as the government has grown.
When I was young, lots of smaller developers built 4 unit apartment buildings all over the place. I don’t see much of that anymore. Regulation (and intellectual property laws) increasingly favors big business.
HT: Tyler Cowen
READER COMMENTS
Dave Tufte
Nov 11 2019 at 8:33pm
I laughed at this one.
The academic committee that voted against my promotion to (full) professor in 2010 followed a set of rules in which abstentions counted as “no” votes. I also had more than followed the stipulations. Funny how NIMBY’s would exploit the same scheme to turn down something that followed their own directions. In my case too, a magical workaround appeared when I pointed out the contradictions.
Academics and NIMBY’s … peas in a pod. Who’d a thunk it?
Phil H
Nov 12 2019 at 1:04am
I’m sure that this story is correct, and that regulation does in fact favour larger businesses. However, I’m not certain of the economic consequences of that. “Small businesses” is a political phrase, that seems to me to be used by politicians in an unrealistic way much of the time. In economic terms, I’ve read that larger businesses are more efficient, and the drivers of much innovation.
So my question is, is the fact that regulation favours big business a reason to hold an opinion one way or another about regulation?
The provisional answer that I hold is that it’s not: we should let big business enjoy the advantages that naturally accrue to them, and tax them to make sure that the benefits they derive can be shared by all in a fair society. Obviously how we do that is a constant balancing act, but I can’t see an argument of principle here.
john hare
Nov 12 2019 at 3:53am
Small businesses and less wealthy individuals are prevented from entering the market due to regulation and you don’t see any principles involved? You think it is all good that only the politically connected or those willing to spend the money to buy off the political machinery can move forward?
Phil H
Nov 13 2019 at 4:34am
John – I don’t think you’ve thought this argument through. Do you really want to argue that it’s important that the government radically change its behaviour in order to help the disenfranchised? Like, y’know, Black Lives Matter suggested?
I think you’ve just made the political argument to me, and I was specifically asking about the *economic* argument.
john hare
Nov 14 2019 at 6:56pm
I’ve extensively thought about this. Neither of us is advocating giving advantage to the little guy. But you are favoring regulation that is crippling to the smaller guy. And then it cascades into less product for the consumer, in this case housing.
Extensive regulation is good if you are trying to harm the consumer and anybody with ambition.
Dylan
Nov 12 2019 at 9:24am
I think larger enterprises tend to be more efficient and sure, they do drive a lot of innovation, but it isn’t clear that they drive the majority of innovation, particularly of the disruptive kind that pushes us forward. I wouldn’t have expected the phone companies to invent Skype, or banks to create blockchain. I’m open to other evidence, but my gut is that it is pretty important to not overly favor large businesses if you want to keep the economy dynamic and full of creative destruction.
Phil H
Nov 13 2019 at 4:39am
Dylan, right, but those are great examples of where very major concentration in the telecom and banking industries *didn’t* stop the innovators from emerging. And economies without big tech giants are definitely not bubbling with innovative start-up energy. I don’t think you’ve demonstrated a good reason to think that giants are bad, or should be smaller.
Dylan
Nov 14 2019 at 7:40am
Phil,
Sure, but I’m not arguing that we shouldn’t have giant companies, just that we shouldn’t create regulation that overly favors them. Yes, we have lots of examples of startup companies popping up and disrupting an incumbent, but we also have some good examples of cases where that hasn’t happened. Take the break up of AT&T for example, look how quickly telecom jumped forward following that decision when you no longer had to rent your rotary phone from the phone company.
For your other point, there does seem to be at least a little evidence that tech giants stifle innovation, see the IMF report earlier this year for more on that.
Thomas Hutcheson
Nov 12 2019 at 7:23am
There is noting “crony” about this unless one just one just wants to drain all meaning from the word. What’s wrong having one concept with certain kinds of regulations favoring larger undertakings and another for regulators over favoring certain business owners that they have know over time (chronos)?
It also seems important to distinguish regulations that grow out of a self-regarding desire to prevent local negative externalities from those that come from an other regarding desire to redistribute income.
What is the source of the transaction costs that prevents Coasean-informed builders (of any scale) to pay local interested parties to support their projects?
robc
Nov 12 2019 at 7:45am
$10 million is a pretty hefty coasean payment that still wasn’t enough to overcome the transaction costs caused by public choice theory.
Government externalities are artificial. There shouldnt be a need to coasean bargain them away. Government action is supposed ( yeah, right) to lessen negative externalities, not increase them.
Pierre Lemieux
Nov 12 2019 at 10:56am
Good point, but is it a “government externality”, except in the loose sense that government carries rent-seeking costs? The argument you are responding to seems more of the sort, “What is the source of the transaction costs that prevent Coasean-informed individuals to pay government or its favored special interests to let you speak, or keep your legs non-broken, or stay alive?”
Thaomas
Nov 12 2019 at 12:22pm
Look, restrictions on residential commercial development did not come out of thin air. There are real if sometimes exaggerated local negative externalities to existing residents from denser development, just far smaller than the benefits that will be enjoyed by “everyone” (developer, future residents/tenants, taxpayers) else. I don’t doubt that there ARE high costs to buy off the NIMBY opposition but just lamenting that the existing set of regulations does not lead to the maximum beneficial set of transactions doesn’t do much good.
robc
Nov 12 2019 at 12:29pm
One of Coase’s points was that the law SHOULD lead to minimum transaction costs.
So this is exactly what we should be “lamenting”.
Thaomas
Nov 13 2019 at 1:46pm
But most of the time the lamentation does not point to what kind of regulation can lead to the result that zero translations cost would get to given, and I believe it should be a given, that transactions costs are not zero.
robc
Nov 14 2019 at 1:06pm
Minimum, not zero.
Christophe Biocca
Nov 12 2019 at 6:15pm
What mechanism exists to do such a thing? The right to build in higher density, in this particular case, is not an owned, transferable right that one party can acquire from others.
The right to approve/deny construction belongs to the city council members in this case, but buying or transferring these rights is illegal.
The council members’ reason for voting no is that they expect to lose more votes from approving than denying. The developer could try to fix that by acquiring votes to counterbalance that, but again, that’s illegal.
I guess the developer could pledge to pay each homeowner in the area some amount if and only if the project is approved by the city, but the problem is that incentivizes the people outside the payment area to raise a stink of their own in the hopes of forcing the developer to broaden it.
nobody.really
Nov 15 2019 at 5:20pm
I think developers do this in the form of property taxes. I expect economies of scale regarding roads, schools, police, fire departments, etc. Thus, each additional unit served should tend to reduce average cost while generating average revenues (reflected in the property tax rate). Current residents who would appreciate shifting some of their tax burdens onto others should be enthusiastic about having more others around–all else being equal.
I surmise that the San Bruno city council did not conclude that all else would be equal.
Christophe Biocca
Nov 17 2019 at 10:10am
Maybe I’m wrong but I think only New Hampshire has a “property-valuation determines your fraction of the total bill” model, everywhere else your tax bill is some fixed % of your property value (which in California will not be reassessed until you transfer ownership, IIRC).
Which means that you don’t shift any tax burden at all, the city just gets more total funds to spend.
Pierre Lemieux
Nov 12 2019 at 10:46am
That’s an important point which is too easily forgotten.
Stewart Bovi
Nov 14 2019 at 12:17pm
I believe that some degree of government regulation is necessary in many industries, construction especially, it can do more harm than good often times. In this instance it looks like the government is over extending its power, which is especially bad when absent voters are counted as votes against. While construction of any building, especially apartments, should be regulated it should not be done so to the point of near impossibility. Rather than providing better housing for people these regulations instead dissuade people from attempting to create more housing, which can in turn lead to greater rates of homelessness and less jobs in the area.
As a matter of fact, it seems like this is almost unintentionally encouraging monopolies in construction. By having such great hurdles to jump in getting projects approved, in addition to having it all decided by a vote, it leads to smaller businesses who can’t afford such lengthy steps to be discouraged from even attempting to build. Those who may still try might be financially unable to or may spend several thousand dollars only to find their project denied due to a single vote from a member who was not even present. This leaves only major corporations who can easily find legal loopholes and afford lengthy projects able to build in the area, effectively removing competition.
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