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Why Regions Fail: Zoning as an Extractive Institution

The hottest topic in economic development theory right now is the role of institutions. In their new book, “Why Nations Fail,” social scientists Daron Acemoglu and James Robinson argue that institutions—the rules of society—have long lasting implications on national prosperity.

Specifically, they contrast “extractive institutions” that concentrate power and hamper development, such as slavery (at the extreme) and limited voting, civil, or property rights, with open institutions that diffuse power and opportunity, providing universal incentives to invest and innovate.

Urban scholars and policymakers have much to learn from such institutional analysis. While most political economists think of institutions operating at the national or even state level, there is one essential but overlooked institution operating at and within the metro scale: zoning.

In a new report I argue that its impacts are destructive. Zoning laws are keeping poor children out of high-scoring schools, degrading education, and weakening economic opportunity.

Anti-density zoning--embodied in lot-size and density regulations--is an extractive institution par excellence. Through the political power of affluent homeowners and their zoning boards, it restricts private property rights--the civic privilege to freely buy, sell, or develop property--for narrow non-public gains. Property owners in a jurisdiction benefit from zoning through higher home prices (because supply is artificially low) and lower tax rates (because population density is kept down, as school age children are kept out), while everyone else loses.

Take New Jersey, which by any measure of zoning is one of the most restrictive, anti-density states. In 1970, two Rutgers professors did a survey of zoning in eight northeastern New Jersey counties. They found that only 8 percent of developable land was zoned for multi-family housing, and 90 percent of land required at least a half acre or more per housing unit; by contrast, the typical single-family house in the United States sits on roughly a quarter acre today. In 2010, the median home value in New Jersey is 80 percent higher than the average for all 50 states, and it has the third highest median home values behind Hawaii and California (which also has extensive zoning laws, albeit less onerous in their opposition to density, as examined recently).

The effects within the state are even more important. Compare two counties in 1970: Somerset and Camden. Zoning laws in Somerset County prohibited multi-family housing on developable land in 1970. Moreover, 85 percent of developable land was zoned so as to require at least one acre of land per housing unit--land plots roughly four times larger than the median U.S. home. In Camden County, by contrast, 46 percent of land was zoned for multi-family use and only 21 percent was zoned for large lots--on one acre or more. Today, homes cost 1.8 times more in Somerset County than in Camden County--a $180,000 difference.

These high housing costs prevent poor people living in Camden, Trenton, Newark, or elsewhere from moving to Somerset County, where they would otherwise benefit from higher-quality schools. Indeed, public school test scores in Somerset County are nearly 30 percentage points higher (on a 1-100 scale) than they are in Camden County. Moreover, while 40 percent of public school students in Camden are eligible for free or reduced lunch--an indicator of low-income status--only 15 percent of students meet that standard in Somerset. Despite multiple New Jersey Supreme Court cases declaring that all municipalities must meet their fair share of affordable housing requirements, these ruling have never had the power to overcome the protectionist incentives of the affluent and iron-willed townships.

The New Jersey case is by no means isolated. These laws are common across the country.

Dragging down the quality of education available to poor children is not only unjust, it hobbles national economic gains and therefore harms even affluent people. Young black and Latino adults earn thousands of dollars more each year, and are far more likely to obtain a college education, if they grow up in metro areas where blacks or Latinos attend high-scoring schools--like in Raleigh or San Jose--compared to their counterparts in metro areas with low-scoring schools--as in Philadelphia or New Haven. Impressive research from Raj Chetty and other economists has also found that the quality of one’s school environment--measured by teacher or peer performance--causes large long term gains in earnings and labor market performance.

Previously, my work has found that zoning laws inflate metro-wide housing costs, limit housing supply, and exacerbate segregation by income and race. Other work faults these laws for their damaging effect on the environment, since they make public transportation infeasible and extend commuting times. With a few possible exceptions (see Michelle Alexander), it’s hard to think of an existing political institution in the United States that is more destructive of human and social capital.