A $2 Trillion Hand Brake

"I couldn't repair your brakes so I made your horn louder." - Unknown

In a fascinating article in the Economist Magazine entitled "The paradox of soil", the authors put forth that the cost of strict land regulation in major metropolitan areas around the world is like a hand brake on economic growth.  In the United States it is estimated that the lost GDP is around 13% a year or $2 Trillion.  This is a very large number and unlocking this blockage would result in significant benefits to society and economic growth.

In the past restricting land development, particularly in large metropolitan areas, was thought prudent due to the inherent slums and poor living standards that urban sprawl created.  Through the years land development controls were put into place to restrict development so that these problems were eradicated.  Fast forward to today and these controls have now moved far past the median and are creating enormous drags on economic growth.  Removing or streamlining a significant portion of these over burdensome controls is the key to unlocking significant economic gains.

In the past it was thought that technology would make cities obsolete.  Workers would be able to work anywhere so there would be a tendency to relocate out of the cities to cheaper more remote places.  It turns out that the opposite is true.  Major metropolitan areas create brain pools that cannot be replicated elsewhere.  People living in these brain pools are stimulated by their peers in ways that cannot be replicated moving away.  For this reason cities like London and San Francisco continue to attract people while the outlying areas remain a backwater.

Furthermore it is shown that due to the concentration of people in the metropolitan areas a large swath of wealth inequality occurs in these cities as landlords receive a larger proportion of income on their land holdings that those who own similar tracts of land outside of these areas.  The impact is even larger when you consider that as the rent rises the poor are pushed further from the city center, away from the brain pool and this further out of the main stream.  This inability to partake in the activities of the main stream expands the inequality and forges a barrier to entry.

In addition, as the cost to living in these cities increases people that are living on the margin of prosperity leave the city in search of a better quality of living elsewhere.  As we have seen above, leaving the brain pools reduces their productivity thereby slowing economic growth and pulling harder on the economic hand brake.

I have to say that I am living through the nightmare that is city planning and development in that I have spent the past 4 years trying to get a 22 unit parking lot built downtown San Diego.  Now I will be the first to admit that this is not the type of expansive land use that the authors of the article are promoting but when you consider that after 4 years I still do not have the necessary permits issued you can see immediately the drag on economic growth.  Were it easier to obtain permitting I would have considered building an apartment complex (which is exactly what the authors think will lead to greater economic growth) but who knows how long that would have taken and how much it would have cost.

So while I believe that some land development restrictions are required to ensure green areas and healthy living standards for all, loosening the strangle hold that is strict developmental control and allowing development to occur would have an immediate and direct impact on the economic outlook to not only the city but the nation as a whole and that should be a high priority in all cities across the globe.