Mar 28, 2019

How Political Capitalism Helps Explain Zoning

Adam Millsap Assistant Director, L. Charles Hilton Jr. Center for the Study of Economic Prosperity and Individual Opportunity, Florida State University

Local zoning policy in America is dreadful. There’s robust evidence it increases housing prices by restricting supply, making many cities unlivable for people with low or modest incomes. Yet despite rampant criticism, restrictive zoning persists. A new book that analyzes collusion between the economic and political elite helps explain why.

Political Capitalism: How Economic and Political Power is Made and Maintained, by my Florida State University colleague Randall G. Holcombe, describes the economic and political system that is “political capitalism.” The key feature of political capitalism is cooperation between economic and political elites to their mutual advantage at the expense of everyone else.

As Holcombe states, “Political capitalism is inextricably tied to the ability of the elite to design the institutions of the political and economic system for their benefit.” (p. 256).

Modern zoning as an institution fits nicely into the political capitalism framework. Since the late 1970s, zoning policy has become increasingly hostile to new development, as explained by economist William Fischel in his book, Zoning Rules!. He notes that developers of large housing projects were early proponents of zoning because it prevented noisy or dirty businesses from locating too close to single-family homes and eroding their value. Thus, zoning became an important way to give potential homeowners the peace of mind they needed before investing a significant sum in an undiversified, immobile asset—a house.

Viewing housing as an investment also gives homeowners a strong incentive to impede development. All else equal, more housing decreases the value of existing housing, and apartment buildings are seen as especially damaging since they create more congestion and alter the character of neighborhoods dominated by single-family homes. Houses today are a large proportion of Americans’ wealth and homeowners recognize that zoning helps protect that wealth.

Homeowners and well-connected developers are the local economic elite and together they preserve the anti-growth zoning that has existed since the late 1970s. As for the political elite, the zoning board members, city council members, and judges who create and enforce zoning rules are largely chosen from the economic elite and they act in ways that protect their interests, namely the value of their homes.

Requiring developers to obtain special permission to build certain things may not appear to be in the best interest of developers, but it really depends on the developer. Requiring zoning changes, variances, and permits can help well-connected developers tilt the rules in their favor. Such developers can provide favors to local officials, either monetary or in-kind, to get access to development opportunities not available to outsiders.

recent case of such behavior in San Francisco involves local officials soliciting $20,000 in bribes from an FBI agent posing as a developer. Another case in Gainesville, Fla. involved county commissioners and building inspectors taking bribes in return for approving development projects. And just this year, a Chicago alderman was charged with extorting a company that wanted building permits for a remodeling job. The Chicago Tribune lists several other examples of Chicago officials taking bribes for zoning changes and permit approvals going back to the 1970s.

Modern zoning ordinances are hundreds of pages long and difficult for the average person to decipher. In the context of political capitalism, these are features, not bugs. As Holcombe states in his book:

"Regulations are often written in obscure language, making interpretation difficult and subject to the discretion of those in government who apply the regulations. This opens a clear advantage to the well-connected, because regulations can be interpreted to benefit cronies and harm the cronies’ competitors.” (p. 267)

Government officials need some discretion for bribes and kickbacks to make sense. The more ambiguous the law, the more room there is for the economic and political elite to manipulate it in their favor. Though the people in the earlier examples eventually got caught, there’s little reason to doubt that many others have benefitted from the current system while avoiding arrest.

Despite the problems posed by political capitalism, there has been some progress on zoning reform. Vancouver and Cincinnati have eliminated parking requirements to make it easier to build housing in walkable neighborhoods. Minneapolis also recently enacted significant zoning reforms including allowing duplexes and triplexes in former single-family zones.

Still, large-scale zoning reform remains a challenge, and political capitalism is the reason. As long as the economic and political elite benefit, they will be reluctant to make changes. Widespread progress on zoning reform and a host of other issues requires a greater awareness of this problem.

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