In this century, we see a few academics start to tug at various corners of this over-arching web of causality.
Much of the current Red-Blue divide in how states vote for President evolved only over the last generation. The Gap now closely correlates with housing prices by state: e.g., the expensive San Francisco Bay area votes Democratic and the cheap Dallas-Fort Worth metroplex votes Republican.
by Ashley Pettus
FOR 100 YEARS, the United States experienced a steady decline in income disparities between the richest and poorest states—with Mississippi and Alabama, for example, beginning to catch up to the more prosperous Connecticut and New York. But this equalizing trend ceased after 1980. Why? According to Daniel Shoag, assistant professor of public policy at the Kennedy School’s Taubman Center for State and Local Government, housing prices explain a large part of the puzzle. In a recent working paper coauthored with doctoral candidate in economics Peter Ganong, Shoag found that land-use restrictions in high-income locales have created barriers to entry for less-skilled workers, exacerbating inequality and threatening labor mobility—a key component of a healthy economy.
Economists have long viewed the leveling of U.S. regional incomes as a prime example of “convergence”—the principle that, in a market system, poor economies will grow faster than rich economies as capital moves in search of greater productivity gains. Yet this “capital mobility” theory doesn’t explain why the nation’s wealth gap stopped closing 30 years ago, leaving poor states still a sizable distance behind.
Shoag and Ganong posited that something more than mobile capital had to be involved to account for the end of the convergence effect. By digging into census records, they found that a pattern of directed labor migration (people moving to more productive places in search of higher earnings) could explain 40 percent to 75 percent of the century-long growth in economic equality among states. As more workers moved into higher-income areas, wages there began to fall, and human capital began to even out, while in the areas that were losing workers, wages began to rise, drawing more people into the workforce and increasing average incomes. “When this directed migration stopped,” Shoag explains, “income convergence also stopped.”
He and Ganong suspected that housing markets might explain why people stopped moving. What they found startled them. “Of course, rich places have always had higher housing prices than poor places,” Shoag notes, “but after 1980, the slope doubles.” The steep rise in housing costs in places like New York City, Boston, and San Francisco has had a direct impact on migration patterns and, hence, on convergence. Even though highly skilled workers in fields like finance or high tech have continued to move to these cities, low-skilled workers no longer have an incentive to do so because the higher cost of living now outweighs the likely income gains. Instead of poorer people moving to New York, pushing down wages there, while bidding up wages in poor areas, and skills equilibrating across places, “What you now get is skill sorting,” Shoag explains. “High-skilled people continue to move in, while poor people start moving out.”
What caused housing markets to change? The researchers created an index of regulation that could predict the flexibility of housing supply in different states in response to demand. Using an online database, they measured the number of times the phrase “land use” appeared in appellate court cases by state and year, and found that land-use restrictions became more common nationwide in the 1970s, but that not all states became strict regulators.
The Have places (e.g., Northern California) had gone heavily for land use regulations while the Have Less places (e.g., Northern Texas) had not.
The frequency of “land use” references in a state’s legal history proved a good predictor of whether a state would develop a high-regulation housing economy with constrained supply. By measuring regulation levels, Shoag and Ganong were able to test their hypothesis: they found that regulations limit housing supply by reducing the number of permits for new construction, and raising prices. This lowers net migration, and thus slows human-capital convergence and income convergence.
It's worth noting an important distinction in regulations on land use between new construction (which are enforced with severity) and land use regulations on existing construction (which often get a wink and a nod). Recall how The Edge of U2 has hired half the ex-legislators in Sacramento in his struggle to build five houses on a ridge in Malibu. In contrast, 20 miles away in Northridge, a resident of an illegal boarding house holding 17 people in a one family home murdered four other people.
Americans, used to having a certain standard of living, move out of regions with strict regulations against new construction and unenforced limits on overcrowding existing construction. Foreigners, who will live 17 to a single family home, move in.
The authors have yet to investigate why increased regulation took hold in certain states, but they do know that land restrictions preceded the concentrations of wealth.
Land use regulations tended to take off first in places like Northern California where you have a combination of really nice land hemmed in by deep water, lots of local high-end wealth producing businesses, and a post-Puritan tradition conducive to elitism.
From the working paper:
During the period of strong convergence prior to 1980, population flowed from poor to rich states, and changes in population were also well-predicted by initial income. Figure 3 plots the relationship between the twenty year changes in log population and initial log income per-capita for the period 1940-1960. Over those decades, a doubling in initial income per capita was associated with an 1.6 percentage point higher annual growth rate in population. Four states – Arizona, California, Florida, and Nevada – had high average incomes and grew extremely quickly.
Hey, those states that grew both in population and wealth in the good old days -- Arizona, California, Florida, and Nevada -- where have we ever heard of them before? Oh, yeah, they are Michael Lewis's Sand States, the one's where the popping of the Housing Bubble set of the current recession. Funny how new arrivals in the Sand States did so well in 1960-1980, but not so hot in the 21st Century. I wonder what changed?
In the last thirty years, this pattern has largely disappeared. ... As an example, from 2000 to 2010 Utah’s population grew by 24% wheareas Massachusetts’s populaion grew by just 3%. This occured even though per capita incomes in Massachusetts were 55% higher in 2000.
And, funny thing is, people in Massachusetts like getting richer without getting more crowded. They like improving the quality of newcomers. Now, it's hard to fit Massachusetts' successful policies of snobbism in with Massachusetts' loudly proclaimed ideology of equality, but such is the way of the world.