Reversing Cause and Effect?

I hate to quibble about a paper that supports my preconceived notions, but I am bothered by this as linked by Tyler Cowen

We quantify the amount of spatial misallocation of labor across US cities and its aggregate costs. Misallocation arises because high productivity cities like New York and the San Francisco Bay Area have adopted stringent restrictions to new housing supply, effectively limiting the number of workers who have access to such high productivity. Using a spatial equilibrium model and data from 220 metropolitan areas we find that these constraints lowered aggregate US growth by more than 50% from 1964 to 2009.

Isn’t it possible that cause and effect are being reversed here? I accept that zoning in places like SF make it more expensive. I would have concluded that this higher cost of living allows only the most productive to live there — less productive folks can’t afford it. So the high average productivity of these cities might partially be a result of their higher costs, not because the zoning somehow increases productivity, but because the zoning creates a sorting process where only the most productive may enter, which brings up the averages.  So a reduction in zoning and living costs would cause the productivity numbers for the city to average down as lower-productivity earners can move in.

  • i don't see it. It just doesn't look plausible that the zoning could be a cause, because such activities tend to happen after productivity already exists. Google was able to become what it is today because politicians didn't understand it- meanwhile they've regulated the crap out of well understood business sectors.

  • Dan Wendlick

    I think this situation is either going to at best self-correct, or at worst implode this cities in the next 20 years. the very technologies that have led to these productivity gains has made it possible to gather together the abilities and capital of many without physically co-locating them. As we go to communications ubiquity and virtualization of office spaces, the premium for gathering in central locations is going to diminish. The nexus of socialization is likely to evolve to commonality of interest over physical proximity. The question of "Why do we all have to work the same hours?" will give way to "Why do we all have to work in the same office?" I already work in an environment where my direct supervisor is 1200 miles away, and much of my work involves ad-hoc project teams spread across states and countries, containing a mix of employees from my firm, customers, suppliers, contractors and free-lancers.

  • LoneSnark

    As usual, it is probably a bit of both. Comparatively low productivity individuals can often increase their own productivity by mixing their efforts with higher productivity individuals. Similarly, high productivity individuals can often increase their own productivity even more by mixing their efforts with others. The example is the lawyer which hires a law clerk to do the busy work. Give the situation in San Francisco, it is fair to say there are positions high productivity firms would create if only there were low productivity individuals willing to move there to take them. But, by forcing them to remain in, say, Texas, the firm in San Francisco has too few support staff to maximize overall US GDP.

    Of course, you are still right, it is fair to say that the city's average productivity would fall as the mix of individuals shifted due to dramatically increased housing supply. But, average US productivity would at the same time increase, as everyone's individual productivity increased.

  • slocum

    I also have serious doubts about the productivity measures. In San Francisco, plumbers undoubtedly make more than they do in Iowa City (they have to be, or they couldn't or wouldn't live in the bay area). But are they more productive? In some sense yes -- they install pipes for people and businesses who are willing to pay more. But in another sense, almost certainly not. I doubt very much that they get more plumbing done per hour in SF (and given the problems imposed by heavier regulations and greater density) I rather suspect it's the opposite.

    Perhaps software developers produce more (or more valuable) output per hour in SF on average than elsewhere. But if we eliminated development restrictions and enabled more people to live in SF, would most of them be like programmers or plumbers? I suspect that it would be the latter -- doing the same work, using the same tools and methods, and producing the same (or lower) level of output compared workers in less expensive, less densely populated areas AND these marginal SF residents would experience a lower quality of life for living there. California has the highest cost-of-living adjusted poverty rate in the U.S., while Iowa has the lowest:

    California's supplemental poverty rate is three times higher than Iowa's and nearly double that of West Virginia (West Virginia!) So why on earth are we worried about how to enable more people to move to CA?

  • james

    Let's cut to the chase.
    People in rich places are generally richer than people in poor places.

    Can I have my PhD now please?

  • slocum

    Not exactly. In rich places like SF and NY, the rich people are really rich, but inequality is very high. So the cost-of-living adjusted poverty rates in CA and NY are also very high and cost-of-living-adjusted median incomes are low:

    Median household purchasing power in NY state is worst in the country, while Utah, Minnesota and Iowa make up the top 3. The bottom line is the cost-of-living varies a lot more than median incomes do, making 'rich' states a bad bet for people not near the top of the income distribution.

  • Dan Wendlick

    You also have to play the whole wealth vs. income game when comparing between states. Farming is a very capital intensive business. A farmer may have a lot of wealth, but much of it is going to be tied up in land and equipment (and probably mortgaged to the hilt), leading to low return on capital and low net incomes. A software company can generate the same net income with some rented office space and a few laptops.

    Secondly, as far as income disparity, the guy in Iowa who owns the grow-out house for Perdue chickens is going to be in a much different financial position than the guy working in the poultry processing plant.

  • MSO

    Facebook and Twitter and Wall Street are high productivity activities? Whatever happened to agriculture and manufacturing?

  • Arrian

    They basically model cities as if they were firms: Output in a city is a function of Total Factor Productivity in that city, Labor, and Capital (largely land in the city in this case.) This leads to their fundamental premise: "Intuitively, if the marginal product of labor is different across cities, output can be increased by moving labor from cities with low marginal product to cities with high marginal product, until the marginal product is equalized."

    In other words, yes, cities like San Francisco have high housing prices because they have high productive workers. BUT, think at the margin: Overall productivity would increase if you shifted more lower productivity workers there until the marginal worker in SF has the same productivity (adjusted for a couple factors) as the marginal worker in, say, Columbus OH. Maximize output for the nation by equalizing marginal productivity across the different cities.

    The elasticity of housing supply is (in their model) the primary factor preventing workers from moving freely from one city to another and equalizing marginal productivity.

    You can certainly argue with their model, it's basically treating cities as if they have a Cobb-Douglas production function and aggregating them across the nation. The big differentiating factor in _productivity_ between cities is city specific technology. Underlying this assumption, I think, is the concept of positive spillovers making some cities more productive for the industries they specialize in than others. I'm not up on the spillover literature, but I think it's not a completely open/shut case, so that's arguable. You can also take issue with the data they use to come up with their 50% reduced growth number, and they discuss the limitations in their paper. There are plenty of other assumptions and parts of the model you can take issue with as well, but all these issues are the type of thing you can argue with in almost any theory paper.

    So, it's not something to dismiss out of hand, but it's also not something that's convincing immediately either. And that's due to relatively nuanced theoretical issues. It doesn't contradict the conventional wisdom that zoning restrictions drive up housing price thus limiting who can live in a city to the most productive workers. In fact, that's at the core of their model.

  • cc

    Warren: some evidence for your proposition is that the black population of S.F. has dropped by 1/2 over the past 30 or so years--they moved out due to costs.

  • slocum

    Labor productivity is value of output divided by hours of work. Google, Apple, and Facebook have relatively small numbers of employees and so the revenues per employee (and productivity) are high. Building restrictions drive up the cost of living, which means everybody else -- even the vast majority of the population who are not in tech or related fields -- have to be paid more to be willing or able to live there. So...SF area plumbers, baristas, Uber drivers, gardeners, etc, etc are 'more productive', not in the sense that they get more done per hour (due to better infrastructure, tools, training, etc), but ONLY in the sense that they get paid more because of the high cost of living.

  • slocum

    The link in my post is about income, not wealth. Median Iowans have much higher incomes than median Californians. Before adjusting for cost of living, the median household income in California is $63.6K while in Iowa it's $60.8K -- which works out to $3000 in CA's favor. But after adjustment, California's high cost of living drives that down to $50.3K, while Iowa's low cost of living boosts it's median to $68.1K. What starts as a $3,000 advantage for Californians turns into an enormous $18,000 disadvantage. Probably most of that is due to housing -- the median home price in Iowa is $125K -- which is quite affordable at two times the median income. In California the median home price is nearly $400K, or six and a half times the median household income.

  • Dan Wendlick

    I guess a point I didn't make well is that the visible disparity in lifestyle is going to be much different in big coastal cities than in "flyover country". Take my example of the guy who owns the three chicken grow-out farms and clears $15 million a year vs. the guy who makes $9.25 an hour gutting chickens in a processing plant. Their probably both going to be driving a Ford pick-up (one will be nicer and newer), going to the same church, and buying shotgun shells at the same store during Pheasant season. There's just much less of a lifestyle premium granted by wealth in areas where the supply of housing is restricted and access to cultural activities is more prevalent.

  • Benjamin Cole

    Warren Meyer: Good post, but really, if someone is a "libertarian" they should be honking about property zoning night and day.

    Really---we outlaw retailing in a city, except for those people who occupy land so zoned?

    We routinely take away people's property rights of development?

    We let government, and not free markets decide how land is developed?

    Moreover, any system of property zoning quickly becomes a system of private economic rents enforced by government.

    Libertarians should be loudly against all property zoning as a matter of principle, even if material gains were somewhat reduced. Freedom is a higher goal than simple GDP.

    That said, in this case, greater GDP could be had by wiping out property zoning.

    Sad to say, the right-wing-libertarian-GOP types are mute on property zoning. Property zoning is embraced by a propertied and financial class.

    So let's talk about the EPA!

  • gr8econ

    To add to your point, are they doing something that is rival or non-rival. Software is generally non-rival so a successful software company will have incredibly high productivity. If you are engaging in a rival activity, your overall productivity is limited.