Econ Duel: Why Is the Rent So Damn High?

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- [Tyler] So Matt and I
have been arguing together online

and in the blogosphere
for well over a decade.

So now it's about time
we argued in person.

And we're going
to argue about cities.

My whole life I've never lived
in a major city.

And this guy Matt, his whole life
he's never lived in the suburbs.

I know that's hard to believe,
but he has a theory

about why cities are too expensive
and you see it in the data.

Rent or home prices
as a percentage of median income,

American cities,
they are much more expensive.

So Matt says the rent
is too damn high.

But me, I'm a little bit
of a skeptic.

I want to know is there some way
of getting the rent down

in these cities that won't
just ruin them for everyone?

So Matt, tell us, why is the rent
too damn high?

- [Matt] Well, primarily you see
high rents in coastal cities

because you have a lot
of restrictions on the construction

of new housing.

You have, to an extent,
geographical limits.

These cities can't sprawl
into the ocean

and so to get bigger,
they would really need

to do more infill --
taller buildings, denser buildings.

But there's a lot of rules
in place to keep most

of the land sort of regulated
for suburbs,

and even in the cities a lot
of limits on how tall you can build

and how much parking
you need to set aside.

And so, it means that land
has come to be a higher

and higher fraction
of the price of houses,

and it's become much too expensive
for many people.

- But isn't this going
to make people much worse off

if we make housing denser?

So there are congestion costs.
People don't like being crowded.

They don't like living next
to big skyscrapers,

so one way we regulate this
is to make it harder to build

and thus we'll all have
nicer lifestyles, right?

So why should we allow
denser building?

- It's definitely true that a lot
of people don't like to live

in dense neighborhoods.

But, you know, this,
it seems to me,

is really a classic example
of something that a market

can work itself out for.

If people want to pay
for low-density living,

they're free to do so
if they have the means.

But at the same time,
lots of people evidently

do want to live in dense places,
otherwise, there would be no reason

to build dense buildings.

There's no reason we can't just
let it work itself out

so that we build the structures
that people feel they can sell.

- But if it were, say, a highway,
and there was a congestion problem

on that highway, you would agree
we should either have a toll

or have some kind
of rush hour restriction.

So aren't restrictions
on building density

just like another way
of pricing the highway

and that's what makes
economic sense?

And we should have some cities
like San Francisco really nice

for the rich people,
lots of space, sea views,

and then have
some other places like Houston.

Don't we right now, more or less,
have the right balance

and just let people move
to whichever city they want?

- Well, you know, the United States
is definitely better situated

than a lot of other countries
because it is a really big country

and we do have very different
urban models

so there's some element
of choice there.

But place is really unique
and you see that, for example,

a huge number
of the most innovative,

most dynamic companies
and industries are located

in one particular area,
around the San Francisco Bay area,

and there's a real cost
to making it difficult

for more people to move there
and for the cities to grow larger.

It leads to lower real wages
for a lot of people

and to a sort of less dynamic,
less robust economy overall.

- I also worry
your solution, you know,

to deregulate building somewhat,
allow higher density construction,

I fear that's just
a temporary solution.

Of course, in the short run,
the city will be less expensive,

but more people move in,
it boosts productivity,

they start new businesses,
don't you just end up

within a generation's time
being back

at a really expensive city
yet again?

And you've only solved
the problem for a little bit.

Do you really think
you can make rents lower?

- Well, look, if rents go up
because people

are becoming more productive,
earning higher incomes,

that's not so bad.

What we're talking about
is increasing the number of people

who have the opportunity
to come into sort of the best,

most lucrative places to live.

That would definitely happen
if more people are allowed in.

- Let me get this right.

You allow more building in say,
San Francisco or maybe parts

of New York City, so more people
would move in.

That would mean
they might produce more,

but you're also applying
a kind of implicit tax

for higher earners
already living there.

So the people in San Francisco
who are well-off,

they have the great ocean view,
they stroll to the coffee shop

every morning.

Now they're in a more crowded city,
don't they just move out?

Like, why, on net,
is this even a gain?

- Well, you know,
I'm sure you know, right,

there's lots of ways
that you can let insiders

and incumbents sort of rig
the system with regulations

to benefit themselves.

That doesn't make it a good idea.

In effect, that's what
you're talking about

with San Francisco.

You know, people are saying,
"Well, I got here first,

so I'm going to keep it
all for myself."

That's understandable,
but it's not a good idea.

- What about the schools?

If you make cities denser,
school systems will become worse.

People move to the suburbs
when they have kids.

You just had a kid, right?

You'll be moving to the suburbs
soon enough for the schools.

Why do we want to go
in this urban direction?

Makes no sense.

- I don't see any reason to believe
that dense areas, per se,

are going to lead to bad schooling.

And you know, education's
a very complicated problem,

but if you want
to see people have choice

in what school they go to,
having denser communities

where you can have more
sort of, schools per square mile,

more options for people
seems to me like a win.

- Now isn't technology going
to render this whole debate moot?

So we're going to have
autonomous vehicles,

self-driving cars,
self-driving buses.

You'll live an hour and a half out,
goodness knows, Louden County,

past some of the suburbs.

You'll be in your
self-driving vehicle,

you'll sleep in the back seat,
you'll text your friend,

do the crossword puzzle,
everything will spread out,

the rent will be much cheaper,
but technology will far outrace

whatever legal improvements
we might make.

- That'll be great if it happens.

But 20 years ago, people thought
the internet was going to do that.

They thought, you know, we're going
to have telecommuting,

it's not going to matter
and we've really seen

the opposite, right?

It's the kind of thing
where a less regulated environment

would let us see, you know,
what is this really good for.

How should we reshape our city?

What we have right now is,
we're stuck in a kind of

a out-dated, decades-old plan
of how cities ought to be.

It's very rigid, it's very hard
to change them and the process

of changing them is driven
by a lot of considerations

that have to do
with just the narrow interests

of people who happen to live
in particular neighborhoods.

So I think the prospect
of technological change

may mean that sort of,
my vision of what a city

should look like is wrong,
but it also means that we need

to be more flexible
in how we create our cities.

- Now, you've written a whole book
on some of these issues,

"The Rent is Too Damn High."

But let me just ask you,
don't you at times feel

this is hopeless?

You said before, "Well, there
are always insiders."

So people own apartments,
condominiums,

homes in exclusive cities.

Cities like San Francisco
with tight building codes,

and they don't want
to allow more building

because the value
of their property would go down.

Maybe they control city councils
directly or indirectly.

Is this a quixotic quest,
or is there a way

we can actually get
to this more diverse,

more prosperous,
higher productivity world

where cities are bigger and people
have more upward mobility?

Or is it just totally hopeless?

- I think it depends what level
the decisions are made at.

Right now you have land use
being made on a very local level.

So the interests of sort of narrow
homeowner groups

speak very, very loudly there.

State governments
have a much wider range

of interests that they deal with.

You could really imagine
the California legislature

deciding, you know, we're going
to be better off as a state

if we have more building
in the most expensive areas.

So you see in Washington State
they do that, Seattle is not quite

as unaffordable
as other coastal cities.

You see a lot
of housing stock growth

in Toronto where the province
of Ontario does it.

So I think that will be
the most likely path forward,

would be to see Massachusettes,
Oregon, California, maybe Virginia

centralize more land-use functions.

- So Matt, all these plans
and schemes that you have,

tell me, why do you want
to ruin it for all of us?

- So, you know, this is a subject
that's really important to me.

I've been thinking
about it for a long time,

I wrote a book about it.

And it's because we have
a lot of question out there

about how are we going
to adapt to a sort of new economy

where there aren't as many
manufacturing jobs.

What are people going
to do for a living?

Where's economic opportunity
going to come from?

And looking around,
you see where the opportunity is,

it's in a relatively small number
of big cities that have

these kind of big, information
industries in them,

and right now there's just
way too many people

who are locked out
of those opportunities.

Creating cities, living and working
in them is going to be the answer

to a lot of these
big social problems.

I think the question to you is why
is it that we're going to let

a handful of, sort of,
lucky first movers

kind of hog all the opportunities
for themselves?

- I think a lot
of the key opportunities

are in the suburbs,
so I want to make sure

the suburbs continue to exist
so that when people

have beautiful children,
they can go

to the better school system.

But also, the people
in these cities

with the high property values,

they're not just lucky
first movers --

a lot of them are very well-off,
very productive people,

and the ability to live
that kind of life in San Francisco

or Manhattan, that's part
of their paycheck in a sense.

And the notion that these people
who have been subject

to all these tax increases lately,
that in essence,

we're going to put yet another
tax increase on them,

I just worry about what that
is going to do

to harm productivity.

- Well, you know,
I think we're seeing

more and more people wanting
to raise taxes on the rich.

More and more populism
in our politics,

and that's because what we're doing
right now isn't really working.

I think especially people
who are skeptical of some

of the solutions that have come
down the pike

in the past few years,
really need to say,

"What's a better way forward?"

I do think that less regulation
of land, more urbanization,

is a much more viable path.

- Matt, thank you
for coming out here

to the suburbs with us,
I know it was a hardship,

I hope it wasn't too bad.
We'll argue some more next time.

- Thank you.

- [Narrator] What do you think?

To see previous episodes
of Econ Duel,

check out our playlist.

Or, for more from Matt,
click to check out his book,

"The Rent is Too Damn High."

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