Zoning Rules!
Engaging with the Travis Corcoran's Neat idea
Back in March, Travis Corcoran proposed a, well I’m not sure it’s novel, but it’s, neat idea for reforming zoning codes. His essay can be found in the following three parts:
Introduction to Zoning and Land Use
A Free Market Zoning Alternative
An Elaboration and Response to Objections
It is an interesting idea. He proposes dividing property up into its constituent rights (something we already do, as in dividing the surface rights from the mineral rights) and providing for transferable easements as a right to use. In essence, what is currently done via the zoning code
No structure in this zone will be converted to heavy industrial use
now becomes an easement owned by all properties in the zone
every property holds an easement on every other property that such property shall not be converted to heavy industrial use unless all such easements are purchased back by the owner of the property.
Thus, a free market in easements replaces the top-down structure of the zoning code and also allows for organic changes in land use over time. It’s ingenious.
Alas, I do not think it works, and in the same spirit as Corcoran’s second post I will give the short reason why first, and then provide the full explanation. The problem he’s addressing is one of the reasons zoning codes came about, but it is not the only one and the tradable easements, while addressing the nuisance problem, do not address the coordination problem. And Corcoran is smart, and knows this. In his response to objections he lists the coordination and holdout objection, but argues that it can be addressed via the use of squeeze out rules. I think he severely underestimates the scale of the problem and the utility of squeeze out rules to solve it because we have, in fact, already tried something similar. And it’s failure is the reason zoning becomes a thing in the 20th Century. Which is to say, I think his idea would ultimately fail in a way that simply revives zoning.
Why Zoning?
Corcoran is correct to suspect the easy Progressive story of zoning is incorrect. My touchstones for studying zoning and land use are William Fischel’s Homevoter Hypothesis and Zoning Rules, and to a lesser extent Ed Glaeser’s Triumph of the City. All three books discuss the origins of modern land use, and the story is not one of pure centralized and progressive administration reform. Rather, it’s a story of addressing specific challenges that arose as the United States shifted from being a pioneering culture to a settled, urban culture. Part of that shift involved legal reforms and changes that then caused other problems, which zoning was used to solve.
To begin with, Fischel makes a compelling case that in the United States nuisance laws never worked. While the common law of nuisance was brought over to the United States from England, nuisance law -when it works -has an assumption of causation that doesn’t reflect reality. Ronald Coase made this point in his “Problem of Social Cost” that in numerous cases, legal attempts to apply liability for nuisance produced results that were, to the public, ridiculous. A man builds his house right next to another man’s chimney, then sues the man for lighting fires because the fires cause smoke to fill the house the man built right next to the chimney. The plaintiff wins. After all, the man lighting fires is causing the other man’s house to fill with smoke, and that’s a nuisance, notwithstanding the first man knew quite well where the chimney was when he built the house. Another man builds a skyscraper blocking a competitor’s hotel from getting either a view of the beach or sun for half the day, ruining value of the rooftop pool. The owner of the first hotel sues the builder of the second, who admits in cross-examination that he built his hotel with the ugliest possible view -industrial piping and air conditioner units -precisely to screw over the hotel he was deliberately ruining. The defendant wins because, after all, there is no right to a view of the beach or to the sun. Fischel and Coase have many more examples of cases where the courts accepted “your face shouldn’t have been where I was punching” as a legitimate argument, but the key point is that the courts do not reliably produce acceptable outcomes in land use cases. Fischel, indeed, argues that the courts are uniquely bad at handling land use cases because of the particularity involved in land use rights.1
For most of American history, though, this didn’t matter. America had lots of space and Americans liked their space, and so most American settled a good distance away from each other and thus nuisance issues never really came up. The cities, where nuisance was more likely to come up, were informally (or sometimes formally) controlled by small cliques of land owners who addressed nuisance issues by negotiating amongst themselves. New York was run by Tammany Hall, and even into the 1940s, Atlanta development was controlled by a small group of landowners and financiers. Zoning codes weren’t needed in the US because the problem they were intended to resolve - “incompatible land uses” - never came up.
Fischel argues that this changed with the advent of the automobile, and more specifically the truck. I think it is also not a coincidence that zoning codes also rise with the closing of the frontier and the last major wave of immigration into cities and the fragmentation of land ownership beyond the powers of the old cliques.2 Where problems had previously been resolved by quiet negotiation and neighborliness, now some form of arbitration was needed because the participants were not locals who could be talked to, or were immigrants who the locals didn’t want there in the first place. Arbitration which the courts manifestly failed to provide.3
There now existed many people placing their faces where they were about to get punched, and many people throwing punches at faces that were just minding their own business, and the chaos this engendered is what spurred the first zoning codes.
Euclid and the Method of Zoning
There were several zoning codes prior to the Village of Euclid’s that were struck down by state supreme courts as an illegal use of the state’s police power.4 New Jersey’s highest court striking down a zoning ordinance resulted in an amendment to the state’s constitution specifically allowing for zoning ordinances by local governments, and a wave of such amendments swept the United States, and in the face of public sentiment, the remaining courts allowed zoning in their states. Today, every state has some method authorizing local governments to use their police power to regulate land use. However, land use still must comply with the Federal Constitution and the Common Law restrictions on land use, which brings us to Village of Euclid v. Ambler Reality.
Euclid isn’t really about the plenary police power. It’s about takings under the 5th Amendment as incorporated against the states by the 14th Amendment. Ambler Reality didn’t contest the rights of the state or the city to control their use of land, they contested their right to do so without just compensation. Yes, ladies and gentlemen, we’ve arrived at “Regulatory Takings Doctrine.”5
The Court ruled that the zoning code was a legitimate use of the state plenary police power, so its limitations were only whether it violated equal protection of the laws, due process, or constituted a taking under the 5th Amendment. The court decided that the legal process for zoning had been public and adequate, that the code was not being applied in a discriminatory way and had a rational basis, and as for the taking -the land was as yet undeveloped and any losses suffered by Ambler were purely hypothetical. They could sell the land for its current use without losing a dime. Thus, there was no takings here.
Fischel argues that all of these points are important to understanding how zoning codes came about. The first zoning codes were not centrally planned. They were catalogs of existing land uses. Fischel goes on to argue that this remains true, today. The vast majority of greenfield development goes on in the absence of zoning codes. The first zoning codes for most new cities are drawn up by the developers themselves and then, once the city incorporates, adopted by the new government. Boards of Adjustment exist to make sure that the zoning codes stay in line with actual use, not to make actual use conform to the zoning codes. Adjustments are a public process (as required by the 14th Amendment) to give people the chance to discuss how they and their neighbors are going to get along and the zoning code provides the legal framework for the decisions, but ultimately zoning is just a formal process for letting people who don’t know each other, don’t like each other, and don’t get along very well make political decisions about how to lay out their communities.
Zoning is a Political Decision
Zoning codes are fluid. They change with the use of the land. They are distinct from strategic planning documents which are also fluid. Its historic purpose is to create a framework in which land use disputes can be resolved without resorting to the courts which so often produce unacceptable outcomes, and it’s a category error to think of zoning as a central plan that people will follow, at least for most of zoning’s American history. Fischel notes a pattern in development in the United States. At first, new cities have very loose zoning codes, encouraging development of every type and in every place. He observes that this is because, to the extent zoning codes exist in these new developments, they are happening in unincorporated county land where the old dispensation of land use still prevails: lots of space to build, a handful of landowners who all know each other, and a general desire to live together and develop their land. Once a critical mass of outsiders move in, a descriptive zoning code is written and passed, locking in current land uses. He notes that the descriptive zoning code does not come, as you might expect, as soon as the outsiders outnumber the landowners. Americans are, in fact, very solicitous to the landowners for a very long time. But then there’s a third transition once the community incorporates and begins providing more services: fiscal zoning.
Nuisance and land use issues have been resolved by boards of and councils and negotiations from the beginning, and Americans generally desire to let land owners do what they want, generally want to keep the courts out of it, and generally the courts want to stay out. Most of our problems don’t arise under the first or second zoning codes. They arise under the third.
Fiscal zoning is the process of writing a zoning code not to solve land use disputes, but to maximize tax revenue for the city government. At its most basic, fiscal zoning is about banning all land uses that don’t produce at least as much property tax revenue as their estimated service costs. This requires zoning codes to keep out families (schools are expensive), poor people (self-explanatory), and businesses (business utilities are much pricier than residential). This is the reason for large lot sizes and single detached housing. They price out all but the self-sufficient at the cost only of low population density -and that problem can be solved by building all the houses close together and having their lots extend away from the center. If the city wants additional protection against later development, they can get a permanent environmental easement preventing any future development on those fields.
The problem for fiscal zoning is that it is quite possibly unconstitutional. Recall that zoning is allowed if it is not discriminatory and has a rational basis. Maximizing tax revenue is not usually considered a rational basis and discrimination against poor people counts as not offering them the equal protection of the laws. This is the reason fiscal zoning is hidden behind environmental or nuisance justifications. Alas, fiscal zoning also wrecks the public purpose of zoning codes. The purpose of zoning codes, historically, was to give landowners a method and process for resolving their disputes using the political process and the police powers of local governments that were responsive to the needs of their residents, but also aware of the benefits of development. Such political discussion requires the ability to frankly and openly discuss the different land uses. But fiscal zoning is illegal, so it cannot be openly discussed. Instead, fights around fiscal zoning a boxing match with smoke as justifications and objections appear and disappear however they are needed to obscure the actual justification: “we are not fiscally structured to allow poor people to move in, and if we’re being honest, you don’t want poor people moving in either, because your taxes would go up.”
Are there Solutions?
Fischel discusses a number of solutions that didn’t work. If the problem is one where landowners don’t want to redistribute money to provide service for poor people, perhaps centralizing services most often used by poor people to the state or federal level would solve the problem -leaving local governments to only deal with the land use issues.6 Alas, Fischel’s demonstration in Homevoter Hypothesis is that local landowners were actually more willing to provide services when their local governments were more dependent on property taxes and services were more directly controlled by local governments. In my own research and experience, I have seen that Americans are quite happy to pay taxes and support community programs, but only so long as they believe they have a say in how the money is spent and how the program is run. American resistance to welfare programs corresponds to its greater and greater centralization. Americans don’t want to pay for people they don’t know with a blank check. Greater centralization of property taxes in California led to more fiscal zoning, not less, and when combined with inflation and skyrocketing house values in the 1970s, let Prop 13 which has been wrecking California’s public finance ever since.7
Fischel’s solution in Zoning Rules was to look to the regulatory takings doctrine, but contrary to common belief, the problem for the regulatory takings doctrine is not financial. Usually the assumption is that if city governments had to pay the costs of their zoning codes in the form of takings compensation that would encourage them to be wiser in their regulations, but fiscal zoning can easily and quickly outstrip such costs within a community. Everyone’s houses are worth more, everyone’s tax rates are lower. The people being hurt are outside the community, and once the regulatory takings doctrine is opened to outsiders, the flood of demands would swamp a city’s ability to respond. So Fischel retreats to reducing federal government income tax subsidies for home ownership so that people will not invest their income in housing as much -subject as it is to fiscal zoning manipulation -but into other investment vehicles, subject to manipulations by someone other than the local zoning board. I leave it to the reader to decide if that seems a feasible plan.
What is the Problem the Easements Fix?
We at last return to the question of Corcoran’s proposal: tradeable easements. Zoning solves two problems: 1.) it creates a framework for competing landowners to resolve their disputes, and 2.) it allows communities to control their makeup by excluding people they don’t like by pricing them out. Corcoran’s proposal very clearly addresses the first problem, and so successfully it is often already used in conjunction with zoning codes. I don’t know about the tradeable part, but many cities that I have worked in or with have standard easements for franchise owners, resource access, transportation, water drainage, and a host of other things. For easy disputes, like building a berm to redirect water, I could see it working very well.
But it does nothing for the other reason zoning codes exist: to shape the community in ways that the residents want. Now, I shall say, I rather hate fiscal zoning and wish we could eliminate it. I dislike America’s current habit of doing its public finance behind a veils and smoke and mirrors so that we can all pretend we aren’t spending money when we are, that we aren’t regulating when we are, and that we aren’t excluding when we are. I wish we could just openly say things like “living in Boston is not a human right, and they can actually just exclude you if they think you don’t have enough money to live there.”8
But we live in the world in which we live, and one of the purposes of zoning codes is to preserve a particular culture and way of life and government finance system. So how would the easements fair against such a system? Perhaps if we could build in covenants or requirements that a property’s value never drops below a real dollar amount they could work, but don’t think such a restriction is legally feasible (pesky 14th Amendment) nor commensurate with Libertarian ideals. Fischel also once suggested home value insurance as a protection against property value losses due to development, but in 20 years he’s dropped that argument as impractical to solve the cultural desires of landowners.
So instead we would have the division of a bundle of rights and easements which all have to be in agreement in order for land to be developed in certain ways, but lurking in the back of everyone’s mind during these negotiation is “will this result in my property value tanking and this district becoming a place I don’t want to live?” These won’t be easy bilateral discussions. Everyone in the district will care about a new apartment complex or a hospital or whatever the defector wants to do to make his property more valuable at everyone else’s expense. There won’t be one holdout, there will be dozens. And perhaps this is fine. But what about a change that really will make everyone better off? The pareto optimal change?
My Favorite Nobel Lecture
I’m an oddball among conservatives in that my favorite Nobel lecture is not Hayek’s “Pretense of Knowledge” or Friedman’s “Inflation and Unemployment.” It’s Ronald Coase’s “Institutional Structure of Production.” I love it because he takes the speech to explain to the Bank of Stockholm that they have given him the prize for the wrong reason, and then to explain to them the correct reason why “The Problem of Social Cost” and “The Theory of the Firm” are worthy of the prize.
Everyone loves the Coase Theorem. I learned it in grad school and I loved it. But, Coase argued, everybody learns it wrong. The theory, as taught, is that in a world with costless negotiations, the initial allocation of rights does not matter from an economic perspective. A nuisance can be negotiated to the same practical outcome regardless of who is determined to be “at fault.” It is government’s hand that causes these negotiations to fail and so we end up with the ridiculous case outcomes. But that, Coase said, was not the point. The point was that these conflicts don’t appear from one person’s actions, but from the actions of many, and all must consider their contribution to the problem. And the reason why they don’t is because the creation of a market in which they could negotiate prices is not costless. Friction was Coase’s contribution. Firms and cities exist to authoritatively resolve these kinds of coordination problems because the cost of figuring out the market prices for damage are prohibitive. Standard economic assumptions tell us markets solve these problems, but 10 minutes familiarity with the real world tells us they don’t -ergo:
in The Problem of Social Cost … what are traded on the market are not, as is often supposed by economists, physical entities but the rights to perform certain actions and the rights which individuals possess are established by the legal system. While we can imagine in the hypothetical world of zero transaction costs that the parties to an exchange would negotiate to change any provision of the law which prevents them from taking whatever steps are required to increase the value of production, in the real world of positive transaction costs such a procedure would be extremely costly, and would make unprofitable, even where it was allowed, a great deal of such contracting around the law.
-Ronald Coase
Nobel Lecture, 1991
And this, I think, is why Corcoran’s tradeable easements would revert back to zoning in fairly short order. The hard questions would require a level of coordination that would eat the value of gaining the easements, and that would be an unacceptable outcome. And the risk of easily parting with the easements resulting in the debilitation of the community is high enough to keep the cost of the easements prohibitively high. And there would be no way to create a market for these kinds of developments -recall, in Euclid, Amberly had only predictions and hypothetical losses. As Fischel’s home value insurance proposal demonstrated in its failure, you can’t create an efficient market for rare, catastrophic, and unpredictable events. So, development of the community will come down to what it has always been: a political decision of the community.
Are there solutions?
I’m not a believer that we live in the best of all possible worlds. I do, however, think that we often occupy a pretty good one given all the constraints we work under. The constraints we operate under, with zoning and community development are:
Disputes involve many people, few markets or prices, and high transaction costs.
The courts are uniquely bad at resolving these specific types of disputes.
The existing processes are often used as a stalking horse for other problems.
And I think we can make improvements, especially on the third constraint. First, we should give local governments more power to say “no.” Fischel demonstrated that local government jiggery-pokery on zoning is turbocharged by states centralizing power and taxation and also by mandates like fair share laws. But if local communities believe they can legitimately say “no” to demands from outsiders, much of the need for hiding behind zoning and environmental laws goes away and that greatly reduces the transaction costs to the city gaining agreement on things like low income housing or locally undesirable land uses (LULUs). NIMBY and its cousin BANANA9 are entirely rational responses to forced land uses by higher governments. Remove the threat of forced acceptance and negotiation becomes possible.
Further, if local governments are empowered to actually make decisions, then local voters have a reason to believe their votes on local affairs matter.10 And again, negotiation in a local forum begins to make sense.
Zoning Rules?
In short11 zoning is a method of politically mediating community development via a collective process which is desirable given the individual transaction costs. A solution to zoning’s problems must be capable of organizing a similar collective decision or reduce transaction costs and friction further than zoning does.
Fischel is not just a scholar of land use, he is also a practitioner -serving on the Board of Adjustments for, I believe, Hanover, New Hampshire, home of his college of Dartmouth. I am not nearly so prestigious, either in college or service, but for 12 years I’ve been around my local Zoning and Adjustment boards and they work in comparable ways.
Fischel doesn’t get into it, but he’s at least aware of the issue. He points out that many of the early zoning codes were immigration codes in all but name, and even Atlanta’s 1922 zoning code explicitly zoned white housing and colored housing.
Sometimes manifestly as in “courts could not sort out the competing land use claims and punted on the issue” and sometimes manifested “struck down the racial zoning codes, or the pretextually not but obviously actually racial zoning codes, as violating the 14th Amendment Right to Contract…” and we’ll get into that in a minute.
State Plenary Police Power is a really big deal and I don’t have time to develop it here, so here’s the sketch: the police power is the executive power to punish you, up to and including death, for the good of the people collectively, but is traditionally limited in English Common Law to matters of Public Health (so we can put Typhoid Mary under house arrest, but we can also regulate safety hazards like industrial fires or elevator brakes), Public Welfare (by which we do not mean “welfare programs” we mean things like public order, murder statutes, and the like) and Public Morals (how the society operates, things like outlawing prostitution or maintaining Blue Laws). Zoning arguably falls within all of these categories, but the state courts disagreed. They would allow for specific regulations for public health -limiting where laundries could be located, for example -but not general zoning.
I am not getting into the weeds of administrative law today, but Euclid also involves a stopover in “Exhaustion of Administrative Remedies.”
This is also the argument of Paul Peterson’s City Limits, the best book about Welfare that masquerades as book about local government public finance.
Along with a hundred other idiotic decisions of America’s second worst governed state. (You gotta wake up pretty early in the morning to be worse than Illinois.)
I would also then like Boston to stop acting like they live on magic dirt that makes them smart and productive and rich rather than being the result of careful selection and exclusion for 400 years, but baby steps in coming back to dealing with reality.
Not In My Back Yard and Build Absolutely Nothing Anywhere Near Anything
This is not a hypothetical -Fischel also showed greater centralization of decision making to the state and federal level tracks declining voter participation at the local level. Why vote for an official who can’t fix anything?
Ha!