Land is of course inherently finite, and land in a particular labor market is not only finite but may be scarce. However, that there is only so much land in a metropolitan area does not determine how many people can live on it. A given plot of land can be occupied by a large apartment building, a small apartment building, or a single-family home, or it can remain just a vacant lot holding nothing but weeds and trash. Which usage the land is put to is political, and in the sense not just that it is decided by the state but that it follows a partisan divide.
In an analysis of California cities, the environmental economist Matthew Kahn found that among the strongest predictors of minimal housing growth was the combined share of the vote going to Democrats and minor parties to their left. Even aside from zoning, neighbors can use environmental-impact review, historical-preservation laws, and other regulations to tie up new construction in the courts, thereby raising its costs. Zoning, however, is the starting point, and in many cities only single-family homes are allowed. One of the surprising things about Silicon Valley is that it looks like the sprawling outer suburb it was in the mid 20th century, not the center of a booming economy that it is today, with headquarters of Apple, Google, and Facebook.
The result is exactly what David Ricardo would have predicted. When you compare metropolitan areas, you find that the annual change in rent is almost perfectly correlated with the annual change in the income of renters. The correlation appears to be achieved in part by landlords’ raising rent to capture rising incomes and in part by churn, with the working and middle classes fleeing expensive areas and high earners being drawn to expensive areas with growing economies. For instance, California is losing its native-born working and middle classes, with net positive domestic migration only among those earning over $90,000. Likewise, the only educational group with net domestic migration into California are Americans with graduate degrees. The biggest recipient state is Texas, followed by Arizona and Nevada — states with lower wages than California but even lower rents. When a state with high wages and a Mediterranean climate is losing its college-educated middle class to states with lower wages and miserable heat, something is profoundly wrong.
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