Lee Ohanian article in the Wall Street Journal

Lee Ohanian and Edward Prescott recently published an article in the Wall Street Journal titled “What in the Sam Hill are Cows Doing on the Sand Hill Road?”  Here is the text of the article in its entirety:


“If you stroll down Sand Hill Road in Menlo Park, Calif., you will find yourself among America’s leading venture capitalists. The companies on this street helped bring the world Microsoft, Amazon, Facebook, Google, Tesla, Lyft and other transformative businesses that have created millions of jobs.

Sand Hill Road also offers some of the most expensive commercial property in the U.S., rivaling even Midtown Manhattan. But despite the enormous cost of real estate, you won’t find any high-rise buildings. What passes for a Sand Hill skyscraper tops out at two stories. Even stranger, near the end of Sand Hill Road you can find cows grazing happily on the most expensive grass in the country.

Why do parts of this area look more like a gentleman’s farm than a leading financial center? Land regulations. In a free market, there would be enormous economic pressure to develop the property, to move its cute cows to far less valuable pastures and to construct much taller buildings. But this kind of development is largely prohibited.

Land regulations have run amok, and not only in Menlo Park. In addition to governing how private property can be used, these rules implicitly dictate which special-interest groups have a say in commercial and residential development. Building proposals bring dozens of vested interests out of the woodwork, ranging from environmentalists, to “not in my backyard” homeowners, to affordable-housing lobbyists.

The question is what this costs the larger economy. Many theories have been raised to explain why the U.S. has been plagued by weak growth, which began even before the 2008 financial crisis. But as much as 40% of the slowdown may be due to increasingly severe land regulations, according to our research, conducted with economist Kyle Herkenhoff at the University of Minnesota.

Land regulations add friction to the economy in that they impede the flow of workers and capital from regions with poor job opportunities to places with good ones. Interstate migration rates used to be high. Between 1950 and 1980, California’s population increased from a little over 10 million to nearly 24 million, and its share of the national population rose from about 7% to 10%. This growth reflected a bounty of new economic opportunities that created millions of high-wage jobs in industries ranging from technology and aerospace to high-skilled manufacturing and financial services.

California’s boom was facilitated by exceptionally good state and local economic policies, which in turn reflected a bipartisan understanding that the public’s interest was served by government that helped, not hindered, development. In the 1950s and 1960s, capital spending accounted for as much as 20% of the state budget. California built schools, roads and water systems to support its population growth. These public-private synergies made California into the most populous state in the country, and the second most productive, behind only New York.

Despite rapid growth, housing remained relatively affordable. In 1970 California’s home prices were about 36% higher than the national average. But that changed as tightening land regulations began to constrain development. By 1990 California housing was 147% more expensive than the nation overall.

These regulations have damaged California and the national economy. Stratospheric home prices have redirected millions of workers away from the Golden State’s highly productive industries to states with more permissive land regulations and lower housing costs, but also with fewer high-paying jobs.

Relaxing land regulations could substantially improve America’s economic performance by making housing and commercial development more affordable. If California rolled back its land rules to where they stood in 1980, our research estimates that the state’s population could ultimately grow to 18% of the country. U.S. gross domestic product could permanently increase by about 2%, or $375 billion. If every state rolled back land regulations to 1980 levels, GDP could rise by as much as $1.8 trillion.

Sadly, California’s land regulations seem unlikely to improve. The state’s leaders recognize the problem of high housing prices but don’t seem to accept its cause. Recent legislation, including a $3 billion bond proposal, has focused on giving developers an incentive to build more low-income housing.

Meanwhile, the burst of public investment that supported California’s growth in the 1960s has slowed to a trickle. The state’s capital budget isn’t enough to maintain its existing infrastructure, much less build anything new. More than half the state’s schools do not meet standards for basic maintenance, according to a 2015 study from the University of California, Berkeley. Los Angeles’s leaky water system–many of the pipes date back at least 75 years–loses an estimated eight billion gallons of water a year, enough for 50,000 households. On a 2012 report card from the American Society of Civil Engineers, California’s levees get a grade of “D.” That group also identifies more than 650 of the state’s dams as “high hazard,” meaning failure would cause loss of life.

Overhauling land regulation, in conjunction with higher capital spending, would significantly improve America’s economic performance. Sand Hill Road in Menlo Park should be for tech investors, not livestock. Here’s to hoping that California–and other states–realize as much and can overcome the well-organized political interests to see reform through.”