Exclusionary Zoning and “Inclusionary Zoning” Don’t Mix

Like oil and water, exclusionary zoning and Inclusionary Zoning don’t mix

Inclusionary Zoning is an Oxymoron

The term “Inclusionary Zoning” gives a nod to the fact that zoning is inherently exclusionary, but pretends to be somehow different.  Given that, by definition, zoning is exclusionary, Inclusionary Zoning completely within the exclusionary paradigm is synonymous with Inclusionary Exclusion.

What is Inclusionary Zoning?

“Inclusionary Zoning” is a policy requiring a certain percentage of units in new developments to be affordable to certain income groups.  Sometimes, this includes a slight loosening of restrictions on the overall scale of the development, but rarely enough loosening to overcome the burden of subsidizing units.

Many cities, particularly the most expensive ones, have adopted Inclusionary Zoning as a strategy intended to improve housing affordability.  Often, demand for below-market units are so high, one must literally win a lottery to obtain a developer-subsidized unit.

Economics of Exclusion

We must first acknowledge the purpose of zoning is to EXCLUDE certain people and/or businesses from an area.  Zoning does this by limiting how buildings are used within a district, as well as limiting the scale of buildings .  These restriction cap the supply of built real estate space in an area.  As we know from microeconomics, when rising demand runs into this artificially created upward limit on supply, prices rise to make up the difference. As every district in a region competes to be more exclusive than its neighbors through the abuse of zoning, regional prices rise in the aggregate.

Since the invention of the automobile, and subsequent government overspending on highways, sprawl has served as the relief valve. We’ve built out instead of up for the last several decades and this sprawl has relieved some of the pressure major metropolitan areas would have otherwise felt. In fact, it’s worked so well–and led to the abuse of zoning rules for such a long time–that exclusionary zoning has become the accepted paradigm. Zoning is the default flavor of land use policy, even for those concerned with affordability.

A Typical Pattern of Interventionism

During the last century, interventionist policies were enacted to try making cities more livable.  With good (and often bad) intentions, politicians enacted strict zoning codes, demolished entire neighborhoods for urban renewal, and built public housing projects and highways in their place.  As with all massive top-down interventions, there were unintended consequences, which took the form of segregation, sprawl, auto-dependency, disinvestment in rail transit, and more recently, long commutes and gentrification.
Instead of acknowledging the failure of past intervention, and abolishing them, new interventions are patched into the system.  This is because new vested interests have emerged that thrive in the interventionist paradigm, and resist change (NIMBYs).  It’s easier to add to the patchwork of intervention in an attempt to alleviate symptoms, than it is to address the root cause: the initial intervention.

This is exactly what Inclusionary Zoning is–yet another layer of intervention.

What does Inclusionary Zoning actually do?

Despite the nice-sounding rhetoric, “Inclusionary” zoning still exists in the exclusionary paradigm.  In the exclusionary paradigm, where the supply of new space is capped well below what the market demands, so called “Inclusionary Zoning” serves three purposes, which do nothing to alleviate the root cause of housing crises:

Wealth Transfer:  These policies increase the supply of below-market rate units through a one-for-one decrease in the supply of affordable market-rate units.  In essence, this is a transfer of wealth from middle/upper-middle class persons to lower/lower-middle class persons, who are often winners of lotteries.  Since inclusionary zoning does not alter the overall supply/demand equation, it does not relieve overall housing prices.  Since the upper-class will always have the means to outbid the middle class and even benefits from the appreciation of their property, Inclusionary Zoning only serves to transfer wealth from the middle class.

Burden upon Supply of Housing:  Inclusionary zoning is effectively a tax on new development by forcing providers of housing to fund the cost of the wealth transfer.  This cost burden increases pressure on the supply of new housing, which actually hampers affordability in a market.  Since it only burdens developers of housing, Inclusionary Zoning lowers the value of land to potential housing developers, giving non-housing uses an advantage in bidding for land, further hampering the supply of housing.

Social Engineering:  Inclusionary Zoning forces a mixing of incomes, based on a paternalistic hypothesis that diversity of incomes is good for an area.  I am sympathetic to this view, and subjectively prefer to live among diverse income earners. However, there are compelling arguments that income integration has problems of its own.  I don’t pretend to know whether integration is for better or worse, but I’d rather see it done organically, through filtering than through top-down coercion.  Even if top-down coercion is to be used to redistribute wealth, I’d rather see it done through vouchers or guaranteed minimum income for reasons beyond the scope of this piece.

Displacement

Displacement is a real problem.  Strong social networks have formed in poor neighborhoods, which suffered from decades of planning and progressive policy.  Rapid gentrification, induced by exclusionary zoning, can be hugely disruptive and severely detrimental to the livelihood of society’s most vulnerable.

Because of decades of exclusionary policies, housing supply in desirable areas has not adjusted to accommodate newcomers who now flock to urban neighborhoods.  As a result, the influx of urban residents often choose to outbid longstanding residents of poor neighborhoods.  Instead of loosening zoning in desirable neighborhoods as they should, politicians loosen zoning in vulnerable neighborhoods, exasperating the displacement problem.  This has the potential to swiftly disrupt vibrant social networks, which are vital among the poor.

These residents are victims of exclusionary policy, and a case could be made for reparations by the cities who enforced exclusion on behalf of privileged neighborhoods. They are not the victims of the gentrifiers, or the developers serving the desires of newcomers.  They are the victims of exclusionary zoning, at the hands of planners and the cities who have enforced them for decades.

Unfortunately, the individuals who advocated for exclusionary zoning cannot be made to pay restitution to the displaced victims.  The best we can do is demand governments pay reparations to the victims displaced by exclusionary zoning policy.

Proposing a compromise

If you want to have effective Inclusionary Zoning, where housing providers fund wealth transfers and social engineering programs, you first need to end the exclusionary regime.  If a city chooses to burden the suppliers of housing with the cost of inclusionary zoning, it should not be implemented until exclusionary zoning is removed.  Cities who stand by their commitment to Inclusionary Zoning should first remove limits on the scale of new development, especially in desirable areas.  Most importantly, this should include all restrictions on the size of units.  Inclusionary Zoning policies should also base requirements on a metric other than number of units.  In most cities, the number of “affordable” units is a percent of total units, incentivizing developers to build large, expensive market-rate units instead of the more affordable market-rate units they’d otherwise build.

Further, cities should publicly accept responsibility for creating the housing crisis and make amends by making a “displacement payment” in reparation to long-term, low-income tenants displaced by new developments.  The total payment to the displaced should be reasonable, covering moving expenses and a certain amount of money to cover higher rent in a new situation.  As a compromise, I would even be willing to concede that cities may require developers to match the displacement payment to displaced long-term tenants.

Such a policy could be enacted at the state level if cities are unwilling to take responsibility for their self-induced housing crises.  Forcing a city to make the displacement payment to displaced long-term tenants will put the pressure on them to actually address the problem where it needs to be addressed: by removing exclusionary zoning.  An abolition of exclusionary zoning would enable development in desirable locations, removing the pressure to displace lower-income neighborhoods.  At that point, Inclusionary Zoning can more feasibly achieve the social engineering goals of its advocates.

In the end, patchwork policies will do nothing to solve affordability, until exclusionary zoning is abolished.  Only through abolition will Inclusionary Zoning be able to achieve anything close to its intended goals.