Every once in awhile I get bombarded by an article. I’ll see it posted on Facebook by multiple people in multiple places, I’ll get it in e-mails, in news aggregators, and even, if you can believe this, in hard copy (the picture is from the main lounge at We Work). Often the article ends up hitting me over the head because it says so well what many of us  have been saying over, and over, and over again. The article that I was bombed with most recently is the cover story of a recent issue of The Economist and is titled, “Poor land use in the world’s greatest cities carries a huge cost.” Last year’s microhousing debacle (and this year’s second thoughts) are sure to come to mind. Read the whole article, but here are the two best paragraphs:

Even in these great cities the scarcity is artificial. Regulatory limits on the height and density of buildings constrain supply and inflate prices. A recent analysis by academics at the London School of Economics estimates that land-use regulations in the West End of London inflate the price of office space by about 800%; in Milan and Paris the rules push up prices by around 300%. Most of the enormous value captured by landowners exists because it is well-nigh impossible to build new offices to compete those profits away.

The costs of this misfiring property market are huge, mainly because of their effects on individuals. High housing prices force workers towards cheaper but less productive places. According to one study, employment in the Bay Area around San Francisco would be about five times larger than it is but for tight limits on construction. Tot up these costs in lost earnings and unrealised human potential, and the figures become dizzying. Lifting all the barriers to urban growth in America could raise the country’s GDP by between 6.5% and 13.5%, or by about $1 trillion-2 trillion. It is difficult to think of many other policies that would yield anything like that.

But here’s what Councilmember Mike O’Brien, who has a Masters degree in Business Administration,  said recently in the Ballard News-Tribune. On commercial space, he said,

Affordable commercial space is important to create and preserve business districts with local businesses. I’m committed to working with local business owners to create conditions under which local businesses can thrive throughout Seattle, and in Ballard

And what exactly is he working on and trying to impose on new development both commercial development? More regulation and fees!

I am working hard to create an affordable housing linkage fee that would require all new development in Seattle to provide affordable, rent-restricted units alongside more expensive rate market-rate units. This will allow more people to stay in Ballard as the neighborhood grows and changes.

O’Brien uses sanitized language as if the fee itself will provide the “affordable, rent-restricted” housing he’s talking about. The fee will come at the expense of renters, who, as The Economist article assures us, are the ones that end up paying for regulation, taxes, and fees, not developers. These units that will be build “alongside” market rate units will be much more expensive than the market rate ones: we know that already because government agencies acknowledge that subsidized housing is more expensive. From Washington’s own Commerce Department:

Construction costs for affordable and market-rate housing are similar, but affordable housing has more “soft costs” associated with financing and project management. Sponsors are required to maintain certain levels of contingencies and reserves, often hire outside expertise to develop or manage the project, and face more finance and regulatory requirements.

On average, affordable housing requires an average of five financing sources and takes twice as long to complete. Because local, state and federal subsidy sources often require leveraging and are awarded through separate competitive funding processes, it generally takes twice as long to assemble the financing as market-rate projects, and contributes to increased legal and other transaction costs.

Sponsors must often take out bridge loans to get interim financing while they are trying to secure permanent funds. They generally have limited internal capital and higher pre-development costs.

Hmmm. Doesn’t sound very “affordable” (or efficient) at all. And as I have pointed out before, it is regulation–the same regulation that drives up costs for market rate housing–that adds more costs to subsidized housing, meaning there is less of it built.

The difference between what is known and taught in economics  at places like the London School of Economics and what local politicians actually do is like day and night. Basic economics, taught in most business schools, is pretty clear that when we expand supply to keep up with demand, the beneficiaries are customers who get lower prices because of competition. Somehow the message hasn’t gotten from London to Seattle yet. But we’ll keep trying.