Mandates versus deregulation – Econlib

In a recent Bloomberg column: Tyler Cowen discussed the difficulties associated with reducing regulation:

The fundamental paradox is this: government regulations are embedded in a large, cumbersome and complex set of institutions. Dismantling it or significantly reducing it would require a lot of work capacity of the state – that is, state jurisdiction. Yet deregulators are suspicious of greater state capacity because it carries the potential for greater state regulatory action. Think of it this way: if someone were to tell a libertarian-leaning government efficiency expert that in order to reduce the state, it must first gain more power, he would probably run away screaming.

Tyler focused on the federal government’s role in regulation, but a Twitter thread recently came up Brian Hanlon illustrates a similar problem at the state level:

Yimby’s efforts to promote housing development have proceeded along two different dimensions: deregulation and mandates. To paraphrase Tyler, if you had asked me five years ago about housing mandates for local governments, I “probably would have walked away screaming.”

I’m still not entirely sure this is a good idea. But I do see some logic in this approach. State governments are trying to deregulate the housing market, and local governments are continually compensating for their moves with increasingly onerous regulatory barriers. Mandates are of course not the first best solution; it would be better if local governments erected fewer barriers to the construction of houses. But mandates are a tool that could force real action in this area.

For example, most state governments engage in revenue sharing. You might imagine that the size of the local subsidy would be proportional to the amount of new homes being built. Because the Nimby policy imposes negative externalities on the rest of the state, a financial penalty for burdensome regulations would force local governments to bear at least some of the costs of their barriers to new construction. This would give them a push towards policies that made more housing construction possible.

To be clear, I have no confidence at all that this would work in the real world. In states like California and Massachusetts, state governments could require that construction use union labor or that a certain percentage of housing be “affordable.” By the time legislation has gone through the sausage-making process in the legislature, it rarely resembles the ideal concept drawn up by policy makers. Nevertheless, there are things in the world worse than housing mandates, and I suspect some parts of the US already have them.