Regulation, incumbency, haves and have-nots

When we talk about regulations, in housing or agriculture or the Internet, it is usually sold as being intended to protect some “little guy” — be it the “family farm” or the file sharer. The insight that is most lacking is that regulations often have the opposite effect, which is to weaken consumers, the poor, or the upstart competitor.

In other words, regulations aimed at Goliath too often hit David. Case in point is a new study in Seattle where housing regulations intended to “preserve character” have driven prices up dramatically: An intriguing new analysis by a University of Washington economics professor argues that home prices have, perhaps inadvertently, been driven up $200,000 by good intentions.Between 1989 and 2006, the median inflation-adjusted price of a Seattle house rose from $221,000 to $447,800. Fully $200,000 of that increase was the result of land-use regulations, says Theo Eicher — twice the financial impact that regulation has had on other major U.S. cities.

Who are the winners and losers in this scenario? Well, people who already have houses are the winners — the “incumbents”. They get to live in a relatively underbuilt place with small-town characteristics. Existing owners are the beneficiaries of that $200,000 increase in value.

The losers are the have-nots: those seeking housing. Artificially adding $200,000 to the price of a house puts it out of reach for the average working person. Due to the restrictions, new homes are not built so there are fewer homes for everyone. Seattle (and other places like San Francisco) effectively become wealthy, quaint enclaves that exclude everyone but the very well-to-do. David loses.

Let’s keep this in mind as we consider the possibility of “Net neutrality” legislation. If we place restrictions on what sorts of networks can be built (by legislating architectures and economic models), we shouldn’t be too surprised when fewer new networks get built. The incumbents ultimately face less competition. Guess who wins?

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h/t Instapundit