Regulatory Issues For AI Are The Same Ones For Housing

I had the opportunity several years ago to be part of a film called Big Cities and Zoning: The Search for Affordable Housing that was part of the Federalist Society’s Regulatory Transparency Project. The film was produced and directed by Motivo Media. The Regulatory Transparency Project has a new series, SHAPED: Innovation, Control, and Freedom. The series is hosted by Adam Thierer, a senior fellow at the R Street Institute in Washington DC on the Technology & Innovation team. The series is relevant to housing because it is perhaps one of the most regulated consumer products bought, sold, and rented in the United States. Whether a person believes housing is an entitlement or a commodity, there’s no doubt the rules that govern its production have a profound impact on affordability. I had an email exchange with Thierer about the series.

“The docuseries is timely,” Thierer told me, “because it examines the hidden ways in which regulation shapes real-world innovation outcomes in areas of enormous importance to individual Americans and our nation as a whole.”

It is important to consider that according to the United States Census Bureau, “of the nation’s 328.2 million people, an estimated 206.9 million (about 63%) lived in an incorporated place as of July 1, 2019.” There are about 19,500 incorporated cities and towns, jurisdictions that make up most of the rules and regulations that govern what can be built, how it is built, and where it is built. States and counties also have a role, but since the Euclid decision of almost a 100 years ago (1926), cities exercise tremendous influence through zoning and land use codes.

I agree with Thierer that, “it is important that regulations not hold-back the life-enriching potential of technologies,” and the same is true of housing. I mentioned Ezra Klein’s Abundance Agenda, which I wrote about not that long ago. Thierer discusses Klein’s work in a longer article called, Defending Technological Dynamism & the Freedom to Innovate in the Age of AI.

People are pretty obsessed these days with questions about how to regulate artificial intelligence. The principles and ideas Thierer applies to technology also apply to housing regulation. One of the key terms in the article is “Regulatory Inertia: Entrenched interests and a precautionary mindset favor stability over progress. This stifles innovation.”

This is absolutely true of housing where concerns like the height, bulk, and scale of a building are driven by rules that are sometimes arbitrary. For example, ask any planner in America whether a 10-story building should be built in a single-family neighborhood. Their answer would almost always be that such a building would be “out of scale” with the surrounding buildings. What does that really mean? Would building such structure for housing jeopardize the health and safety of the neighbors? Would it lead to an outbreak of disease? Of course not. But such concepts, like scale, have a serious impact on housing supply, which, when it is attenuated by such rules, can create scarcity and higher prices.

I mentioned to Thierer the tendency of regulators and those on both the left and the right to focus on trying to control the outcome of everything. a Firing Line interview, Hayek delivers what I called a Burkean assessment of the dominant thinking about social institutions, that,

“We can make everything to our pleasure, that we can design social institutions in their working. Now, that is basically mistaken. Social institutions have never been designed and do much more than we know. They have grown up by a process of selection of the successful without people frequently knowing why it was successful.”

Hayek rightly asserted in The Use of Knowledge in Society, that there isn’t a single mind that can know the marginal rates of substitution between all goods in an economy in order to craft policies and inputs that would perfectly satisfy both buyers and sellers. Economies are messy and imperfect, and innovation usually occurs in spite of norms and trends when prices rise enough to reward an innovator for being able to bring a project to market more affordably.

“Hayek taught us that the fundamental problem with government planning is the so-called Knowledge Problem,” Thierer says, “and our inability to ever fully understand the full range of complex phenomena that drive markets. The complex technologies and markets featured in the docuseries—automobiles, pharmaceuticals, and artificial intelligence—are particularly prone to the Knowledge Problem due to their sophistication.”

I’d say that the same is true of housing. But government uses the most blunt tools to regulate such a complex market.

The normative standard used for “affordability” is that nobody should pay more (or less because this would mean someone who could pay more is in someone else’s cheaper unit) than 30% of their gross, pre-tax income on housing. When I ask the “technocrats” if everyone in the United States paid exactly 30% of their income on housing would the housing “crisis” be over. This makes them very upset. Affordability is truly a qualitative measure, not a quantitative one, yet it is widely used to set policy. Can you speak to that kind of thinking and measuring and the way it distorts and shapes outcomes. I’ve written about this often when it comes to housing

“Government interventions have already distorted outcomes in bizarre and costly ways here, yet planners often fall into the trap of thinking that still more technocratic interventions can solve all the problems previous interventions created.”

This is exactly why I’ve argued for more than a decade that we need to change the way we measure “affordability.” The measure when used retrospectively in assessing cost burden leads to terrible outcomes. The number of households paying more than 30% of gross, pre-tax monthly income on housing suddenly becomes the number of units that need to be built using Low Income Housing Tax Credits (LIHTC), a method of financing that consistently delivers housing that is massively overpriced and complicated to build. The SHAPED series will be another important analysis of similar ways government can make a problem worse by trying to solve it.