Dan Malouff has written a disappointing response to my post (and Yglesias’ post) on the impacts of Washington’s height limit. He casts himself as the moderate between preservationists and economists, but there is nothing moderate about the nonchalance with which he accepts the huge opportunity costs associated with the height limit:
I think the issue calls for a scalpel rather than a hatchet. Yes, letâ€™s allow taller buildings, but rather than applying a one-size fits all solution to the whole downtown, letâ€™s raise the limit carefully in the places where and the ways in which it will do us the most good. Use a height bonus to increase residential diversity downtown, or to encourage investment in Anacostia, or to find a developer who will build air rights buildings over I-395. Letâ€™s absolutely do those things. But letâ€™s not needlessly erase one of the most unique and interesting things about Washington in a misguided quest to make sure all office space is located within a single two-mile diameter circle.
What we have here is a complete and utter failure to grapple with the costs of the policy choices he prefers. Malouff says that the desire to build more office space in downtown Washington is misguided, but he makes no effort to explain why firms are willing to spend so much money on that particular location. If it’s not actually that important to be downtown, then why are firms throwing their money away on stratospheric rents? People who actually participate in the Washington office market are demonstrating with their money that adding office space downtown is decidedly not misguided.
And as I continue to emphasize, imposing an artificial limit on construction in Washington generates a very large dead-weight loss. And much of the economic surplus that would have been generated would have accrued to Washingtonians in the form of increased earnings, additional jobs, and higher tax revenue. Malouff treats this foregone surplus as if its his to dispense with, without even trying to justify why it’s less valuable than the outcomes he prefers. Frankly, I’m less concerned about what buildings are allowed where than about getting urbanists and preservationists to understand the simple point that the limits they’d like to impose have real costs. If you’re making policy recommendations and adopting policy positions without rigorous consideration of these costs, you’re behaving irresponsibly.
Malouff also misunderstands the point I make about industrial diversity. (And he seems to think that the fact that the height limit is encouraging the construction of downtown clones elsewhere in the city is a good thing.) When I say dynamism, I don’t mean neighborhood vibrancy. I’m referring to the diversity of Washington’s economic base.
Let me give an example. Back in 1996, 25% of New York City’s private wages were earned in the financial sector. Over the next ten years, finance experienced remarkable growth, which generated a huge demand for space in New York City. Demand for office space rose, which pushed up rents. And demand for labor rose, which pushed up demand for housing, which pushed up housing costs. The growth in finance might have generated an increase in real estate costs no matter what, but because New York’s property market, while more flexible than some, still has significant restrictions on new construction, real estate prices soared. And the effect of rising prices was to squeeze out some business and individuals not associated with the financial industry. By 2007, financial sector wages were up to a third of the city’s total earnings. Direct financial sector employment rose by about 25,000 over that period, an increase of about 15% which was faster than the 11% growth in total private employment.
What is the impact of this crowding out? Well, it means that the New York economy is heavily dependent on the financial industry and government budgets are heavily dependent on revenues from financial workers. When the financial sector experiences a bust, the city finds itself in deep trouble. That’s less of a concern for Washington, because government so rarely busts.
But the impact of financial sector dominance is felt elsewhere. As financial employment grows as a share of the economy, employment in other industries declines. The industrial mix becomes less diverse. What isn’t seen is that high real estate costs also deter the formation and growth of new industries altogether. Throughout the city, in business and the arts, it becomes harder to open new enterprises that aren’t already well-financed. Economic diversity falls, as does experimentation and innovation.
We can see this in the office sprawl Malouff praises. High-end office space in NoMa is a poor substitute for high-end office space downtown. And if developers were able to meet the demand for high-end office space within downtown, they wouldn’t have any desire to build high-end office space in NoMa. That land could be developed for lower margin (but still profitable) alternative uses, including office space sufficiently affordable to accommodate the growth of new kinds of enterprises. There might be room for artists and entrepreneurs. There might be room for more people providing basic services, so that the few doctors who can afford downtown space don’t enjoy the market power that allows them to overschedule and make patients wait an hour to be seen (a particular pet peeve of mine).
But presently, there is a clear limit on office space in downtown Washington, and developers know that as that limit is approached, tenants will have to look to alternative markets, like NoMa. This gives them an incentive to either develop high-end office space speculatively or leave the land they own undeveloped until the market comes to them and they can build for the high-margin office crowd. Malouff thinks it’s damning to my point that lots of land on the fringes of downtown is undeveloped. On the contrary, the higher returns developers can expect when the height limit forces the office market their way discourages them from building more affordable space now.
The height limit, in my view, is bad for DC. Other might disagree with me, but I’m going to have a hard time taking their view seriously until they honestly grapple with the trade-offs the limit involves. It’s not a free lunch.