‘Caps’ Set the Wrong City Limits

On July 27 the San Diego City Council passed its Interim Development Ordinance, the latest event in the continuing fight to put limits on further urban growth in California cities. San Diego now becomes the largest city in the country to establish statutory controls on growth, empowering the city to implement a strict annual limit on the number of residential building permits issued.

After World War II, Southern California grew more rapidly than any other major U.S. economic region. Now, anti-growth measures are considered from San Diego to Los Angeles.

Traffic congestion has provided the most visible concern, but it is not the only congestion associated with growth. Park and recreation facilities have become increasingly overutilized. Schools are overcrowded even with year-round schedules. Overloaded sewage treatment facilities often break down, discharging floods of untreated waste into coastal waters. The disposal of the solid wastes of 14 million people presents a mounting crisis--landfill capacities are exhausted and not replaced. The intermittent threat of drought is exacerbated by the rapidly rising demand for water. The region has fallen short of air-quality targets set by the Environmental Protection Agency.

While growth continued unabated during the last decade, the region suffered a significant erosion of public resources. Proposition 13 severely contracted local tax bases and Proposition 4 limited the rate of growth of state expenditures. The Reagan Administration radically reduced direct federal subsidies to state or local services and facilities. Resulting deterioration accentuated congestion difficulties. Many urban dwellers were driven to conclude that the only way to save the quality of local life was to limit growth.

But is growth control the appropriate way to treat these complex problems? The answer depends on two other questions:

--Are growth caps like San Diego’s in the true interest of residents?

--Is the policy in the interest of the rest of the region?

Stopping the growth of a city is not the same as shutting off the sprinkler system. Not only do cities grow or decline for complex reasons, but how they change depends in large part on their economic relations with the rest of the world. When regions--and the cities within them--are growing, populations and jobs are increasing, as are payrolls, retail sales, savings, local bank accounts and local tax collections. And if the local government is not attending to the expansion of infrastructure and service systems, then congestion, pollution and all the other problems associated with growth will also increase.

Consider the fictional case of Centerville, a city not unlike Bakersfield with a relatively “closed” economy, remote from any nearby metropolis. Its growth-control would be fairly straightforward: Restraining the construction of new housing while its economy is expanding and generating new jobs could only cool off that economy. While prospective demands on the local living environment would be abated, any benefits would emerge gradually over the years--and then not be directly perceptible. By itself this strategy can promise no actual improvements in quality of life. Proponents can only contend that, in the future, things may not be as bad as they would have been--a gap most people have difficulty thinking about, much less perceiving.

Meanwhile, Centerville pays a price not nearly so mysterious. Competition for housing pushes prices up, which nudges up wages. Shutting off new housing means shutting off growth in the labor force, which translates into higher labor costs for all enterprises. Centerville, now a high-cost environment for business, will find it difficult to hold on to existing enterprises. Any modest improvement in the local environment for existing residents will have been achieved by weakening its economic base at the expense of tenants, the retail sector and job-seekers. Any windfall comes to the current owners of residential property (at least in the short run) at the expense of current renters and prospective home buyers.

Los Angeles, San Diego and other Southern California cities are not Centervilles. They are not only much larger, they have “open” local economies, deeply enmeshed in the regional economy. Not everyone lives and works within the city limits. The job market extends far into the region; so does the housing market. This does not exempt San Diegans from “the Centerville effect,” but it does allow them to export some of the consequences of their policies to other communities within its “commuter shed.” Problems that San Diego seeks to avoid will be passed on to neighboring cities where developers go to satisfy the housing demand. Then pressure in neighboring cities impels them to follow San Diego’s example. This propagation of growth-control policies raises a pervasive threat to the competitive position of the whole regional economy.

Perhaps the most telling charge against growth-control policies is their inequitable nature: They promise a burden for the poor and a benefit for some of the rich. Indeed, owners of homes and apartments at the time of the ordinance’s passage may enjoy a double windfall; the value of their housing assets will be increased by rising prices and they will benefit from any environmental improvements resulting from slower growth. Tenants and local merchants will pick up the tab in higher rents and lost revenues.

Clear winners in cities with growth ceilings are homeowners who live in the last home they will buy and apartment owners who may raise rents because of a scarcity of new housing. Obvious losers are renters, first-time buyers and existing homeowners trying to buy larger homes.

Growth caps tend to inflate local labor costs through their impact on housing prices and the local cost of living. In the longer run, the local labor force loses as companies move operations to lower-cost communities. And the community loses from a decrease in its tax base associated with lost job opportunities. Caps will successfully slow down growth only if they raise the cost of living to the point where Southern California becomes less attractive to new residents than other parts of the country. The price for such “success,” if success it is, will be paid primarily by current residents.

Growth-control is a political decision. Supposing that a consensus exists to slow down growth, caps such as building-permit limitations are one of the worst ways to go about it.

Growth caps resemble other administered methods of control, including moratoriums. Most economists consider such rationing methods inferior to a pricing strategy because they tend to be arbitrary, discretionary--and often unreasonable. Pricing strategies, in contrast, rely on taxes and fees (or tax incentives and rebates) to achieve a desired result. A pricing strategy would simply raise the cost of development to the point where the desired number of new homes and apartments were built. New development in Southern California is already paying some of the highest impact fees in the country for schools, roads, parks and utilities. A pricing strategy would raise these fees even further but it would remove the basic arbitrariness of rationing--deciding who merits building permits and utility service.

Growth-control initiatives are popular because everyone is unhappy about congestion, air pollution and other negative consequences of growth. Caps, however, a form of rationing, are an egregiously poor way to slow down growth:

They are irreparably unfair. They create unfair financial hardships for projects already in the pipeline. They place the burden of paying for the consequences of growth on new home-buyers and apartment renters. Gains from increased property values accrue to existing owners, not to the benefit of the community.

They place a disproportionate burden on those who can least afford to pay for it. Low and middle-income residents not only receive fewer benefits from increased home values but are more likely to suffer from relative decreases in job opportunities.

Twenty years of underinvestment in the urban infrastructure, including transportation, created the current severity of growth problems. Growth-control initiatives do not address the problems of inadequate infrastructure. To the extent that growth caps redistribute growth problems within a metropolitan area, they will have no effect, even in the long run, on traffic and pollution. Then everyone loses except the lucky family that already owns its dream home--and the landlord who just happened to be outdoors playing the tuba the day it rained gold.