Government Restrictions On Building Construction Leads To Inequality

Thomas Piketty’s “Capital in the 21st Century” is so far the most influential economic treatise of the 21stcentury. According to Piketty, concentration of capital in a few hands is the major cause of inequality. But, a recent paper by Massachusetts Institute of Technology (MIT)  graduate student Matthew Rognlie argues that concentration of capital in a few hands does not contribute majorly to inequality. He says the returns from capital is not higher than that of economic growth. But, there is one exception to this rule, and that is residential property. In other words, escalating residential property prices is the major cause of income inequality, according to Rognlie.

Why are  residential property prices rising more than other forms of capital?  Residential property prices are rising at a rapid pace in some parts of the world because of government regulations on building construction.  Residential property, for instance, is affordable in parts of the world where government restrictions are less on construction of buildings, like zoning laws and land use restrictions.  

Why is price appreciation of property in India a major source of inequality? In India, for instance, there are restrictions on using agricultural land for other purposes. Agricultural productivity is low because a typical farmer does not own large plots. The technology used in farming is not sophisticated either. Though farming is not a productive activity, restrictions on land use prevent people from disposing their property of and migrate to urban centers to seek jobs in more productive sectors where they can earn more. This also prevents India from being a more industrialized, manufacturing powerhouse.

Another factor which leads to income inequality is government restriction on vertical growth of buildings. Piketty is a French economist, and he observed that in Paris, the capital and most-populated city of France, there are restrictions on high-rise buildings in order to preserve the city’s heritage and aesthetics. This has made homes in Paris beyond the reach of most people. If such restrictions were not put, this would not have happened.

This is true of property in Mumbai, too. Restrictions on the height of buildings and topographical constraints have made it very difficult for low-income people to rent or buy a house in the city. Such people are forced to either live in slums or move to the suburbs. According to some estimates, people who live in cities are far more productive, and, on an average, earn more than people in small towns. Preventing migration to metropolises like Mumbai through land use and building restrictions locks many people in poverty for no legitimate reason.ᐧRaising the FSI in Mumbai can solve many of these problems.