Economist David Friedman Says India Must Go Taller To Make Homes Affordable

In this exclusive interview to PropGuide, legendary economist David Friedman, who studied at Harvard University and University of Chicago, says that the government should allow developers to build high-rises to make homes affordable for everyone by 2022.

I met David Friedman at Starbucks in Connaught Place, the Central Business District of Delhi. Starbucks, which exemplifies the age of aesthetics, tends to maintain consistency in look, feel and attitude across the world. But, its store in Delhi's premier market reeks of traditionalism, with bare cement interiors, local crafts and furniture. The Connaught Place market, though somewhat dilapidated, is one of the most expensive office spaces in the world. Starbucks, which does not have many outlets in India, bought space here because as per its brand values, it cannot afford to open stores where the catchment area does not justify the investment. The young men and women who listened to Friedman consuming expensive retail space without consuming the expensive coffee epitomize India's leisurely café culture.

Economist David Friedman is one of the most creative minds of our times. Friedman studied Physics at Harvard and Chicago, and has never taken a course for credit in economics or law. But, the finest of minds vouch that Friedman's class on legal systems is the best economics course in the world. David Friedman is the son of Milton Friedman, the 1976 winner of Nobel Prize in Economics, and economist Rose Director. Rose Director was the co-author of Milton's best-selling book, 'Free to Choose' and sister of economist Aaron Director who was instrumental in the development of the Chicago School of Economics. 

Here are excerpts from an interview:

Shanu Athiparambath: Economist Tyler Cowen said that when he visited India, he was surprised to see crowded streets where nothing happened. He couldn't see their possessions, because they live on the streets. Why are so many people homeless in India? 

David Friedman: He couldn't see their possessions because they did not have any. I think they sleep on the sidewalks. It is expensive to build homes in India because there are many restrictions on what you can build, where you can build, and how tall you can build. But, how many of these arguments are actually raised in the Indian context?

Shanu Athiparambath: These arguments are raised, but not very often. In India, the floor area ratio (FAR) is often less than 2. No large Asian city outside India has an FAR lower than 5. In Gurgaon and Noida, buildings are taller than in Delhi.

David Friedman: Aren't Gurgaon and Noida adjacent to Delhi? Do those buildings fall down?

Shanu Athiparambath: No. They don't.

David Friedman: Asian cities like Shanghai have apartment buildings that are 30-40 stories tall. To make this point clear, I think Indian journalists should superimpose a picture of Shanghai on Delhi in a way that it shows high-rise buildings in Shanghai alongside dense, low-rise buildings in Delhi.

Shanu Athiparambath: But, they believe India doesn't need Shanghai-model development. Some economists think that FSI in India should go up to 5-20. I have read that hundred years ago, in Manhattan, there were 16 people on a floor. But, now it is 4. But, in India, people think that space is congested because population is rising.

David Friedman: Yes. There are many other countries in the world, where population had gone up. But, floor area per person has not gone down in those countries because buildings became taller. In New York, floor area per person has gone up even when population rose. Hong Kong has tall buildings but floor area per person is low, but then Hong Kong has a really dense population.

Shanu Athiparambath: The Indian government plans to make homes affordable for everyone by 2022. What should the government do?

David Friedman: The government should allow developers to build high-rises. In India, large tracts or urban land are used by the government, especially by officials and politicians that live in bungalows in expensive parts of the city.  Government buildings do not need expensive lawns. The government can use such land to build homes for the homeless.

Shanu Athiparambath: Lutyens' Zone is less than 2% of the land in the city, but most buildings in the bungalow zone are owned by the government.

David Friedman: I remember my father saying that when he visited India in 1950s and 60s, bureaucrats in Delhi made arguments for restricting luxuries for the rich in air-conditioned luxury hotels where bureaucrats and American visitors held conferences.

(While India was preparing the Second Five Year Plan, David Friedman's father Milton Friedman was assigned to advise C D Deshmukh, the Finance Minister in 1955. In 1963 and 1976, Milton Friedman had visited India to study the monetary conditions in India, and to film his TV series, 'Free to Choose'.)

The government officials in India talk about helping the poor, but they themselves are rich. So, a demagogic argument can be made against the demagogues. Journalists can show readers pictures of vast tracts of government land with greenery in Delhi, with densely settles areas around it. Are there any political parties in India that would support such efforts?

Shanu Athiparambath: The Prime Minister had raised the FAR in parts of Gujarat, like Ahmedabad, Surat, Jamnagar, and Rajkot. In Mumbai, the FAR is now, 1.33, but Greater Mumbai's governing authority might soon raise it even up to 8 in some parts of the city.

David Friedman: 8 is very high. But, would that be near the city center?

Shanu Athiparambath: In the densest parts of the city.

David Friedman: If getting construction permits take very long in India, the government should make the process faster. Why do such approvals take very long? If this is because they can take bribes, that would be something government can eliminate. The Indian government should make more land available for consumption by freeing up the land which is under its control.

Friedman's 25 year old homeschooled daughter Rebecca Friedman interrupts, saying, “When the internet becomes more popular, powerful, and less expensive, businesses will find it easier to relocate to suburbs or smaller cities. Now, people are used to their office buildings. It is inertia that stops them.”

(Rebecca Friedman reminds me of everything I have read about the Friedmans. She argues forcefully, like her father. David Friedman's son Patri Friedman is a well-known activist, whose non-profit was once funded by PayPal co-founder Peter Thiel to build artificial cities on the ocean.)

David Friedman: Land in India is not expensive in areas, which are far from the central districts in cities. The government should make it easier to telecommute. If I call a customer service center in the US, I would probably hear an Indian accent. Now, that is half way around the world. The internet will be a very powerful force here. Firms stay near the city center because they continually deal with government bureaucrats. The more firms have to do this, greater is the incentive to locate their businesses in the center. This causes more people to migrate to the center, making homes more expensive near the city center. The license-permit raj forces firms to be in the city.

Shanu Athiparambath: Can the government make homes affordable by lowering interest rates?

David Friedman: It is true that lower interest rates make it easier to construct, but interest rates are not something the government can determine. There are many other factors. The central bank (Reserve Bank of India) can cut the interest rates at which it lends out. But, the RBI can lower interest rates only by printing a lot of money and lending it out. Then the price of goods will go up. The government does not have a magic wand with which it can make homes affordable.

Shanu Athiparambath: Should the government forcefully acquire land to build industrial, residential or infrastructural projects?

David Friedman: For building highways, railways, and other infrastructural projects, the government should buy land.

Shanu Athiparambath: They argue that corporations or the government cannot buy large plots of land without forcefully acquiring it.

David Friedman: It depends. A highway can go this way, this way or this way. One way to buy land is to get options around routes. Tell people, “I won't tell you in which route I am going to build this highway. But I will give you this much if you sell the land. If one option costs less, I can exercise that option and not the other.” That is a solution.