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How Federal Policy Holds Back Sustainable Economic Growth

Overly restrictive patent law and housing regulation reward existing monopolies.

There are few national solutions that can help all cities. There are, however, two federal policies holding back widespread business creation and concentrating economic power in fewer hands—overly restrictive intellectual-property law and housing regulation that promotes unsustainable sprawl.

Patents used to be difficult and expensive to enforce. One of the main reasons the film industry set up shop in Los Angeles (on the other side of the country from New York City with its legions of actors, producers, set designers, costume makers and all the various and sundry people needed for a major stage production or a film) is because easterner Thomas Edison owned many of the patents on filmmaking and he didn’t want to license the technology. So the moviemakers went to California, where they could skedaddle to Mexico in case Edison wanted to make trouble.

The Industrial Revolution came to the United States because Samuel Slater copied British weaving machinery. It came to Japan because Japanese entrepreneurs were able to copy American and British technology. Now the Chinese are copying American and Japanese technology. Many innovations also resulted from tinkering. Early automobile pioneers experimented with internal combustion engines they made themselves and a number of important figures in Silicon Valley were members of a group called the Homebrew Computer Club that built their own computers and shared skills and ideas.

But such tinkering is all but impossible now. According to Modern Farmer, intellectual-property law has been used to make it illegal for farmers to fix their tractors. Similarly, Barry Lynn has written in Washington Monthly about how Franklin D. Roosevelt’s administration began applying antitrust law to businesses holding large numbers of patents. This allowed competitors to imitate and innovate. Since the policy was reversed in the 1980s, large companies have once again used patent control to suppress competition or patent troll small firms for millions of dollars.

Related rollbacks of antitrust enforcement across all sectors, according to Brian Feldman, have resulted in smaller, regional firms being absorbed by national and international ones. “While some new out-of-town owners kept large operations in St Louis, the city lost entire layers of expertise,” Feldman wrote. “Applying that lesson more broadly, when the citizens of St Louis . . . look at the decline of their local economies . . . their fates may be the result of decisions in Washington . . . to overturn antitrust laws passed by elected officials of both parties over the course of the twentieth century.”    

So Ross Douthat’s recent call to “Break Up the Liberal City” is partially right. There are monopolistic combinations at work in America, based in large cities, but they exist because of government policy. Another such concentration of power exists among homeowners. A few years ago the French economist Thomas Piketty argued that capitalism was in the midst of a crisis because of a lack of regulation resulting in increasing amounts of economic concentration in the hands of the one percent. Shortly afterwards Massachusetts Institute of Technology graduate student Matthew Rognlie analyzed the data and found that virtually all of the increased returns on capital have gone to owners of housing.

In the 1970s, policies were designed to restrict housing construction and increase home values. This change correlates very well with the beginnings of wage stagnation, widening inequality, the hollowing out of the middle class, and a million other factors. To put it bluntly, restrictive housing policies in places like Boston, New York, San Jose, and San Francisco cost the country about $1.6 trillion a year, according to economists Chang-Tai Hsieh and Enrico Moretti. The result, as Matt Yglesias puts it, is that “People go where land is cheap, not where their labor is valuable.”

Another major impact is from the policies that guide small towns. As Charles Marohn has shown, towns across the country have favored automobile-dependent development that relies on massive infrastructure investment. They go deeply into debt to build the infrastructure in order to attract big-box-store development, which doesn’t generate enough in taxes to pay for the costs of that infrastructure—and then they have to go deeper into debt to build more infrastructure to attract more sprawling development that still doesn’t pay for itself. This also applies to residential construction: According to a 2007 paper by Mark Obrinsky and Debra Stein of Harvard University’s Joint Center for Housing Studies, compact walkable neighborhoods produce more tax revenue while having lower infrastructure costs.

It is perhaps not surprising that, even within Boston’s orbit, Massachusetts cities and towns allow development that is dependent upon car usage, has made compact and walkable development illegal, and are increasingly reliant upon the state for funding to maintain roads and schools. In Iowa, a small city called Mount Union recently dissolved because it couldn’t pay its bills for a new sewer system and several cities and towns around the country have begun replacing paved roads with gravel or dirt ones to save on repair costs.

This is especially prevalent in places where local governments rely on sales taxes for revenue. The worst excesses of consumerism, viewed through such a lens, are a matter of life and death for such communities: Municipalities need people to buy disposable goods in vast quantities from retailers with poorly-paid workforces. Without enough sales or when labor costs get too high, City Hall will be bankrupt when WalMart moves to greener pastures. But City Hall will still go bankrupt sooner or later.

The policies adopted throughout this country to protect big, well-connected businesses from competition, to keep existing home values rising, and to promote economic development have destroyed local economies and the hard-earned wealth built up over decades. Revitalizing rural places and “interior” cities is not simply a question of jobs and infrastructure, but one of whether or not public policy allows for the creation of wealth and economic diversification.

Some aspects of the urban-rural divide will never be closed. Cities and small towns have different cultures because they are different places. More seriously, as cheap money dries up, businesses with good political connections will continue to evade antitrust laws. As deferred maintenance starts to show up, real trade-offs will have to be made. Some rural places may have to be abandoned, both because making them productive would consume too many resources and because the political pressure exerted by suburbs will result in their debts being subsidized by city production.

It’s not pretty, but recovery can only begin when we admit that we can’t borrow, build, or steal our way to prosperity.

Matthew M. Robare is a freelance journalist based in Boston.

This article was supported by a grant from the Richard H. Driehaus Foundation.



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