How local decisions affect inflation in housing, energy and more

Perhaps it’s not surprising that inflation has so heavily weighed down the Biden administration. The buck famously stops at the Oval Office’s Resolute Desk, and when a buck doesn’t buy what it used to, that’s a problem for the president.

But many of the worst bottlenecks making the pandemic economic recovery so painful were put in place by political actors much lower down the food chain, from governors to city councilors to everyday citizens.

Two years of soaring prices once thought to be fleeting effects of the initial Covid-19 shock have reached their most painful point yet. The most recent consumer price report shows an increase of slightly over 9 percent from June 2021, the biggest yearly increase in four decades. The cost surge has been driven primarily by a lack of housing and an energy crisis that has notably rippled into food prices, along with lingering Covid-related supply chain problems.

The Federal Reserve’s 0.75 percent interest rate increase this week is its latest attempt to control inflation overall, but in many of the sectors hit worst by rising costs, delays, and shortages, the federal government has a relatively small role to play in getting supply to catch up to demand.

In our federalized system, it may make more sense to blame your state and local government or even your neighbors, not President Biden, for out-of-control costs in housing and energy or supply chain pain in our logistics infrastructure. That’s because most of the time, the US tasks lower levels of government with responsibility for infrastructure and land use — and the decisions made at those levels in the past are contributing to rising prices today.

State and local jurisdictions, not the Fed or the feds, determine how much housing is built and where, when to permit cheap clean energy sources and vital energy transmission lines, and whether to expand ports and logistics infrastructure. Across the country, local legislators, executives, and public authorities have declined to spend more to improve economic capacity, or placed additional hurdles in the way of badly needed new development.

Here are three big parts of the economy undergoing inflation stress that local officials have made worse, and what it would take to reverse course.

1) Energy and transportation

In the US and globally, energy has been perhaps the single most painful contributor to inflation. Surging energy costs hit Americans not only at the gas pump, but in nearly every other part of their budgets. Oil-based fertilizers have grown scarce, making food more expensive, while rising fuel costs hit transportation for basically every consumer good, and energy-intensive heavy industries pass on higher input costs to consumers.

The problem ultimately stems from disruptions in various fossil fuel commodity markets. Russia’s invasion of Ukraine and the subsequent diplomatic backlash cut off supplies of oil and natural gas from one of the world’s largest producers. Those markets were already tight before the war because producers thought it would take longer for economies to reopen after the initial Covid-19 shutdown and ramped down production.

As a result, countries less dependent on fossil fuels, like France, with its extensive nuclear energy infrastructure, have seen much less dramatic overall inflation. Americans have felt the energy price pain mostly at the gas pump, which is not surprising since, among its peer countries, it has the lowest rate of electric vehicle adoption and the lowest rate of public transit usage.

The Biden administration has tried to visibly fight the cost of fossil fuels by releasing stockpiles from the strategic petroleum reserve, and has framed legislation to promote electric vehicles and move away from fossil fuels as inflation-fighting measures. But the ultimate decision-making authority over US energy lies with states and localities.

The power authorities that oversee much of the energy market are creations of state governments, and decisions like whether and where to build new transmission lines and electric vehicle charging stations lie with municipalities.

As a result, local actors have stymied the transition away from fossil fuels, leaving the country more exposed to sudden shocks in prices, said Samantha Gross, the director of the Brookings Institution’s Energy Security and Climate Initiative and author of a report on local obstacles to renewable energy.

She pointed to endless delays on projects like the Grain Belt Express, a transmission line that would bring dirt-cheap Kansas wind energy across the plains to the Midwest and connect to the East Coast grid. Missouri legislators, among others, have been almost implacably hostile to the project. Local officials have deferred to local landowners, declining to approve the Express and instead pursuing legislation that would raise eminent domain compensation costs for building it and give lower-level county officials more discretion to cancel the project.

It’s not just red-state officials who have delayed electrification and kept the country dependent on fossil fuels, even as the cost of those fuels spikes. Maine voters shot down a 2021 referendum to build transmission lines to hook New England up to Canada’s ample existing supply of renewable hydroelectric power, leaving the region more dependent on fossil fuel generation. Opposition was led by local conservationists and hunters who objected to cutting down forests to make way for the lines. They found themselves strange bedfellows with incumbent fossil energy interests, who bankrolled efforts to kill the project.

Local opposition and procedural delay mean “you get projects that make sense financially and from an environmental perspective, that even already have private investment, are still really, really hard to get sited and built,” Gross said. As a result, she said, “We’re going to end up with a slower and more expensive energy transition than we need, and that’s a drag on the economy on a continuing basis for years, decades maybe.”

2) Housing

One of the largest drivers of national inflation has been housing costs. Shelter accounts for about one-third of the Consumer Price Index, or CPI, one of the most important measures of inflation. This spring, housing costs accelerated the fastest they have in more than 30 years, even as the Federal Reserve had been raising interest rates for months, which should slow down demand for homes.

Local officials ultimately have much more control over housing production than the Fed or Biden. Home building is constrained by three main factors: national credit conditions, supply chains, and local land use policy, explained Paul Williams, a housing economics expert and founder of the Center for Public Enterprise, a new think tank focused on public investment. Of those three factors, only one — land use policy — is truly within the remit of elected officials, and local leaders have almost all of the power. The local level is simply “where policy happens,” said Williams.

Through zoning regulations that dictate how much housing can be built and where, local governments determine how much the housing market can respond to new demand with corresponding supply. The majority of land in some of the most prosperous and rapidly growing cities, like Seattle or North Carolina’s Research Triangle, has been zoned exclusively for single-family homes, restricting housing supply even as demand in those areas rises.

Pre-pandemic, the hottest housing markets in coastal metros like the Bay Area and New York City were among the most restricted by zoning, sending house prices skyrocketing. When Covid hit and many of the well-paid professionals who had previously been tied to jobs in San Francisco or Manhattan shifted en masse to remote work, the price pressure that had been concentrated in a few nodes spread throughout the entire country. Simultaneously, a strong labor market led to a burst of long-delayed household formation by millennials who are finally able to move out of shared apartments or parents’ basements and might be starting their own families.

Local governments have only recently and haltingly begun to reverse course to encourage housing production. California, home to much of the country’s most in-demand residential real estate, passed landmark zoning reform bills last year, but some of its largest markets like Los Angeles have blown deadlines to develop plans to actually allocate more land for housing, and implementation has barely begun. In New York, meanwhile, a promising effort to include similar apartment legalization and transit-oriented development schemes in the state budget was torpedoed in the face of opposition from suburban politicians like Democratic gubernatorial primary candidate Tom Suozzi.

While there are some federal tools for addressing housing costs at Biden’s disposal, such as the newly revived Obama-era fair housing rule, they don’t radically move the needle on supply. Ultimately, these tools can work by offering carrots and sticks to local governments, who remain the final decision-makers.

The Federal Reserve, meanwhile, can only cool the market by raising interest rates to make the job market worse. That could have the effect of scattering young households, forcing people to move back in with parents or roommates, and further discouraging housing production. The most direct route to lowering housing costs, most people’s biggest expense, runs through state houses, city halls, and zoning board meetings.

3) Logistics infrastructure

Along with a housing crisis and energy price spikes, supply chain chaos has been one of the defining aspects of the post-Covid inflationary moment. The Biden administration has been working to solve this: It passed an infrastructure bill that will funnel lots of money into projects like port expansion and has launched a supply chain disruption task force to tackle backups of physical goods.

But as in the cases of housing and energy, many of these efforts fall apart because of local land-use fights, said K.N. Gunalan, former president of the American Society of Civil Engineers.

As Gunalan observed, “incentives at the local level don’t always align with national incentives.” He pointed to the recent decision by California authorities to abandon a decades-old plan to expand Highway 710, the main trucking corridor leading out of the country’s busiest port in Los Angeles and toward the intermodal transfer stations that move imported goods along to the rest of the country.

Local opponents have slowed down new logistics facilities in deep-red Utah as well, where a coalition has fought against an “inland” port that would take pressure off overloaded West Coast hubs.

The Highway 710 expansion would have imposed heavy costs on local communities, which would lose land and suffer worse air quality. But the absence of any alternative plan to get stuff out of the Los Angeles ports will lock in current congestion.

Local fragmentation creates national inflation

When all politics is local, as the cliche goes, stakeholders can only see local costs and not national benefits, so it’s a lot easier to say “no” than “yes.”

American deference to local jurisdictions on crucial land use and permitting questions has become a kind of meta-bottleneck, one that makes it impossible to straighten out the actual bottlenecks driving inflation. Local opponents of new infrastructure investments may have good reason to object to big projects. But right now, local quality-of-life concerns are not in balance with the need for new investment in housing and infrastructure, so stakeholders double down on procedural delays or throw up their hands and avoid the problem altogether.

If America is going to accommodate growth without crippling inflation — let alone avoid the worst losses from climate change — new housing, port expansions, power transmission lines, and other projects to build the nation’s infrastructure all have to go somewhere. That somewhere will often be in the middle of existing communities and across local jurisdictional lines.

These efforts require a level of coordination and prioritization policymakers haven’t practiced in decades. The American system of government splits responsibility for some of the most crucial parts of the economy across countless small fiefdoms and levels of government, which often have competing interests. Breaking the local economic logjams that are sending prices higher will require elevating and expediting the planning process for projects that could make a difference.

Alex Yablon writes about economics and public policy. He is a fellow with the Jain Family Institute.

The post How local decisions affect inflation in housing, energy and more appeared first on My Blog.

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