Thursday, January 12, 2012

How Government Regulation Creates Wealth Inequality

A small-town newspaper (scroll down to Section B after hitting the link) profiled a local land developer, explaining how he started and grew his own business.

Harry Fox, Jr. spent the past few decades becoming a successful land developer in the Commonwealth of Pennsylvania. (Fox generally does not build but instead acquires large tracts of land and goes through the necessary steps in order to subdivide the land into lots and bring them to market.) He mentioned to the newspaper that if he had tried getting into the land developing business today he would have a much harder time doing so because of all the government regulation that exists. I wanted to know what he meant by this so I contacted him and conducted an interview of my own.

South-central Pennsylvania on a foggy, autumn day. Photograph © Paul Hair, 2011.
South-central Pennsylvania on a foggy, autumn day. Photograph © Paul Hair, 2011.

I wanted Fox to explain to me all the steps needed to bring a piece of land to market in the Commonwealth of Pennsylvania. However, government regulations and requirements are so extensive that we couldn’t go through all the steps in just a few hours. So we focused on just one area: what a developer needs to do to bring a piece of land to market with that piece of land having a private septic system. The description that follows pertains only to Pennsylvania. Any errors made are mine and mine alone.

A developer who wants to sell a piece of land as a building lot (with the intention of using a private septic system on it) must spend thousands of dollars and deal with multiple layers of bureaucracy just to determine if he can install a private septic system on it.

The bureaucracy in the case of trying to install a private septic system is the Pennsylvania Department of Environmental Protection (DEP). The Pennsylvania government has enabled the DEP to implement and enforce sewage planning and management throughout the Commonwealth. This means that the DEP can (like the federal government) bypass the state legislature and unilaterally institute binding laws through regulation, thus giving it extraordinary power with little to no accountability to the public (since DEP officials don’t face elections, and because bureaucracies rarely undergo reform and almost never disappear).

The first step in the septic-system-authorization process generally is a preliminary hydro-geology study. The necessity of a preliminary hydro-geology study varies somewhat from region to region, but is quite prevalent in south-central Pennsylvania (where Fox operates) and mandated in all areas with a limestone geology. The hydro-geology study determines if nitrate levels on the land are within acceptable levels to install a private septic system. If they are, the developer then must perform a perc (percolation) and probe test to determine if there is sufficient depth of limiting zone. Sufficient depth of limiting zone means that the perc and probe test is checking to see if there is sufficient depth of permeable soil (48 inches needed) between effluent and the limiting zone (i.e. bedrock, etc.). Local municipalities require this perc and probe test based on DEP mandates.

If the developer passes these tests he then must submit a sewage planning module to the local municipality and the DEP. This will take additional time and may cost more money if the DEP decides that additional steps are necessary. Even after the DEP approves the sewage planning module the developer must go through further steps with the local municipality to get final permits and approval for the septic system installation.

Fox mentioned that a lot of people who want to subdivide a piece of their own land to sell to their child or other relative often have no idea how difficult it is to do so. I’d imagine that the steep price necessary to do all the tests needed to determine if one can install a private septic system on the land would be enough to turn off many people from trying to use their own property as they wish. If not, there still are all the other tests, bureaucratic regulations, and thousands of dollars that might stop someone from trying to sell his own land.

Fox told me the most interesting part of our conversation when our meeting had just about ended. He said that government regulation (through existing environmental and statutory constraints) has restricted the supply of approved building lots and land that is capable of being developed (hereafter simply referred to as approved building lots). And while he favors deregulation, he said that this extensive government regulation actually benefits him in the long run. Here’s what he meant.

Just a few decades ago the average person could subdivide and sell a piece of his land rather easily and without spending a lot of money. Less bureaucracy meant there were fewer tests and expenses. Therefore, if a person wanted to sell some of his land he simply did it. This in turn meant that there were more approved building lots on the market and thus an acre of an approved building lot was cheaper since there was a greater supply of it.

Now, however, with all the bureaucracies, expenses, and time needed to bring a piece of land to market, less people are attempting to sell land, meaning that there are less approved building lots on the market for purchase. This means that those who do invest the money and time needed to bring land to market now can charge more per acre of an approved building lot than they could have ten, twenty, thirty, forty, or fifty years ago.

Fox called this, “restriction of supply by regulation.” And he said that while deregulation would allow more people to enter the land market and profit from it, the heavy hand of government regulation actually benefits him by keeping many people out of the land market, thus allowing him to sell more land and being able to reap the benefits of the higher cost of land per approved building lot acre. Thus, the profits from selling land are increased for those who can afford to enter the land selling market while those who don’t have the money to do so cannot profit at all from their own property.

In this day and age when totalitarians and would-be tyrants scream about the need for more government regulation, the evils of the free market, and the need for big government to rule our lives in order to eliminate so-called wealth inequality, the truth is that it is these same totalitarians and would-be tyrants (through their massive bureaucracies and regulations) who are responsible for the true inequality—the inequality that eliminates a level playing field and promotes the consolidation of money in the hands of the few.

If people truly are concerned with eliminating inequality as much as is humanly possible, then deregulation—not increased regulation—is the correct answer.

Big Government