Rekindling the California Dream

It is great news that California's Governor Gavin Newsom has signed new legislation scaling back CEQA.

This action removes a key obstacle that has been slowing down real estate development across the state of California. This regulation, which had good intentions, was designed to protect the beauty and environmental uniqueness of California by requiring a cost-benefit analysis for any development project, whether it involved hotels or housing near the coast, or the construction of the California high-speed rail.

However, over the past 40 years, many sophisticated NIMBY (Not In My Back Yard) activists have used this environmental regulation to delay development projects by introducing endless rounds of environmental evaluations. While this created jobs for ecologists, lawyers, and consultants, it ultimately acted as a tax on real estate development, benefiting incumbent homeowners by increasing the value of their properties due to reduced competition from new development. In a place where demand is rising and supply is limited, basic economic principles predict higher prices. The winners are the incumbent homeowners, while the losers include young people and immigrants who do not come from wealthy families and face affordability challenges in beautiful California.

The Abundance Synergies of Removing CEQA and Up Zoning

If this phase-out of the regulation is successful, real estate developers will have new opportunities. There is still the question of local zoning. If there is also a simultaneous change in zoning laws—since much of California Metro area land is currently zoned for single-family housing—this rollback of environmental reviews, along with a shift in local zoning rules, could allow developers to build not just single-family homes, but also two-story, three-story, and four-story condos. Such changes would increase the housing supply in California and, ideally, contribute to middle-class affordability.

Does Real Estate Development Damage Local Environmental Quality?

In the past, there were concerns that local growth could lead to increased congestion and pollution, exacerbating the tragedy of the commons with the scale of local economic activity. If cities introduce road pricing, vehicle registration fees tied to the age and mileage of vehicles, and water and electricity prices reflecting scarcity, they could manage the scale of economic activity without degrading the environment.

Too often, California’s regulators have neglected to introduce these pricing mechanisms to address the environmental issues linked to local growth. In ecologically sensitive areas, such as Joshua Tree or coastal regions, the question arises: if we build more housing, does that endanger wildlife?

For example, if a thousand turtles lose their habitat, can ecologists actually measure this impact? Do these displaced turtles die, or do they migrate elsewhere? How adaptable is nature when real estate developers begin to build on parcels previously blocked from development? How valuable is this lost natural capital that is displaced by new real estate development? Put simply, with the phase out of CEQA, what ecological tradeoffs emerge?

If there is valuable natural capital that is lost, then market environmentalism offers a solution. Organizations like the Nature Conservancy can collect donations from successful individuals and prioritize using ecological research to identify which parcels of land are most valuable for protecting species. The Nature Conservancy and other land trusts can then acquire these parcels and conserve them. This approach would create market competition between real estate developers and ecologists, utilizing market principles to protect biodiversity.

This discussion focuses on how to leverage markets to achieve the dual goals of housing development while addressing traditional issues such as air pollution, water pollution, and species degradation. These goals can be accomplished by employing pricing mechanisms.

Under the status quo rules of the game that didn’t introduce market forces, environmentalists can raise valid concerns about the consequences of increased development. However, if the progressive state of California simultaneously reduces implicit taxes on real estate developers and promotes market environmentalism, this combination of policies could lead to greater economic growth and more middle-class housing. This outcome would arise not because it was specifically targeted at the middle class, but simply from increasing the housing supply in desirable areas.

New Housing Construction and Natural Disaster Resilience Risk

An unintended consequence of wonderful, progressive cities such as Berkeley and Santa Monica in not building housing (and using CEQA laws to block housing) is that prices are very high there. This has nudged middle class people to move further out to areas that are increasingly wildfire Zones. This movement is not because they are attracted to wildfire zones, but because they are seeking affordable housing.

If California's real estate developers begin constructing more housing in relatively safer areas—such as Berkeley and Santa Monica—and if zoning regulations are adjusted to ensure a positive resilience synergy, we can reduce the bureaucratic barriers developers face. This would also provide them the option to build taller structures with more housing units per square foot.

The Role of the For Profit Insurance Industry

The insurance industry can play a synergistic role in this process. If California’s regulatory agency allows the insurance industry to charge higher rates and encourages competition, individuals who previously located in wildfire-prone areas will face increased insurance costs. Conversely, they will find lower rates in safer areas, creating a spatial incentive for them to seek housing in lower-risk locations like Berkeley and Santa Monica, which face less fire risk than adjacent communities that are hotter and drier.

My Abundance Punchline

The long term beneficial effects for California economic development hinge on adopting synergistic policy reforms related to changing zoning codes, and allowing for dynamic pricing for insurance, water, road pricing and electricity. Together this suite of policies will unlock real estate investment and stronger more resilient California economy will emerge.

If you want to learn more about my thinking here, read my May 2025 book on the economics of natural disasters.

Why Do So Many Californians Live In Single Family Homes?

There remains a debate among economists regarding the desirability of single-family homes. What drives this preference? Is it the noise? Is it the fear of smelling cigarette smoke from neighbors? Is it the apprehension about living in close proximity to strangers?

More of us are spending years of our lives without children in the household. Adults living in households with no young kids should be willing to live in high quality multi-family housing in interesting areas. Young people are marrying later, and many are choosing not to marry at all, with numerous individuals deciding against having children. The elderly are living longer than ever. For instance, I think of my parents. I was born when my mother was 24, and by the time my brother went to college, she was 48. She spent the first 24 years of her life with children in the home, but the last 36 years without any. Similarly, I lived the first 35 years of my life without children in my household, and I have now spent the last 6 years without children at home. This trend shows that more and more people are experiencing significant periods of their lives without children present.

For those of us without young people in our homes, many, including myself, are open to living in multifamily housing. I lived in multifamily housing in Baltimore from 2019 to 2021, and I enjoyed living in multifamily housing during my time at Columbia University.

Rekindling the California Dream

California is a major state, and as we face the challenge of young people choosing not to have children, it's likely that the housing situation plays a role in delaying marriage and childbearing. It may also contribute to a growing sentiment among young people that capitalism is unfairly structured, leading to concerns about home ownership. I think that the cynicism felt by younger generations will lessen, and their optimism will increase if more states, especially those led by Democrats, such as Oregon, Washington, and New York, allow real estate developers to build.

As an economist, I plan to track whether more people are achieving their California dream as a result of allowing real estate developers more freedom to build. While the wealthy have ample options for where to live in California, how does increasing the housing supply enhance the choices available to middle-class and upper-middle-class individuals?

Additionally, there is great concern regarding homelessness. My friend John Quigley documented in a great co-authored paper that in areas where housing is cheaper, there is less homelessness. For example, no one is homeless in Detroit. Although it is cold there, the lower housing costs enable more people to find housing.

I believe that allowing real estate developers to build will help address the homelessness challenge in California. Furthermore, this initiative will impact the demographics of the state. California is aging; I live on a block where the homes were built with children in mind, yet there are very few children living there, partly due to Proposition 13. Many elderly individuals are living as couples in large five-bedroom homes. These homeowners often have substantial equity in their properties and benefit from grandfathered property tax rates, creating a disincentive for them to move.

Ending CEQA Will Not Cause True Abundance in California

Encouraging greater housing development is a necessary but not a sufficient condition for achieving true abundance in California.

Similar to the authors of the Abundance book, Governor Newsom is focused on building things. He does not devote enough attention to why so many young people are not flourishing. Too many Californian kids are educated in mediocre K-12 public schools. I discuss this point at length in this Substack.

I believe it's no coincidence that the abundance team (including Gavin Newsom) focuses on construction; they likely want to avoid confronting the more contentious issue of public sector unions. California has not effectively educated young people in public schools, which ultimately limits growth. While addressing housing, which Governor Gavin Newsom rightly prioritizes, is important, the formation of skills is even more critical. I would be more impressed with the advocates for abundance if they also prioritized educating young people to compete effectively in the modern economy.