About covenants:
Whether they are better or worse than zoning, there are some crucial differences between covenants and zoning schemes.
First, generally schemes of neighborhood-wide covenants were imposed by the developer before the neighborhood is built. Because of collective action problems, it is uncommon and perhaps nearly impossible to institute them once parcels of land are in individual ownership.
Second, private neighborhood land use restrictions do not address the seams between neighborhoods the way that a municipal land use regime can (even if it doesn’t always do so optimally).
Third, private land use regimes may be very difficult to change for current occupants, further limiting the evolution of an area.
Fourth, legal limitations on public zoning schemes and private covenant schemes differ, leading to potentially different land use outcomes.

About de-regulation:
I agree with Yglesias’s assessment of the problem. More density is good for a lot of reasons in a lot of places. In order to reach that ultimate end, I’m more sympathetic to Mike Dorsi’s recommendation of managed growth than wholesale deregulation of land use or even of density.

Although I fear that “managed growth” is often much more “managed” than it is “growth,” the question for me is how to modify our current system of land use regulation that allows for more density while meeting some of the quite-legitimate goals behind current land use controls. Just because many of the critique’s of density are ill-founded doesn’t mean that there is nothing to manage. There are real externalities of development of many forms.

And, in particular, I believe that predictability with regard to one’s surroundings are an important element of land use regulation. It doesn’t mean that the current system actually provides that result; or that things must stay the same forever; but it does mean that there should be some system to ensure that one doesn’t wake up in a single-family home neighborhood to fine a high-rise across the street without any notice or opportunity to shape the result.

There are various faults to leaving land use planning to private contract and “deregulation.” This is one. Others are externalities related to infrastructure: water, electricity, gas, transportation, etc. For more on this, see my review of the book at http://quartz.he.net/~beyondch/news/index.php?itemid=9977