Thu, 14 May 2020
Our discussion addresses some common concerns about housing markets. For instance, why do new luxury homes sometimes sit empty? What's the deal with Houston's land-use laws? And what can we do about the urban housing crisis?
Wed, 29 January 2020
Today's episode features Gilles Duranton and Diego Puga on their new working paper, "Urban Growth and its Aggregate Implications." This paper builds a detailed theoretical model that includes urbanization, agglomeration economies, inter-city migration, congestion externalities, and land-use restrictions.
We develop an urban growth model where human capital spillovers foster entrepreneurship and learning in heterogeneous cities. Incumbent residents limit city expansion through planning regulations so that commuting and housing costs do not outweigh productivity gains. The model builds on strong microfoundations, matches key regularities at the city and economy-wide levels, and generates novel predictions for which we provide evidence. It can be quantified relying on few parameters, provides a basis to estimate the main ones, and remains transparent regarding its mechanisms. We examine various counterfactuals to assess quantitatively the effect of cities on economic growth and aggregate income.
Thu, 22 August 2019
Today's guest is Alain Bertaud, author of Order Without Design: How Markets Shape Cities. Alain discusses his extensive experience in urban planning: When he was first trained as a planner, urban planning was thought of as an offshoot of architecture. In this conception, cities are just large buildings that need to be laid out and designed by a skilled architect.
Through his experience, Alain came around to thinking of cities not as large buildings to be designed, but as markets. He argues that planners are too focused on what happens on private property and not focused enough on what happens on public streets and roadways. He argues that urban economics has many useful insights for urban planners and that economists should be integrated into urban planning teams.
The publisher's description of the book follows:
Urban planning is a craft learned through practice. Planners make rapid decisions that have an immediate impact on the ground—the width of streets, the minimum size of land parcels, the heights of buildings. The language they use to describe their objectives is qualitative—“sustainable,” “livable,” “resilient”—often with no link to measurable outcomes. Urban economics, on the other hand, is a quantitative science, based on theories, models, and empirical evidence largely developed in academic settings. In this book, the eminent urban planner Alain Bertaud argues that applying the theories of urban economics to the practice of urban planning would greatly improve both the productivity of cities and the welfare of urban citizens.
Sun, 9 June 2019
Today's guest is Robert Krol of California State University. Our topic is a recent policy paper he wrote for The Center for Growth and Opportunity at Utah State University entitled Can we Build our way out of Urban Traffic Congestion?
This paper examines the impact of highway expansion on congestion. Because highway expansion lowers travel times, expanded highways attract additional vehicle traffic—so-called induced travel. The empirical evidence indicates that the magnitude of induced travel is economically significant. Some researchers find cases where, despite highway expansion, congestion changes very little owing to high levels of induced travel. These results suggest that costly highway expansion will increase access, which is beneficial to a community, but highway expansion is generally an inefficient solution to the high time costs of urban congestion. Instead, variable tolling of some or all lanes could manage traffic flows efficiently and reduce congestion.
Fri, 14 July 2017
My guest today is Kevin Erdmann, he blogs about economics and finance at Idiosyncratic Whisk.
Kevin has written a ton about housing, as evidenced by the titles of his blog posts. A recent one is labeled Housing: Part 239. This series is part of a larger book project that Kevin is publically drafting on his blog.
We discuss the housing bubble of the 2000s and the post-2008 housing market. I took my first undergraduate economics class in 2008, just as the financial crisis was beginning, so there's never been a time in my economics career when people weren't talking about this. And yet, I still have so much to learn!
Kevin makes an interesting distinction between "open-access cities" and "closed-access cities." Closed-access cities are places like San Francisco, New York, and San Jose that have restricted their housing supplies. Open-access cities are places like Houston and Phoenix with more elastic housing supplies. We talk about these factors and how they relate to the housing boom and bust, liquidity, and central bank policy.
Kevin points out that supply side restrictions on housing construction are necessary for demand-side factors to cause housing bubbles. That's because in a market with an elastic housing supply, more demand doesn't result in higher prices, it just causes more homes to be built.
Fri, 21 October 2016
What follows is an edited transcript of my conversation with Emily Hamilton about land use regulations' effects on affordable housing.
Hamilton: Thanks a lot for having me.
Petersen: So, Emily recently wrote a paper titled "How Land Use Regulation Undermines Affordable Housing" along with her co-author Sanford Ikeda. The paper is a review of many studies looking at land use restrictions and it identifies four of the most common types of land use restrictions. Those are: minimum lots sizes, minimum parking requirements, inclusionary zoning, and urban growth boundaries. So Emily, could you tell us what each of those restrictions entail?
Hamilton: Sure. So, starting off with the first, minimum lots sizes. This is probably what people most commonly associate with zoning. It's the type of Euclidian zoning that separates residential areas from businesses and then within residential areas limits the number of units that can be on any certain size of land. And this is the most common tool that makes up what is sometimes referred to as Snob Zoning, where residents lobby for larger minimum lots sizes and larger house sizes to ensure that their neighbors are people who can afford only that minimum size of housing.
Petersen: So it keeps the poor away, effectively.
Hamilton: Exactly. And then parking requirements are often used as a tool to ensure that street parking doesn't get too congested. So when cars first became common, parking was really crazy where people would just leave their car on the street, maybe double parked, or in an inconvenient situation near their destination. And obviously as driving became more and more common and that was just an untenable situation and there had to be some sort of order to where people were allowed to park. But street parking remained typically free or underpriced relative to demand. So, people began lobbying for a parking requirement that would require business owners and residential developers to provide parking that was off streets so that this underpriced street parking remained available. But that brought us to today where we often have just mass seas of parking in retail areas and residential areas, which are paper focuses on. Parking substantially contributes to the cost of housing, making it inaccessible in some neighborhoods for low income people and driving up the cost of housing for everyone who has been using the amount of parking that their developer was required to provide.
Petersen: So that's one where you can really see the original justification. And it makes sense, if you have a business and a lot of people are parking and it spills over onto the street then maybe that's an externality. And it seems reasonable for you to have to provide parking for the people who come to your business, especially if a lot of them are driving there. But we push that too far, is what I'm hearing.
Hamilton: Exactly. Yeah, it does seem reasonable but the argument in favor of parking requirements tends to ignore that business owners have every incentive to make it easy to get to their business. So, in many cases there's not necessarily an externality because the business owner providing the parking has the right incentive to provide enough to make it easy for their customers to get there. The externality really comes up when we think about street parking and Donald Shoup---probably the world's foremost expert on parking---has made the argument that pricing street parking according to demand is a real key in getting parking rules right.
Petersen: So, on to the next one. What is inclusionary zoning?
Hamilton: Inclusionary zoning is a rule that requires developers to make a certain number of units in a new development accessible to people at various income levels. Often inclusionary zoning is tied with density bonuses. So, a developer will have the choice to make a non-inclusionary project that is only allowed to have the regular amount of density that that lot is zoned for. Or, he can choose to take the inclusionary zoning density bonus which will allow him to build more units overall including the inclusionary unit and additional market-rate units. Typically, units are affordable to people who are making a certain percentage of the area median income, so people who might not have low income but who are making not enough to afford a market rate unit in their current neighborhood.
Petersen: Okay, so that's sort of forcing developers to build affordable units that they then will probably lose money on, so that they can build the market rate units that they can make money on.
Hamilton: Exactly. That's how cities make inclusionary zoning attractive to developers is by giving them that bonus that can allow them to build more market rate housing. In other cities, however, inclusionary zoning is required for all new developments so it really varies from jurisdiction to jurisdiction how it's implemented.
Petersen: So the fourth land use restriction you mention is urban growth boundaries. What are those?
Hamilton: So Oregon is the most famous example in the US of implementing an urban growth boundary. And what it is, is basically a state law that requires each city to set up a boundary around its edges, where for a certain amount of time no housing can be built outside of that boundary. And the idea is to gradually expand the city's footprint over time to allow the suburbs to expand a little further, but to restrict that suburban development using the boundary for some time period. Other examples like London's urban growth boundary I believe are permanent, so there are certain areas that can never be developed.
Petersen: So I believe we have something like this in Vancouver. We have farmland in the metro Vancouver area which---for context this area is one of the most overheated high-priced housing markets in the world---and we have this land that's just zoned for farms. And a lot of the time people don't even bother to plant crops, they're just holding the land for the day when eventually it can be rezoned into housing. So I looked it up before we went on and some of these plots are $350,000 an acre, which of course is not reflective of just how productive they are as farmland but of how productive they would be when they are eventually rezoned.
Hamilton: Exactly. Yes, very similar to Oregon's program. And a lot of empirical studies have been done on Portland's growth boundary because researchers can easily look at the block that are selling on either side of the boundary to see whether or not it's affecting land prices and several studies have found a very clear effect of the boundary in driving up the price of the land.
Petersen: And in Vancouver, the city is very reluctant to rezone. So, people are constantly applying and being denied but you know it's like winning the lottery having your bit of useless farmland rezoned to super high value housing. And people are just holding on to those dead lands in the hopes of winning that lottery which is kind of---it's a bizarre outcome.
Hamilton: It is. And urban growth boundary supporters often frame it as environmental regulation that's going to protect this open space. While encouraging people to live in more dense and transit and walkable friendly neighborhoods, but it's not as if Portland is free of other types of zoning rules. So at the same time it has this urban growth boundary it also has a lot of traditional zoning rules that limit the potential to build up while the growth boundary is limiting the potential to grow out. So it's coming from both directions.
Petersen: So, just how costly do economists think these regulations are? What kind of estimates do they have?
Hamilton: So, I think some of the most compelling estimates look at the macroeconomic effect of these rules. Because typically the most binding zoning rules are also in the most productive cities, where there's the highest level of demand for people to live. Because these are where the best jobs are as well as the best urban amenities, a lot of people want to live here. One study looking at this macroeconomic effect found that the three most productive cities which are New York, San Francisco, and San Jose---I should clarify; this is just looking at the effective growth within US---if those three cities lowered the burden of their land use regulation to that of the median American city it could result in a 9% increase in the level of US GDP. So, these rules are having just an enormous effect on economic growth. Not to mention the very substantial effect they have for individuals and making it difficult or impossible for people to afford to live in their desired location.
Petersen: So, you know, San Francisco that's where Silicon Valley is. And so we think of it as a place with super high productivity---tech workers working at Google---and yet with their housing market being one of the most restricted. So not only is there the loss from the housing market itself, that you could sell a lot of housing there and that would increase GDP by itself, but also there are people living in less productive areas doing less productive jobs, who could come and work for Google. But they can't because they've been priced out of the market. Is that where most of the effect comes from?
Hamilton: That's right. Yeah, I think the effect is also certainly at that top-end of the market where we're seeing all kinds of blog posts and articles about a person making six figures at Facebook who can't afford the Bay area. So those people might choose to go live in say Denver, or Austin, or a city that still has plenty of great jobs but isn't as productive as San Francisco or San Jose. But then we also see this down the income spectrum, where people who are in the service industry, say waiting tables, could make much more in San Francisco then they can in Houston, or wherever they happen to live. But their quality of life is much better in some of less productive cities because of the cost of housing and other areas of consumption that higher real estate costs drive up.
Petersen: One thing I've heard about a lot of these Californian coastal cities---I think it was Palo Alto---where not a single member of the Palo Alto Police Department lives in Palo Alto because you just can't live there on a policeman's salary, so they all have to commute in every day and then commute out every night.
Hamilton: Yeah, and for some of these hugely important needed services it just makes the quality of life of the people in those industries so much worse than it would be if they could afford to live closer to their job.
Petersen: Right. So, to summarize the labor market mobility of the United States in general has been greatly restricted by these land use restrictions. Even though the land use restrictions are local, this has an effect on the national economy.
Hamilton: Exactly right. And we can see this in the data where income convergence across areas of the country has greatly slowed down since the 1970's when these rules really started taking off.
Petersen: You argue that the costs of these restrictions fall primarily on low-income households so can you talk through how that happens?
Hamilton: Sure. It happens in two ways. First off, you have the low income people who are living in very expensive cities and these people might have to endure very long commutes---you talked about the police officer in Palo Alto who can't live anywhere near his job. Not that police officers are low income, but just as an example that illustrates the point. Or they have to live in very substandard housing, perhaps a group house that's just crammed with people maybe even illegally, in order to afford to live anywhere near where they're working.
Petersen: Yeah, I was going to say I thought those group houses were illegal from these very same land use regulations, but I guess people get around it.
Hamilton: Yeah, a lot of US cities have rules about the number of unrelated people who can live in a house. And certainly those rules are sometimes broken. That, I think, is clear to anyone who's spent time in an expensive city. You know, people have to live in these less than ideal conditions and waste too much of their time commuting in order to make that work. But the unseen version of it is the person who lives in a low-income part of the country and would like to improve their job opportunity and quality of life by moving to somewhere more productive, but they simply can't make it work so they stay in that low-income area without meeting their working potential.
Petersen: There was a study by David Autor---I think I cited it in a previous episode and got the author name wrong but it's definitely David Autor---and it was looking at the shock, the trade shock that hit United States when it opened up trade with China in the early 2000's. And it basically showed that a lot of parts of the country just never recovered. So, if you worked in particular industries---I think the furniture industry was one that was basically wiped out---and if you worked in a town next to a furniture factory and that was your job, not only did you lose your job, you lost all the value in your home because the one industry in the town is gone. And you can't afford to move to one of the booming industries like Silicon Valley or in another part of the country because they've so greatly restricted the elasticity of their housing supply. And that's not all, Autor's paper basically just shows that it took a very long time to recover from the shock and a lot of places didn't recover at all. But I really think that housing is part of that picture if you're trying to figure out why the US economy can't respond to shocks like it used to in the 20th century. That has to be a big part of the picture.
Hamilton: Definitely. And that trend, as far as people being able to leave these depressed or economically stagnant areas, this also comes out in the income's convergence as we talked about earlier.
Petersen: So, the other part of that, I saw in your paper, was not only are poor people hurt but rich people who already own homes have seen those home prices rise. So it's affecting inequality at both ends of the spectrum, correct?
Hamilton: Right, Bill Fischel at Dartmouth has done a lot of work on why it is that people lobby so hard in favor of rules that restrict development. And he terms it as the Homevoter Hypothesis, where people who own homes have a huge amount of their wealth tied up in their home and so they are in favor of rules that protect that asset and prevent any shocks such as a huge amount of new development that could result in a decline in their homes value. I think you talked about that in your episode with Nolan Gray on trailer parks.
Petersen: Yeah, we talked about William Fischel's Homevoter Hypothesis. So the essence of that is that people vote in local elections, and they lobby to restrict the supply of housing in their neighborhood, and that increases their wealth by, you know, increasing the land values in that area. How do you deal with that when there's such an entrenched special interest everywhere to push up land prices?
Hamilton: I think that's the hugely difficult problem. And at the same time as we have the challenges with the Homevoter system that Fischel plays out, we have a lot of federal policies that encourage homeownership as not just a good community-building tool but also as an investment. So people are programmed by the federal government to see their house as an investment in spite of economic challenges that it presents. David [Schleicher]---a law professor at Yale---has done some really interesting work on ways that institutional changes could limit the activity of homeowners and lobbying against new development. One of his proposals is called a Zoning Budget. And under a zoning budget, municipalities would have to allow a certain amount of population growth each year. So, they could designate areas of a city that are going to only be home to single family homes, but within some parts of the city, they would have to allow building growth to accommodate a growing population.
Petersen: How would that be enforced, though?
Hamilton: It would have to be a state law, or perhaps a federal law, but I think much more likely a state law that would mandate that localities do that. Massachusetts recently passed a law that requires all jurisdictions within the state to allow at least some multifamily housing. So it's kind of a similar idea. The state government can set a floor on how much local government can restrict development.
Petersen: So, what I'm hearing is that different levels of government have different incentives with respect to restrictions. So, at the lowest level if I'm just in a small district or municipal area and I can restrict what my neighbors build on their property, that really affects my home price and that's the main thing that I'm going to lobby for at that level of government. But if I had to go all the way to the state government to try to push up house prices in my neighborhood, it wouldn't go so well. The state government has incentives to allow more people to live within their boundaries. Is that the gist of it?
Hamilton: Yeah, that's right. It's easy to imagine a mayor of a fancy suburban community who simply represents his constituents' views that the community already has enough people, you know, life there is good and so nothing needs to change. But, I don't think that you'd find a Governor that would say "Our state doesn't need any more people or economic growth." So the incentives are less in favor of homeowners, local homeowners, the further up you go from the local to state jurisdiction.
Petersen: Right. I guess a big issue is that the people who would like to move somewhere but live somewhere else don't get to vote in that place's elections or in their ballot measures. And so there's this group that has an interest in lower housing costs because they might move to your city or your town, if they could afford it, but they're not represented politically in that city or town and so they can't vote for more housing and lower prices. But then when you go to the whole state level and people are mobile within a state, those people do have a say or they are represented and pricing them out of the places they'd like to live really is bad for politics, bad for getting their votes.
Hamilton: Right. So the Palo Alto police officer can't vote to change Palo Alto's policies but he can vote to change California policy.
Petersen: Right, because he still lives within California. So one of the other policy recommendations I saw in your paper is tax increment local transfers or TILTs. What are they and how can they impact land use restrictions?
Hamilton: That's another idea that comes from David Schleicher and I think it's another really interesting concept. The idea behind TILT is that a new development increases the property tax base within a jurisdiction. So, if you have a neighborhood, say a block full of single family homes that is allowed to be sold to a developer in order to build a couple of large apartment buildings, each apartment is going to be less expensive than the previous single family homes, but overall the apartment buildings will contribute more to property tax. And the idea behind a TILT is that part of this tax increment---which is the difference between the new tax base and the previous smaller tax base---could be shared with neighbors to the new development to kind of buy off their support for the development. So, those people who are in some sense harmed by the new buildings, whether in terms of more traffic or a change in their neighborhood's character, also benefit from the new building financially. So they're more likely to support it.
Petersen: So economists talk about Potential Pareto Improvements, where you have a situation where some people are made better off while other people are worse off, but you could have a transfer to make everyone better off. And what I'm hearing with TILTs is you actually do that transfer, you actually pay off the losers with some of the surplus you get from the winners. So everyone can be better off when you make this overall beneficial change.
Hamilton: Exactly. And sometimes communities do use community benefit as a tool to try to get developers to share their windfall and build a new project with the neighborhood. So they might say, "you can build an apartment building here, but you also have to build a swimming pool that the whole neighborhood can use at this other location," and in a way that achieves the end goal of buying off community support for new development. But it also drives up the cost of the new housing that the developer can provide. So TILTs have the advantage of keeping the cost of building the same for the developer, but still sharing that financial windfall of the new development with a broader group of people.
Petersen: Yeah, I really like these policy recommendations. It would be so easy to just say "land use restrictions are bad, let's not have those anymore." But these really have an eye to the political structures that we currently have and towards making progress within the structure we have. So I like that approach to policy or to policy recommendations. I think economists should maybe do that more often.
Hamilton: Yeah, looking for a win-win outcome.
Petersen: The one other one that I don't think we've talked about is home equity insurance, which sounds like a business plan more than a policy proposal. But how can home equity insurance help to reduce the costs of land use restrictions?
Hamilton: That proposal also came from Bill Fischel a couple of decades ago following on his work of the Homevoters theory. He proposed the idea that the reason home owners are so opposed to new development is often because they have so much of their financial wealth tied up in this house that they're not just opposed to a loss in their investment, but even more so, opposed to risk. So they want the policies that they see will limit the variance in their home equity and he proposed home equity insurance as a financial goal that could lower this threat and provide homeowners with a minimum amount of equity that they would have regardless to the new development. I think it's a really interesting concept but it's unclear, would this be a private financial product? Obviously the market isn't currently providing it, or would it be some kind of government policy? And while I do think it's very interesting, I think that we should be somewhat leery of new government policies that promote homeownership as a financial wealth building tool.
Petersen: Well, the funny thing is that usually with insurance, if you have fire insurance you want to minimize the moral hazard of that, you don't want people to say: "Well I've got fire insurance so I don't have to worry about fires anymore." But with this, you sort of want that, you have insurance on the value of your home and then actually your goal is to make people less worried about the value of their home so that they will be okay with policies that reduce it. It's almost the opposite of what you want with insurance most of the time. In this case you want to maximize moral hazard.
Hamilton: Yeah that's a great point and I think that's why it could only be a government product.
Petersen: Right. Because if the private sector was providing home price insurance to homeowners then the company that provided the insurance would now have an incentive to lobby against upzoning the neighborhood.
Hamilton: Exactly. Yeah it would create a new a new group of NIMBYs.
Petersen: Yeah, at first I thought 'Oh great!', well this is something that we can just do, without the government. You can just get a bunch of people together, who have an interest in making cities more livable and they can provide this financial asset. But that seems like there are problems with it that are hard to overcome within the private sector. So overall do you think the tide might be turning on the NIMBYs? Are people becoming more aware of this issue and of land use restrictions and their effects on housing prices?
Hamilton: I do think awareness is growing. There's a group popping up called YIMBY which stands for "Yes In My Backyard" as opposed to the suburban NIMBY to say "Not In My Backyard" to any sort of new development. And these YIMBY groups are gaining some traction in cities like San Francisco and lobbying in favor of new development to counter the voices that oppose new development. I am somewhat pessimistic, I have to say, just because from a public choice standpoint the forces in favor of land use regulations that limit housing are so powerful. But in spite of my pessimism, I'm seeing since the time that I started working on this issue several years ago, much more coverage of the issue from all kinds of media outlets, as well as much more interest in on-the-ground politics from people who aren't in the typical homeowner category.
Petersen: Yeah, and I am hopeful too. But I often see people blame other factors for high home prices. They blame the speculators. The speculators are always the ones that are pushing up home prices. And rarely, I think, do people blame restrictions, although the YIMBY movement is a happy exception to that.
Hamilton: Yeah, I think way too often real estate developers are framed as the enemy in these debates because they're the ones who make money off building new housing. But it's really the regulations that are to blame both for the inordinate profits that developers can make in expensive cities, and for the high costs of housing.
Petersen: Do you have any closing thoughts about land use restrictions?
Hamilton: I think that it's just really important to try to spread the message about the costs that these regulations have. Not just for low-income people but for the whole country and world economic growth. That's obviously a cause that I would think everyone would be behind: creating opportunity for people to live in the most productive cities where they can contribute the most to society and to the economy.
Petersen: My guest today has been Emily Hamilton. Emily, thanks for being part of Economics Detective Radio.
Hamilton: Thanks a lot for having me.
Fri, 7 October 2016
Today's guest is Stephen Smith, he is an analyst for a New York real estate firm.
Stephen did some research showing that at least 40 percent of the buildings in Manhattan could not be built under today's zoning regulations. In fact, the number is probably significantly higher. Classic landmarks like the Empire State Building, with its floor-area ratio of 30, wouldn't fly today.
Watch this time-lapse of the New York City skyline, and pay close attention to the kind of changes that happen in the earlier part of the video compared to the later part:
Before the twentieth century, the pace of change is very gradual. Two storey buildings are replaced with three storey buildings. Waves of development sweep through the city, replacing wood buildings with brick and stone and concrete.
In the twentieth century, we see a different kind of development. Pay attention to any particular small building and you'll notice one of two things happening: Either the building stays exactly as it is, or it is replaced by a massive skyscraper. There's no more gradual change.
This is caused by the city's adoption of land-use regulations. The first zoning code was adopted in 1916, but the really strict zoning came in 1961. Once this happened, tearing down and replacing a building meant pulling political strings to get it rezoned. Because of the significant fixed cost of getting a lot rezoned, developers opted to build a few extremely tall buildings rather than many moderately tall ones. Heavy restrictions in most of Manhattan led developers to concentrate development in the few places that would allow it. That's why Midtown built up while other neighbourhoods didn't.
New York's mayors tend to be pro-development, but its city councillors block development at every turn. The city council's behaviour is consistent with William Fischel's home voter hypothesis. The city council tends to defer to individual councillors on their own local issues, giving each councillor de-facto control over development in his neighbourhood. When authority is devolved to the hyper-local level, there's a strong incentive to block development to raise real estate prices.
Fri, 23 September 2016
Today's guest on Economics Detective Radio is Chuck Marohn, founder and president of Strong Towns.
Strong Towns is a non-profit that seeks to reform America from the ground up, starting with its towns and cities. It aims to promote healthy local economies by improving local governance.
The Growth Ponzi Scheme
Chuck began recognizing the problems in America's towns and cities when he was working as a civil engineer. He recounts a story of working in a little city in central Minnesota in the late 1990s. The city had a 300-foot pipe that had cracked, allowing ground water to leak in and overflow their treatment facility. Chuck proposed a $300,000 solution to fix the pipe. However, this was a tiny town with an annual budget of $85,000. So Chuck went to higher levels of government (the federal government, the USDA, etc.) to find someone to fund the project. They all said, "This feels like maintenance. We don't have money for maintenance, so you need to pay for this yourself." Since the feds would only fund expansion projects, Chuck devised a plan: He would propose the largest expansion project he could, then repair the pipe as part of the expansion. This wasn't so much deviousness on his part as it was standard practice in his profession. He designed a couple miles of new pipe, doubled their treatment facility, and as part of that he included repairs for the old pipe. This new project cost $2.6 million.
Everyone was happy about this project. The grant agencies were happy. The legislators issued glowing press releases and held a big ribbon cutting. Chuck got a big bonus from his company. The city was ecstatic. The only lingering problem was that this tiny city that couldn't afford to maintain 300 feet of pipe would now be left with a few miles more pipe and a larger treatment facility.
This is an example of one part of what Chuck calls the Growth Ponzi Scheme. This is when cities and towns expand in ways they can't maintain without further expansion.
There's a political reason why things like this happen. Building new infrastructure is very politically appealing. You can build a new highway and name it after a prominent politician, you can have a big ribbon-cutting ceremony, and you can get all sorts of good press for the project. Maintenance is less sexy; you close down a lane of some existing highway, delay everyone's commute, and then you don't have a ribbon-cutting or positive press for all the potholes you filled in. That's why higher levels of government have been paying for big projects and passing off the responsibility for maintaining them to local governments. These local governments become insolvent when the revenue from the initial big project runs out and the maintenance expenses come due.
This process leads to a form of development where the local tax base is not sufficient to pay for the infrastructure that supports it. When the expansion can't go on any longer, the infrastructure crumbles, the affluent people leave, and the community ends up locked in poverty.
What's Wrong with Big Box Stores?
Embracing this form of unsustainable growth has made our cities less dense and walkable. Instead we have heavily subsidized driving as a means of getting everywhere. One consequence of this has been the rise of big box stores.
The public debate on big box stores tends to miss the mark. The left says big box stores crowd out local businesses, which is true. The right says they pass the market test, offering lower prices and thus improving poor people's standard of living, which is also true.
What both miss is that these big box stores only pass the market test because they don't bear the costs of the infrastructure needed to support them. By subsidizing infrastructure, and by building our cities to be spread out and unwalkable, we make bringing groceries to the people unviable. Instead, the people drive to where groceries are.
In addition to the rise of big box stores, we've seen the demise of small town living. While small towns still exist, they used to have enough small businesses, shops, and grocers to allow a full and comfortable life without leaving the town. Today, small town life consists of driving to the regional hub, perhaps multiple times every week, to get many of your necessities.
What's Wrong with Hastings Street?
Chuck coined the term "STROAD" to push back against the interchangeable use of the terms "street" and "road."
A street is where value lives. Homes and businesses locate themselves along streets so that they can be connected to rest of the transportation network, but the street itself features narrow lanes, low speed limits, and good sidewalks because it's designed more for pedestrians and less for vehicles.
Roads, by contrast, are not meant to be valuable locations in themselves; they are optimized for transporting large volumes of traffic over long distances. They feature wider lanes and faster speed limits.
STROADs are an unhappy blend of both elements. Wide lanes and low speeds make them bad for both pedestrians and drivers. One example of a STROAD is Hastings Street in Vancouver, which tries to be a major thoroughfare for thousands of commuters during rush hour, while still catering to the many businesses along its ten-kilometer span.
Because of its high volume of traffic and many stop lights, motorists can expect to average just twenty kilometers an hour on their commutes to downtown Vancouver.
Gentrification as Part of an Organic System
Chuck wrote an article titled "The Gentrification Paradox," in which he argues that gentrification was actually a healthy part of urban development in the pre-automobile age:
The pre-automobile development pattern was an organic process. It was both incremental and complex... Gentrification – investment followed by displacement – was part of the natural order of things and, as with any organic system, it had a positive role in making things work for everyone.
Before the twentieth century, cities would gradually grow and change over time. But we've used zoning laws to turn our neighbourhoods into unchanging time capsules. Cities used to be antifragile, to borrow a term from Nassim Taleb.
In the past, poorer people would buy property on the outskirts of town, on which they would live and run small businesses. Over time, as the city grew, these outskirts would gradually come to be incorporated into the urban ecosystem. These properties would become more valuable and they would grow with the community, perhaps adding a second storey and expanding the business.
You couldn't do this today. Building codes and zoning laws make any new development into a million-dollar endeavor. People with very little capital can't start with a small property and gradually increase its value over time. This makes the modern form of urban development much less equitable than it was in the past.
Fri, 2 September 2016
Market urbanism is the synthesis of classical liberal economics and an appreciation for urban life. Market urbanists are interested in economic issues specific to cities, such as housing affordability and urban transportation.
Nolan wrote an article titled "Reclaiming 'Redneck' Urbanism: What Urban Planners Can Learn From Trailer Parks." As Nolan points out, trailer parks are remarkable in that they achieve very high densities with just one- and two-story construction. They do so while providing remarkably low rents of between $300 and $500, or $700 to $1,100 per month to live in brand new manufactured homes. They are also interesting in that the park managers provide a form of private governance to their tenants.
A century ago, there were many kinds of low-income housing available to people of lesser means. Low-quality apartments, denser housing, and boarding houses have largely been regulated out of existence. The remarkable thing about trailer parks is that they haven't been made illegal or untenable by regulation. The one thing trailer parks don't have is a mixture of uses, but they get around this by locating close to business areas.
Cities in Europe and Japan, which didn't adopt American-style zoning, have much higher density and more mixed-use neighbourhoods. Houston, which has taken steps to de-regulate, has seen more development of this sort recently. It seems like dense, mixed-use neighbourhoods pass the market test whenever they are allowed.
Sonia Hirt, in her book Zoned in the USA, explains why city planners became focused on separating uses. When these rules were first being adopted, industry polluted much more than it does today, so there was a health justification for separating them. But there were also superstitions, such as the idea that having children close to groceries would spread disease.
William Fischel's homevoter hypothesis states that local homeowners engage in political activism to prevent development, thus protecting their home prices. They may justify their opposition to development in terms of environmentalism or preserving local character, but homeowners stand to gain or lose a significant portion of their life savings depending on the price of their homes. This makes local politics particularly hostile to new development and denser, more affordable housing.
Meanwhile, people blame everything except land use restrictions for high housing prices. Foreign buyers have been a recent scapegoat in Vancouver, which adopted a tax on foreign buyers, thus popping its housing bubble. Airbnb is also blamed for high housing costs, though its effect is certainly negligible.
While housing is important because it is many households' largest expense, inelastic housing supplies prevent people from moving for labour opportunities. Autor, Dorn, and Hanson (2016) show how many local labour markets in America never really recovered from a trade shock with China in the early 2000's. Much of this may have been due to America's inelastic housing supply. When industries like the furniture industry were outcompeted by Chinese imports, the people who owned homes in furniture-producing towns lost both their jobs and the value of their homes. With home prices elsewhere being so high, many of these people chose to spend the rest of their lives on welfare rather than moving to find work. Ed Glaeser has written more on the costs of subsidizing home ownership.
Home ownership is a bad investment. Having a single, large asset take up a large part of one's portfolio is just bad investing, particularly when that asset's value is correlated with your labour earnings. While one can hedge one's home value against futures markets based on the Case-Shiller index, but few people do this.
Errata: I accidentally referred to The Simpsons character Frank Grimes as Rick Grimes. Rick Grimes is from The Walking Dead. Also, I wrongly said that the paper on the China shock was by Angus Deaton. Somehow I mixed him up with David Autor. Same initials, just reversed?
Fri, 21 November 2014
This episode of Economics Detective Radio features Pierre Desrochers discussing the life and work of Jane Jacobs. Jacobs, born Jane Butzner, was a thinker and activist who wrote about cities. She spent her early career as a business journalist. When she started writing about urban renewal, she recognized the policy for the disaster it was. Jacobs became a voice for the general dissatisfaction with a policy that would bulldoze whole neighbourhoods, relocating the inhabitants into new buildings preferred by urban planning reformers and political elites.
The editors of Fortune Magazine invited Jacobs to write a piece about downtowns. Her piece, “Downtowns are for People” became the magazine’s most-discussed article. She developed the ideas in that article into her first and most famous book, The Death and Life of Great American Cities. The book launched her as a minor celebrity.
In New York City, she successfully opposed initiatives to “renew” Greenwich Village. She also opposed a plan that would have cut a highway through SoHo, Chinatown, and Little Italy. Eventually she found herself opposing the Vietnam War, and, fearing that one of her sons would be drafted, moved to Toronto.
Jacobs’ most important contributions to economics came in her second book, The Economy of Cities. Jacobs is essentially a spontaneous order theorist, though she never used that term. Her concept of entrepreneurship is particularly rich and dynamic. Unlike most economists (even Austrians) she has no urge to talk about how entrepreneurship leads us closer to equilibrium.
Her largest influence on the mainstream economics literature is the so-called “Jacobs externality.” Jacobs suggested that innovation would often come from outsiders to a given industry, so having many diverse industries clustered in a small geographic area would lead to innovation. The alternative thesis, associated with Alfred Marshall and later Paul Romer, holds that when a region specializes in a particular industry it allows knowledge spillovers to occur between similar firms. There has been significant empirical research to try to resolve these two opposing views, with Jacobs often coming out the winner.
Pierre can be found online at his academic website.