Thanks to the urging of my daughters, I went to see Modest Mouse in Anaheim on Saturday. They were very good, and I had a lot of fun.
Two things I care about are demographics and music. The only genre music I don't like is country-western (although I like Willie Nelson). At Modest Mouse's show at the Grove of Anaheim, I was (I would guess) in the top decile of the age distribution. When I saw Jethro Tull at the Greek last year, I was about median. When I see the LA Phil (or any other symphony orchestra), I am in the bottom decile (or at least quintile). I worry about its audience dieing.
I am convinced that part of the problem is that when one goes to hear classical music, he is expected to keep a stick up his butt. Yet classical music is full of dances. Bach wrote loads of Gigues, Sarabandes and Courantes; Wagner called Beethoven's 7th "the apotheosis of the dance;" Stravinsky's music was commissioned by Diagolev.
So maybe classical music concerts need to change so that people can move while listening. But as Jan Swafford notes, part of what makes classical music great is silence. I don't know the answer.
Monday, August 31, 2015
What is a "Land of Opportunity?"
I just heard Clive Crook on NPR describing new research that shows that by one measure, the United States falls behind Finland, Sweden and France (yes, France) as a land of opportunity. The measure? How well a parent's income predicts his or her offspring's income. Presumably, if we all started out even, if our parents didn't matter, there would be no correlation in income across generations.
But why do kids of the affluent do well in the US? Is it a Paris Hilton effect? Perhaps. If this were the whole story, then America's claim as a land of opportunity is on shaky groud. My suspicion is that things are more complicated.
I happen to live in one of the most affluent counties in the United States--Montgomery County, Maryland. The reason I live here, instead of the District of Columbia, is that the schools here are excellent. One of the reasons that the schools are excellent is that the kids in these schools are amazing. I never fail to be impressed by the work ethic of my sixteen-year olds' circle of classmates. These kids, whose parents are by and large pretty well off, will be by and large well off themselves. Their affluence will not come from clipping bond coupons with golden scissors, but rather from the fact that they will be valuable in the labor force. And as the world globalizes, people with rare skills will become more valuable, as their abilities affect more people.
Paul Krugman suggests that it is policy, rather than productivity, that has led the income distribution to become more skewed, and has reduced social mobility. One wag supported this notion by pointing out that Paul Krugman makes far more money than James Tobin ever did, even though Tobin was a greater economist.
Tobin was the better economist, but Krugman is more productive, because his ideas reach a much broader group of people--technology had enhanced Krugman's productivity and therefore his salary. People with high levels of education and unusual gifts are more valuable than they have ever been. Well educated parents have a particular incentive to make sure that their children gain both the attitudes and credentials necessary for success.
But in the end, this is unfair to those whose parents are at the bottom of the income ladder. Among other things, they cannot afford to live in those parts of metropolitan areas where the schools are excellent. Let me share something I wrote for the Congress on New Urbanism:
But why do kids of the affluent do well in the US? Is it a Paris Hilton effect? Perhaps. If this were the whole story, then America's claim as a land of opportunity is on shaky groud. My suspicion is that things are more complicated.
I happen to live in one of the most affluent counties in the United States--Montgomery County, Maryland. The reason I live here, instead of the District of Columbia, is that the schools here are excellent. One of the reasons that the schools are excellent is that the kids in these schools are amazing. I never fail to be impressed by the work ethic of my sixteen-year olds' circle of classmates. These kids, whose parents are by and large pretty well off, will be by and large well off themselves. Their affluence will not come from clipping bond coupons with golden scissors, but rather from the fact that they will be valuable in the labor force. And as the world globalizes, people with rare skills will become more valuable, as their abilities affect more people.
Paul Krugman suggests that it is policy, rather than productivity, that has led the income distribution to become more skewed, and has reduced social mobility. One wag supported this notion by pointing out that Paul Krugman makes far more money than James Tobin ever did, even though Tobin was a greater economist.
Tobin was the better economist, but Krugman is more productive, because his ideas reach a much broader group of people--technology had enhanced Krugman's productivity and therefore his salary. People with high levels of education and unusual gifts are more valuable than they have ever been. Well educated parents have a particular incentive to make sure that their children gain both the attitudes and credentials necessary for success.
But in the end, this is unfair to those whose parents are at the bottom of the income ladder. Among other things, they cannot afford to live in those parts of metropolitan areas where the schools are excellent. Let me share something I wrote for the Congress on New Urbanism:
Urban Location and Schools
Richard K. Green
The George Washington University
Neighborhoods within cities are heterogeneous; municipalities within metropolitan area are heterogeneous too. The racial and income composition of individual neighborhoods in diverse cities is rarely similar to the composition of the cities in which they lie. For example, the average poverty rate in Washington, D.C. and its proximate counties (Arlington, Fairfax and Alexandria City, Virginia and Montgomery and Prince George’s County, Maryland) was 8.2 percent in 2000; but the rate ranged from 4.5 percent in Fairfax County to 20 percent in the District. Within the District itself, census tract level poverty rates ranged from around one percent to over 70.
The reasons for this variation are myriad. Perhaps the most important reasons for this variation have nothing directly to do with schools: the availability of affordable housing and the cost of transportation. William Alonso, in a classic paper, uses a simple theoretical model that predicts that in a world of high fixed transportation costs, the poor will settle in a city’s center. The reason: by living close to jobs, neighbors and services, the poor avoid transportation costs. In exchange, they consume little in the way of housing, and live very densely. While this leads to housing being relatively inexpensive, the cost they spend per unit of housing services they receive is high. That is, while total rent in the middle of Philadelphia is relatively inexpensive, the houses people are renting may be in disrepair—all of the rent is going to pay for location.
But it is also true that low income people may be constrained to live in urban centers because of a phenomenon William Fischel termed fiscal zoning. Local officials have an incentive to please the median voter in their communities by maximizing services relative to taxes. One tool for doing this is zoning that assures that the least expensive houses are very expensive indeed. Some communities ban apartments; others have large minimum lot size requirements. This combination creates a large per capita tax base and leads to high quality services being capitalized into property values. But it also locks low income people out.
A crude, but easy method, for demonstrating how settlement patterns have played out is to look at the household shares of single women with children and married couples with children in some cities and immediately adjacent suburbs.
Central City County Unmarried Female with Children Share Married Couple with Children Share Suburban County Unmarried Female with Children Share Married Couple with Children Share
Orleans 14.0 16.5 Jefferson 7.2 27.7
Suffolk 9.1 13.6 Middlesex 4.4 24.5
San Francisco 4.3 13.8 San Mateo 4.1 24.5
Philadelphia 9.8 16.9 Montgomery 3.1 28.0
St. Louis 12.0 12.8 St. Louis County 5.3 26.8
Denver 6.7 15.6 Jefferson 5.4 30.1
The poverty rate among married couples with children is low—around 6 percent, or about half the national rate. But the poverty rate among unmarried with children is nearly 35 percent. So the combination of urban land prices, transportation costs and fiscal zoning has led to income heterogeneity in settlement patterns.
While schools may not in themselves be the primary cause of these settlement patterns, the implications of these patterns for schools are important. The ability of low income people to choose to live in areas with good schools is limited by economic considerations apart from school, or by zoning. Conversely, families of means have the ability to choose economically feasible neighborhoods and schools jointly. Let us be clear—school choice is already available to people with money. This lesson came home to me when my family moved to metropolitan Washington; my wife and I were in the fortunate position of being able to choose the public schools our children would attend. The choice set broadened further when my children decided to attend a magnet high school outside of their local school district.
It is unfair that geography allows only some families to choose where their children go to school. Among other things, it means that almost all students at some schools come from families whose choices are limited. A large number of studies (including one by conference participant Thomas Nechyba and his Duke colleague Jacob Vignor) have demonstrated the importance of peer effects—who one goes to school with matters. Of particular interests are findings that students who go to school with peers who have a variety of abilities may perform better, controlling for average level of ability, than those who go to homogeneous schools. Economic and zoning conditions force some families to send their children to schools with students whose performance is both homogeneous and low.
An appropriate policy response to this is to decouple school choice from geography. School vouchers are one method for doing this; charter schools are another; magnet schools are a third—all are worth trying. The Experimental Housing Allowance Program demonstrated that housing vouchers were an efficient and effective method for providing low-income people with housing. The current experiments with choice and charter schools could well prove to me even more important.
The Poetry of Judith Wright - South of My Days
Photo: Here, in the misty rain, Cooney Creek rises out of its bed and passes behind the old cottage. Gordon Smith. Cooney Creek crosses Waterfall Way, the main road linking Armidale to the coast, just to the east of the city.
While the poem does stand alone, the language and content of the poem are also deeply imbued by the world in which Judith grew up. I know and love this world, so I thought that I might continue my irregular series on the poetry of Judith Wright by placing this poem and its language in a context.
I am not going to repeat the poem in full. If you are interested, I suggest that you read Neil's post first, perhaps printing the poem off. At the end of the post I have added links to some of the other posts I have written on the Wrights
.
The Wrights and the associated Wyndhams are one of the great New England pastoral dynasties whose story encompasses the rise and later fall of New England itself.
The story begins in the Hunter Valley in 183o when George and Margaret Wyndham purchased "Annandale", renaming the property "Dalwood" and building Dalwood House as a home. From there the family spread, acquiring a chain of properties along the eastern edge of the New England Tablelands and then stretching up into Queensland. Judith's own book, Generations of Men, captures the early history of the family.
Wallamumbi, the home property for Judith's branch of the family, lies on Waterfall Way to the east of Armidale just before that road plunges into the rough country of New England's Snowy Mountains. Look north, and the rolling green hills are all Wallamumbi.
The poem begins: "South of my day's circle, part of my blood's country,".
As Neil notes, Judith was then living to the north in Queensland. The spare elegance of these words captures location and love of country. Blood can be read in two ways, both her blood and that of her family. The poem goes on:
rises that tableland, high delicate outlineThis is high country. Coastal hugging Australians know the eastern escarpment mainly as a distant blue range seen from a car window. Some venture as far as the national parks along the rim, the Barrington Tops, Oxley Wild Rivers, Dorrigo, New England. Far too few venture further in.
of bony slopes wincing under the winter,
low trees, blue leaved and olive, outcropping granite -
High country means cold. The "black-frost night" is a term Judith uses a little later in the poem. Snow is not uncommon, frost very common. The worst frosts, the black frosts, crisp the ground itself. This can actually crunch under your feet as you walk.
Much of the New England Tablelands is also granite country, especially in the west.
Granite takes many forms. The water-streaked dome of Bald Rock is the largest single granite rock in Australia. It's 750 metres long, 500 metres wide and 200 metres high. Sometimes you have several major boulders together such as Thunderbolt's Rock south of Uralla where Captain Thunderbolt used to watch for the gold coaches. Sometimes the granite forms flattish sheets.
Granite makes for poor soils. Trees are low, smaller, struggling. This can be, as Judith says, "clean, lean, hungry country." Hungry country carries two linked meanings: country that has to be fed if it is to be productive; but it also means country that can suck the spirit, the life, from the settler.
The poem goes on:
clean, lean, hungry country. The creek's leaf-silenced,There is a contrast built into these lines between the Australian "low trees, blue leaved and olive "and the very European willow and crabapple.
willow choked, the slope a medlar and crabapple
branching over and under, blotched with green lichen;
and the old cottage lurches in for shelter.
The old cottage" lurches in for shelter" continues the theme of "wincing under winter." This continues in the next verse:
O cold the black frost night. The walls draw in to the warmthIn the early period, cooking was done over an open fire. There was often a bar over the fire on which hung kettles, pots and pans. To avoid the problem of fire, kitchens were often separated from the main house by a covered walk-way.
and the old roof cracks its joints: the sling kettle
hisses a leak on the fire ...
Judith grew up in a village world.
South of my days' circleAs they do for me too.
I know it dark against the stars, the high lean country
full of dark stories that still go walking in my sleep.
Linked stories:
- 14 August 2006: In praise of Patrice Newell
- 22 August 2006: Death of David Wright
- 7 October 2006: New England New State Movement - References. Papers of Judith's father held in the University of New England Archives.
- 30 January 2015: Poetry's Decline and the Sound of Words
How much revenue would scaling back the Mortgage Interest Deduction raise?
Less than static analysis would suggest. Even in the absence of the mortgage interest deduction, homeowners get a tax preference because imputed rent goes untaxed. If the MID were scaled back or eliminated, some households would sell assets with taxable returns to pay down their mortgages, thus reducing the net tax revenue arising from the policy change.
Jim Follain was the first (I think) to arrive at this insight, and Pat Hendershott and I found that people in Australia (where there is no MID) pay off their mortgages faster than Americans. The reduction in leverage is probably a good thing, and I know of no compelling argument for the mortgage interest deduction (it does almost nothing to encourage homeownership), but we should not delude ourselves into thinking that its elimination would produce a great revenue windfall.
Jim Follain was the first (I think) to arrive at this insight, and Pat Hendershott and I found that people in Australia (where there is no MID) pay off their mortgages faster than Americans. The reduction in leverage is probably a good thing, and I know of no compelling argument for the mortgage interest deduction (it does almost nothing to encourage homeownership), but we should not delude ourselves into thinking that its elimination would produce a great revenue windfall.
From Ken Harney: Ideas to cut the federal deficit could cost homeowners billions -- latimes.com
Ideas to cut the federal deficit could cost homeowners billions -- latimes.com
Posted using ShareThis
This makes sense to me. Base broadening (particularly in a progressive manner) is better that rate raising. Those whose marginal tax rate is 15 percent of less would be basically held harmless.
Posted using ShareThis
This makes sense to me. Base broadening (particularly in a progressive manner) is better that rate raising. Those whose marginal tax rate is 15 percent of less would be basically held harmless.
Sunday, August 30, 2015
Assessment of Education
My colleague Mary Gowan is passionate about the importance of assessment in eduction. Derek Bok, in Our Underachieving Colleges, articulates why it is important:
But this is not enough. We must develop metrics, some of which might involve testing, and some of which might not, to figure out how we are doing at our fundamental job of teaching. Any thoughts on such potential metrics are welcome.
Although the prominent critics of undergraduate education may have an imperfect grasp of history, nothing that has been said proves that colleges are above reproach. It may well be that undergraduate education has not suffered any discernible decline in quality over the past 50 or 100 years. But is that really a satisfactory outcome? Most human enterprise improves with time and experience. That is certainly true of consumer goods, athletic performances, health care, the effectiveness of our armed forces, the speed of our transportation and communication systems, and much else. Given the vastly expanded resources colleges have acquired, thanks to growing private donations, steadily rising tuitions, and massive infusions of federal financial aid, isn't it fair to expect the quality of education to improve as well?As we ask our students and their parents to invest more and more in higher education, we must do a better job of assessing learning. We as faculty can do this in part by giving more feedback to students; in the course of providing the feedback, we get to know better what our students know and what they don't. This has implications for how we structure instruction, about class sizes, about the use of TAs, and many other aspects of our teaching.To be sure, the undergraduate enterprise has grown in several dimensions. Millions more students enter college today than half a century ago. Countless new buildings have been built; faculties have greatly increased in numbers; new courses of every kind fill college catalogues to overflowing. Undergraduates can now watch PowerPoint lectures, print out articles at their personal computers, and receive homework assignments via the Internet. But all these changes, however broad in scope, say very little about what is truly important. Has the quality of teaching improved? More important, are students learning more than they did in 1950? Can they write with greater style and grace? Do they speak foreign languages more fluently, read a text with greater comprehension, or analyze problems more rigorously?
The honest answer to these questions is that we do not know. In fact, we do not even have an informed guess that can command general agreement.
But this is not enough. We must develop metrics, some of which might involve testing, and some of which might not, to figure out how we are doing at our fundamental job of teaching. Any thoughts on such potential metrics are welcome.
Housing inside the Beltway seems to be different
IAS 360 puts out data on house prices at the county level for 360 counties around the country. I am in the process of finding out more about how their data are put together, but one thing in their data really stood out for me: all but two places covered on their home page have seen house price declines since 2006.
Those two places are Will County, IL and the District of Columbia. House prices in DC are 30 percent higher, by the IAS 360 measure, than they were at the national peak in 2006. I find this plausible, because my GW colleague Paul Carrillo showed me hedonic regressions that demonstrated that prices in DC remained flat in 2015, while prices were falling rapidly elsewhere in the region.
Why is DC different? Part of it may be that transportation infrastructure within DC is pretty good (lots of public transportation and taxis), while in the suburbs, particularly the far flung ones, it is bad. Part of it is that its amenities continue to improve. I am sure it helps a lot that Michelle Rhee seems intent on making the schools better. But for it to be such an outlier? That is still a mystery.
Those two places are Will County, IL and the District of Columbia. House prices in DC are 30 percent higher, by the IAS 360 measure, than they were at the national peak in 2006. I find this plausible, because my GW colleague Paul Carrillo showed me hedonic regressions that demonstrated that prices in DC remained flat in 2015, while prices were falling rapidly elsewhere in the region.
Why is DC different? Part of it may be that transportation infrastructure within DC is pretty good (lots of public transportation and taxis), while in the suburbs, particularly the far flung ones, it is bad. Part of it is that its amenities continue to improve. I am sure it helps a lot that Michelle Rhee seems intent on making the schools better. But for it to be such an outlier? That is still a mystery.
New England's Federal Electorates - Welcome Visitor 8,000
Welcome to visitor 8,000 who came to visit via a Google Australia search on government electorates, New England NSW.
Looking at his visit, I realised that while I have previously listed state seats, I have not provided a complete Federal list. So, for the record, a list of Federal seats follows in alphabetical order. A full list of all seats by state can be found here.
- Charlton. Safe Labor - margin 8.4.
- Cowper Safe National - margin 6.6.
- Hunter. Safe Labor - margin 11.1.
- Lyne. Safe National - margin 13.4
- New England. Safe Independent - margin 13.6
- Newcastle. Safe Labor - margin 9.1
- Page. On paper, moderately safe National - margin 5.5.
- Parkes (most). Safe National - margin 17.5.
- Paterson. Safe Liberal - margin 6.3.
- Richmond. Marginal Labor - margin 1.4.
- Shortland. Safe Labor - margin 9.2.
Greenstreet Advisors' Panel on Real Estate Markets
There is a good discussion at http://www.greenstreetadvisors.com/RE_portfolio.html.
The key takeaway is that one can be bullish on Texas and Arizona as economies without being bullish on their real estate markets. Because there places have few physical or legal restrictions on development, it is just about impossible to get real land price appreciation. The reason--as soon as real estate prices rise beyond construction costs, developers will build until prices are bid back down again.
Moreover, cities in Texas and Arizona generally have flat density gradients. They were built around the automobile; as such, no one part of Phoenix or Dallas is generally any more valuable than another. There are few exceptions--the Park Cities, two small towns that are surrounded Dallas, have exceptional school and can't expand, so the value of their schools gets capitalized into land prices. And Scottsdale's natural location makes it sufficiently unusual to get a price premium. But by and large, one subdivision in most sun-belt cities is pretty much like another, and so in the absence of constraints, the opportunity for price appreciation is limited.
The key takeaway is that one can be bullish on Texas and Arizona as economies without being bullish on their real estate markets. Because there places have few physical or legal restrictions on development, it is just about impossible to get real land price appreciation. The reason--as soon as real estate prices rise beyond construction costs, developers will build until prices are bid back down again.
Moreover, cities in Texas and Arizona generally have flat density gradients. They were built around the automobile; as such, no one part of Phoenix or Dallas is generally any more valuable than another. There are few exceptions--the Park Cities, two small towns that are surrounded Dallas, have exceptional school and can't expand, so the value of their schools gets capitalized into land prices. And Scottsdale's natural location makes it sufficiently unusual to get a price premium. But by and large, one subdivision in most sun-belt cities is pretty much like another, and so in the absence of constraints, the opportunity for price appreciation is limited.
Saturday, August 29, 2015
Will the Housing Slump create a recession?
NYU Professor and Guru Noriel Roubini is arguing that it will--that the housing market is about to crash (especially in coastal cities, although not in Washington, D.C.), and that the crash will lead to a recession.
Housing is manifestly cooling off; housing is also a far more powerful leading indicator of the business cycle than business investment (see my 1997 paper in Real Estate Economics for the scoop on this. Email me if you want a copy).
But my model says it hasn't cooled off enough yet to produce a recession (despite what I told my colleagues the morning--oops). According to NIPA, seasonally adjusted residential invesment is off 6.3 percent in the second quarter, and was off a total of 1.2 percent in the previous two quarters. This should shave about .6 percent off of GDP; not a nice number, but not enough in and of itself to create a recession. If housing continues to get worse (and anecdotes suggest that it might), we could well get a recession by the second quarter of next year. I will wait for the third quarter residential investment numbers to come out before saying more.
Housing is manifestly cooling off; housing is also a far more powerful leading indicator of the business cycle than business investment (see my 1997 paper in Real Estate Economics for the scoop on this. Email me if you want a copy).
But my model says it hasn't cooled off enough yet to produce a recession (despite what I told my colleagues the morning--oops). According to NIPA, seasonally adjusted residential invesment is off 6.3 percent in the second quarter, and was off a total of 1.2 percent in the previous two quarters. This should shave about .6 percent off of GDP; not a nice number, but not enough in and of itself to create a recession. If housing continues to get worse (and anecdotes suggest that it might), we could well get a recession by the second quarter of next year. I will wait for the third quarter residential investment numbers to come out before saying more.
Where most affordable housing comes from--Old Houses
Sarah Kunkleman, who is Assistant Director for Communications in my school, asked me a good question today: if New Orleans were rebuilt, where would the affordable housing come from? After all, isn't old, dilapidated housing the cheap housing?
Sarah's insight is correct. A New York Times article from March 6 of this year describes work by Glaeser and Gyourko:
Indeed, old affordable housing almost certainly kept New Orleans'population from declining more rapidly than it did. The Glaeser-Gyourko work actually is part of a long tradition of urban economics work on "filtering." Ed Olsen at the University of Virginia wrote a paper in the early 1970s called "A Competitive Theory of the Housing Market," that predicted that in general the poor would live in the center of cities, for the simple reason that they would live where the old housing was. The poor actually tend to pay more for land rent than higher income people do, because (1) they can't afford to pay for transportation, and thus need to live near jobs and services and (2) because the old housing is on the most valuable (centrally located) real estate (it doesn't look valuable because the housing stock is so poor).
This phenomenon also explains why New Orleans population will likely not return to anything like what it was a little over a year ago. The "affordable" housing cannot be replicated, and so a principal reason many people stayed in New Orleans is gone forever.
Sarah's insight is correct. A New York Times article from March 6 of this year describes work by Glaeser and Gyourko:
"In 2000, Glaeser took a sabbatical from Harvard and began to spend a few days a week in Philadelphia working with Joseph Gyourko, a real-estate economist at the Wharton School of the University of Pennsylvania. Glaeser had already been thinking about the relationship between housing and urban poverty when one day he and Gyourko began to discuss why cities like Philadelphia and Detroit — places with poor future prospects, both economists believed — weren't doing even worse in terms of population. Why didn't everyone leave, Gyourko wondered, and go to a place like Charlotte, N.C., that had a fast-growing economy? This question addresses a puzzle of urban economics. Cities (think of Las Vegas or Phoenix) can grow at a very fast rate, exploding overnight with businesses and residents. Some can increase in population by 50 or even 60 percent in a decade. But cities lose their residents very slowly and almost never at a pace of more than 10 percent in a decade. What's more, when cities grow, they expand significantly in population, but housing prices tend to rise slowly; even as Las Vegas grew by leaps and bounds in the 1990's, for instance, the average home there cost well under $200,000. When cities decline, however, the trends get flipped around. Population diminishes slowly, but housing prices tend to drop markedly.
Glaeser and Gyourko determined that the durable nature of housing itself explains this phenomenon. People can flee, but houses can take a century or more to finally fall to pieces. "These places still exist," Glaeser says of Detroit and St. Louis, "because the housing is permanent. And if you want to understand why they're poor, it's actually also in part because the housing is permanent." For Glaeser, this is the story not only of these two places but also of Buffalo, Baltimore, Cleveland, Philadelphia and Pittsburgh — the powerhouse cities of America in 1950 that consistently and inexorably lost population over the next 50 years. It is not just that there were poor people and the jobs left and the poor people were stuck there. "Thousands of poor come to Detroit each year and live in places that are cheaper than any other place to live in part because they've got durable housing still around," Glaeser says. The net population of Detroit usually decreases each year, in other words, but the city still attracts plenty of people drawn by its extreme affordability. As Gyourko points out, in the year 2000 the median house price in Philadelphia was $59,700; in Detroit, it was $63,600. Those prices are well below the actual construction costs of the homes. "To build them new, it would cost at least $80,000," Gyourko says, "so there's no builder who would build those today. And as long as those houses remain, the people remain."
The resulting paper, "Urban Decline and Durable Housing," caused a stir among urban economists even before its publication last year. (It was initially circulated with a subtitle along the lines of "Why Does Anyone Still Live in Detroit?" until the authors, thinking it politically insensitive, removed it.) In addition to illuminating some of the forces shaping our poorest cities, the research proved to Glaeser that it is impossible to think about urban economies without thinking of urban buildings at the same time. "
Indeed, old affordable housing almost certainly kept New Orleans'population from declining more rapidly than it did. The Glaeser-Gyourko work actually is part of a long tradition of urban economics work on "filtering." Ed Olsen at the University of Virginia wrote a paper in the early 1970s called "A Competitive Theory of the Housing Market," that predicted that in general the poor would live in the center of cities, for the simple reason that they would live where the old housing was. The poor actually tend to pay more for land rent than higher income people do, because (1) they can't afford to pay for transportation, and thus need to live near jobs and services and (2) because the old housing is on the most valuable (centrally located) real estate (it doesn't look valuable because the housing stock is so poor).
This phenomenon also explains why New Orleans population will likely not return to anything like what it was a little over a year ago. The "affordable" housing cannot be replicated, and so a principal reason many people stayed in New Orleans is gone forever.
Urban Sprawl (Part 2)
Reasons 5 through 9:
V. GOVERNMENT SERVICES
Economist Charles Tiebout pioneered the idea that local units of government compete with each other for citizens. Specifically, he argued that local officials put forward packages of services in return for a given tax level, in the hope of attracting people and capital to their communities. This theory is supported by empirical evidence suggesting that people respond to service packages. Although it is often suggested that people seek to avoid taxes at all costs, work by Therese McGwire, Michael Wayselenko, and others has shown that people do prefer communities with better services, and tend to move to cities that provide the services they want at the lowest possible tax costs.
This competition puts newer cities at an advantage relative to their older counterparts. First, old cities’ infrastructures tend to be old and often inadequate, and replacing infrastructure is very expensive. Newer cities can offer better infrastructure at lower cost. Second, and perhaps more importantly, newer cities have often used land regulation to prevent the construction of low-priced housing. Old cities, on the other hand, have large amounts of old (low-priced) housing, which tends to attract low-income owners and tenants. Low-income people, who require a disproportionately large share of public services, are therefore concentrated in central cities. This concentration of individuals drawing on public resources puts central cities at a fiscal disadvantage as they try to offer “middle-class” benefits.
Newer cities, on the other hand, can provide these services at lower levels of taxes. Lower taxes attract the middle class, a migration that further increases the concentration of poverty in the older cities, which in turn worsens the older cities’ competitive position. Edward Glaeser argues that, because of this middle class exodus, higher levels of government (perhaps the federal government) should take responsibility for income redistribution and social services spending if older central cities are ever to become more competitive.
To make matters worse, older cities have often been run by politicians who are overtly hostile to private development in their jurisdictions’ central areas. This hostility stands in contrast to newer cities, which provide low tax rates on industrial parks and use tax-increment financing (TIF) to stimulate business development. Older cities are already at a fiscal disadvantage relative their less aged counterparts. But when the political class that runs an older city erects hoops (such as “pay-to-play” in Philadelphia) through which businesses must jump before they are allowed to develop, the fiscal disadvantages of the community grow even larger and harm the city and its residents.
VI. RACIAL DISCRIMINATION
Racial discrimination remains a central fact in U.S. housing markets; the statistical evidence, while in itself not conclusive, is nevertheless overwhelming. Leaving aside, for the moment, the moral repugnance of discrimination, discriminatory behavior is harmful because it generates perverse incentives, thus producing economically unappealing outcomes. One unwanted outcome is unnecessary sprawl. For example, “white flight,” by definition, requires development of land that would not be developed absent race related behavior. And while discrimination may have become a less pervasive element of individual minority group members’ treatment in the housing arena, the rising share of minorities in American society means that discrimination could become an increasingly destructive feature of the housing market in the years to come.
Consequently, one of the most important things that governments wishing to attack sprawl can do is to vigilantly and strictly enforce fair housing laws. After more than 30 years of federal fair housing laws, we still observe widespread patterns of discrimination and segregation, as numerous credible studies have shown. As time passes, it becomes clearer that testing is likely the only effective mechanism for enforcement. Testing involves sending equally financially qualified white and minority buyers and tenants into the housing market, and determining whether they are disparately treated. Disparate treatment implies discrimination, and thus is illegal. Putting widespread testing into practice is a severe and expensive means of enforcing fair housing laws, but if we, as a society, are serious about eliminating the blot of housing discrimination, we must do something serious in response.
VII. HOLDOUTS AND LAND ASSEMBLY
From at least one perspective, redeveloping at the city center always has a disadvantage relative to new development at the urban periphery: the cost of land assembly. Suppose that a company is considering where to locate a new manufacturing facility. If it can get zoning approval from the local government to develop at the periphery, then the company can negotiate an option to purchase from one landowner, typically a farmer. If the farmer will not sell at a price that is agreeable, then the developer of the facility can find another place to locate. By contrast, city centers tend to be characterized by any small parcels owned by different people. As a result, the owners of the last few parcels needed by a developer have monopoly power in setting price. Once the developer has bought the majority of parcels she needs, she may not be in a position to walk away from outrageous asking prices sought by a few holdout owners whose land is needed for the assembly to be complete. The periphery has another substantial advantage over the central city: property on the periphery is generally environmentally “clean,” while central city parcels often require costly environmental cleanups.
VIII. FEDERAL INCOME TAX POLICY
Federal tax policy has generally favored development on the periphery of cities. A striking example is the mortgage loan interest deduction (MID), which lets a household deduct home loan interest from ordinary income in determining its federal income tax liability. The MID is a residual part of the original tax laws; it was not designed to stimulate housing: the original 1913 federal income tax code allowed for deducting all consumer interest. It was the Tax Reform Act of 1986 that phased out consumer interest deductions, with one prominent exception: interest on a home mortgage loan. [Ed note: Add note here to update the state of MID.]
Yet the MID has done little to promote home ownership. The reason is that for those at the margin of home owning, the MID is not worth very much. Someone who pays little in property and state income tax might find that, even with the MID, the standard deduction is more valuable than itemization. Even for those who itemize, the MID can have little value, because the typical marginal federal income tax rate for low to moderate income families is 10 percent: each dollar paid in home mortgage loan interest is worth a mere 10 cents in tax relief. Contrast this situation with that faced by those higher up the income scale, where each dollar of deduction is worth between 25 cents and 45 cents, depending on the marginal tax rate. Of course, households with higher incomes are likely to own their homes regardless of the tax treatment of mortgage loan interest. Note that in Canada and Australia, countries without mortgage loan interest deductions, home ownership rates are quite similar to the rate in the United States.
On the other hand, the MID encourages high-income households to buy more expensive homes than they otherwise would, because the size of the implicit subsidy increases for costlier residences, up to a point (interest can be deducted only on up to $1.1 million of home loan debt). More expensive houses generally sit on larger lots than do less expensive homes. The tax code’s encouragement for buying relatively expensive houses therefore contributes to sprawl.
The tax treatment of parking had a more subtle effect. A firm on the Chicago periphery, where land was relatively cheap, could pave some acreage and provide free parking for its employees, a benefit on which users pay no income tax. Workers in the Loop, on the other hand, typically paid to park, a cost the IRS viewed as personal and therefore not deductible. (Parking in major downtown areas is uniformly expensive since the opportunity cost of land is too high to allow workers to park cheaply.) All things being equal, the suburban employee is better off. The implication was that the tax treatment of parking gives firms incentives to locate on the periphery, where land is cheap, rather than in city centers. This incentive was largely neutralized with the Tax Act of 1998, which went into effect in 1999.
IX. LAND USE REGULATION
I have already discussed how newer communities use land use regulation to prevent settlement by low income households, and how this activity contributes to sprawl. But even seemingly innocuous land use regulations can cause more land to be used than is necessary to house a given number of people. These regulations fall into a variety of categories, including setback, minimum lot size, street width, and, ironically, green space requirements. Simply put, all of these policies reduce the number of housing units that can be placed within a particular land area, in turn reducing population density, which, perforce, creates sprawl. World Bank planner Alain Bertaud has shown how seemingly small changes in these regulations can have a large impact on the number of housing units that can be fit into a particular land mass.
CONCLUSION
Sprawl has a variety of causes, some benign and others malignant. If policy makers are truly concerned about the malignant underpinnings of sprawl—discrimination, fiscal zoning, transportation that imposes social costs, federal tax policy, and regulations that needlessly consume land for residential development—then they will deal with these causes directly. Otherwise, we will know that they, and their voting constituents, are content with the way things are.
V. GOVERNMENT SERVICES
Economist Charles Tiebout pioneered the idea that local units of government compete with each other for citizens. Specifically, he argued that local officials put forward packages of services in return for a given tax level, in the hope of attracting people and capital to their communities. This theory is supported by empirical evidence suggesting that people respond to service packages. Although it is often suggested that people seek to avoid taxes at all costs, work by Therese McGwire, Michael Wayselenko, and others has shown that people do prefer communities with better services, and tend to move to cities that provide the services they want at the lowest possible tax costs.
This competition puts newer cities at an advantage relative to their older counterparts. First, old cities’ infrastructures tend to be old and often inadequate, and replacing infrastructure is very expensive. Newer cities can offer better infrastructure at lower cost. Second, and perhaps more importantly, newer cities have often used land regulation to prevent the construction of low-priced housing. Old cities, on the other hand, have large amounts of old (low-priced) housing, which tends to attract low-income owners and tenants. Low-income people, who require a disproportionately large share of public services, are therefore concentrated in central cities. This concentration of individuals drawing on public resources puts central cities at a fiscal disadvantage as they try to offer “middle-class” benefits.
Newer cities, on the other hand, can provide these services at lower levels of taxes. Lower taxes attract the middle class, a migration that further increases the concentration of poverty in the older cities, which in turn worsens the older cities’ competitive position. Edward Glaeser argues that, because of this middle class exodus, higher levels of government (perhaps the federal government) should take responsibility for income redistribution and social services spending if older central cities are ever to become more competitive.
To make matters worse, older cities have often been run by politicians who are overtly hostile to private development in their jurisdictions’ central areas. This hostility stands in contrast to newer cities, which provide low tax rates on industrial parks and use tax-increment financing (TIF) to stimulate business development. Older cities are already at a fiscal disadvantage relative their less aged counterparts. But when the political class that runs an older city erects hoops (such as “pay-to-play” in Philadelphia) through which businesses must jump before they are allowed to develop, the fiscal disadvantages of the community grow even larger and harm the city and its residents.
VI. RACIAL DISCRIMINATION
Racial discrimination remains a central fact in U.S. housing markets; the statistical evidence, while in itself not conclusive, is nevertheless overwhelming. Leaving aside, for the moment, the moral repugnance of discrimination, discriminatory behavior is harmful because it generates perverse incentives, thus producing economically unappealing outcomes. One unwanted outcome is unnecessary sprawl. For example, “white flight,” by definition, requires development of land that would not be developed absent race related behavior. And while discrimination may have become a less pervasive element of individual minority group members’ treatment in the housing arena, the rising share of minorities in American society means that discrimination could become an increasingly destructive feature of the housing market in the years to come.
Consequently, one of the most important things that governments wishing to attack sprawl can do is to vigilantly and strictly enforce fair housing laws. After more than 30 years of federal fair housing laws, we still observe widespread patterns of discrimination and segregation, as numerous credible studies have shown. As time passes, it becomes clearer that testing is likely the only effective mechanism for enforcement. Testing involves sending equally financially qualified white and minority buyers and tenants into the housing market, and determining whether they are disparately treated. Disparate treatment implies discrimination, and thus is illegal. Putting widespread testing into practice is a severe and expensive means of enforcing fair housing laws, but if we, as a society, are serious about eliminating the blot of housing discrimination, we must do something serious in response.
VII. HOLDOUTS AND LAND ASSEMBLY
From at least one perspective, redeveloping at the city center always has a disadvantage relative to new development at the urban periphery: the cost of land assembly. Suppose that a company is considering where to locate a new manufacturing facility. If it can get zoning approval from the local government to develop at the periphery, then the company can negotiate an option to purchase from one landowner, typically a farmer. If the farmer will not sell at a price that is agreeable, then the developer of the facility can find another place to locate. By contrast, city centers tend to be characterized by any small parcels owned by different people. As a result, the owners of the last few parcels needed by a developer have monopoly power in setting price. Once the developer has bought the majority of parcels she needs, she may not be in a position to walk away from outrageous asking prices sought by a few holdout owners whose land is needed for the assembly to be complete. The periphery has another substantial advantage over the central city: property on the periphery is generally environmentally “clean,” while central city parcels often require costly environmental cleanups.
VIII. FEDERAL INCOME TAX POLICY
Federal tax policy has generally favored development on the periphery of cities. A striking example is the mortgage loan interest deduction (MID), which lets a household deduct home loan interest from ordinary income in determining its federal income tax liability. The MID is a residual part of the original tax laws; it was not designed to stimulate housing: the original 1913 federal income tax code allowed for deducting all consumer interest. It was the Tax Reform Act of 1986 that phased out consumer interest deductions, with one prominent exception: interest on a home mortgage loan. [Ed note: Add note here to update the state of MID.]
Yet the MID has done little to promote home ownership. The reason is that for those at the margin of home owning, the MID is not worth very much. Someone who pays little in property and state income tax might find that, even with the MID, the standard deduction is more valuable than itemization. Even for those who itemize, the MID can have little value, because the typical marginal federal income tax rate for low to moderate income families is 10 percent: each dollar paid in home mortgage loan interest is worth a mere 10 cents in tax relief. Contrast this situation with that faced by those higher up the income scale, where each dollar of deduction is worth between 25 cents and 45 cents, depending on the marginal tax rate. Of course, households with higher incomes are likely to own their homes regardless of the tax treatment of mortgage loan interest. Note that in Canada and Australia, countries without mortgage loan interest deductions, home ownership rates are quite similar to the rate in the United States.
On the other hand, the MID encourages high-income households to buy more expensive homes than they otherwise would, because the size of the implicit subsidy increases for costlier residences, up to a point (interest can be deducted only on up to $1.1 million of home loan debt). More expensive houses generally sit on larger lots than do less expensive homes. The tax code’s encouragement for buying relatively expensive houses therefore contributes to sprawl.
The tax treatment of parking had a more subtle effect. A firm on the Chicago periphery, where land was relatively cheap, could pave some acreage and provide free parking for its employees, a benefit on which users pay no income tax. Workers in the Loop, on the other hand, typically paid to park, a cost the IRS viewed as personal and therefore not deductible. (Parking in major downtown areas is uniformly expensive since the opportunity cost of land is too high to allow workers to park cheaply.) All things being equal, the suburban employee is better off. The implication was that the tax treatment of parking gives firms incentives to locate on the periphery, where land is cheap, rather than in city centers. This incentive was largely neutralized with the Tax Act of 1998, which went into effect in 1999.
IX. LAND USE REGULATION
I have already discussed how newer communities use land use regulation to prevent settlement by low income households, and how this activity contributes to sprawl. But even seemingly innocuous land use regulations can cause more land to be used than is necessary to house a given number of people. These regulations fall into a variety of categories, including setback, minimum lot size, street width, and, ironically, green space requirements. Simply put, all of these policies reduce the number of housing units that can be placed within a particular land area, in turn reducing population density, which, perforce, creates sprawl. World Bank planner Alain Bertaud has shown how seemingly small changes in these regulations can have a large impact on the number of housing units that can be fit into a particular land mass.
CONCLUSION
Sprawl has a variety of causes, some benign and others malignant. If policy makers are truly concerned about the malignant underpinnings of sprawl—discrimination, fiscal zoning, transportation that imposes social costs, federal tax policy, and regulations that needlessly consume land for residential development—then they will deal with these causes directly. Otherwise, we will know that they, and their voting constituents, are content with the way things are.
Friday, August 28, 2015
Off to Jackson Hole on Thursday
I am going to this year's Kansas City Fed symposium, where I am giving a paper with Susan Wachter called the Housing Finance Revolution. I have pretty much wanted to do something like this since I was a kid (I know, I'm a strange kid).
Preliminary Syllabus for Finance 397
Finance 397
Applied Microeconomic for Business
Professor Richard K. Green
Office: 507 Funger
Keynesian.richard@gmail.com
202-994-2377
202-994-9141
301-467-3582
Office Hours: 1-3 Tuesday or by Appointment
This is a course in the application of microeconomic theory to academic business disciplines. As such, it is not a traditional graduate microeconomics course, such as Economics 301. All business disciplines—even management and marketing—contain some economic theory in their literatures. For example, papers in marketing are often applications of industrial organization theory, and papers in management often deal with principal-agency and asymmetric information issues.
The class will contain four requirements: two exams (25 percent each), an 8-10 page critical review paper (30 percent), and a 15 minute presentation, such as one would give at an academic meeting (20 percent).
Texts: (*)-ed readings are required.
1. Introduction to Economic Analysis, by R. Preston McAfee, (an open source principles text downloadable from http://www.introecon.com/). (*)
2. Game Theory for Applied Economists, by Robert Gibbons, Princeton University Press (1992, paperback). ISBN 0-691-00395-5. (*)
3. Identification Problems in the Social Sciences, by Charles F. Manski, Harvard University Press, (1995, paperback). ISBN 0-674-44284-9.(*)
4.
Week 1: Introduction to Optimization and the Robinson Crusoe Economy
http://www.econ.iastate.edu/classes/econ500/hallam/documents/Opt_Simple_Multi_000.pdf
http://www.econ.iastate.edu/classes/econ500/hallam/documents/opt_con_gen_000.pdf
http://www.econ.ucla.edu/doepke/teaching/resources/e102ch1.pdf
Week 2: Optimization and Theory of the Firm
McAfee Chapter 4 and 6
Griliches, Zvi and Jacques Mairesse (1995) Production Functions: The Search for
Identication, NBER Working Paper No.w5067.
Week 3: Industrial Organization I
http://www.econ.iastate.edu/classes/econ501/Hallam/documents/Competition_000.pdf
Borenstein, Severin, Hubs and High Fares: Dominance and Market Power in
the
Week 4: Theory of the Consumer
McAfee Chapter 5
http://www.econ.iastate.edu/classes/econ501/Hallam/documents/FunctionalForms.pdf
Laurits R. Christensen; Dale W. Jorgenson; Lawrence J. Lau, Transcendental Logarithmic Utility Functions, The American Economic Review, Vol. 65, No. 3. (Jun., 1975), pp. 367-383
Week 5 Industrial Organization II
http://www.econ.iastate.edu/classes/econ501/Hallam/documents/Oligopoply.pdf
.
Zettelmeyer, Florian, Fiona Scott Morton, and Jorge Silva-Risso (2005) Cowboys
or Cowards: Why are Internet Car Prices Lower?
The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970), pp. 488-500
Week 6 Topics in Game Theory I
Gibbons Chapter 1
McAfee Chapter 7
Week 7 Exam I
Week 8 Topics in Game Theory II
Gibbons Chapter 2
Shapley, L. S. and M. Shubik (1972) The Assignment Game I: The Core, Interna-
tional Journal of Game Theory, 1: 111-130.
Week 9 Adverse Selection
Gibbons Chapters 3 and 4.
Week 10 Moral Hazard
Week 11 Identification I
Manski 1,2
James J. Heckman (2000) Causal Parameters and Policy Analysis In Economics:
A Twentieth Century Retrospective, The Quarterly Journal of Economics, 115(1),
45-97.
Week 12 Identification II
Manski 3-7
Week 13 Student Presentations of Applied Microeconomic Papers (choose from list)
Week 14 Exam II
Papers to choose from for presentation
Avery, Christopher, Mark Glickman, Caroline Hoxby and Andrew Metrick, A Revealed Preference Ranking of US Colleges and Universities, Working Paper.
Borenstein, Severin and Andrea Shepard (1996) Dynamic Pricing in Retail Gasoline
Markets, Rand Journal of Economics, 27(Autumn): 429-51.
Donohue, J.J. and Steven Levitt, The Impact of Legalized Abortion on Crime." Quarterly Journal of Economics, 2001, 116(2), pp. 379-420.
Gandal, Neil, M. Kende and Rafael Rob (2000) The Dynamics of Technological
Adoption in Hardware/Software Systems: The Case of Compact Disk Players, Rand
Journal of Economics, 31(1): 43-61.
Graddy, K. (1995) Testing for Imperfect Competition at the
Rand Journal of Economics, 26 (Spring): 75-92.
Green RK and MJ White, Measuring the Benefits of Homeowning: Effects on Children, Journal of Urban Economics,
Krugman, Paul, Scale Economies, Product Differentiation, and the Pattern of Trade
The American Economic Review, Vol. 70, No. 5. (Dec., 1980), pp. 950-959.
Mankiw, G and D Weil, The Baby Boom, the Baby Bust and the Housing Market, Regional Science and Urban Economics
Katrina
I watched good chunks of Spike Lee's HBO film on Katrina last week. Like the rest of Lee's work, the film is brilliant, if frustratingly flawed. He is a much better polemicist than Michael Moore.
One could say all kinds of things about Katrina and the government's response to it, and many already have. I would just like to focus on the contradiction that is New Orleans. I have been there something like a half-dozen times, and I have made sure that I have gotten out of the tourist areas at least a little bit.
New Orleans is a jewel and a shame. Outside of New York, it would be hard to place a city ahead of New Orleans in terms of importance to our national culture. The city's music, literature and food make it world famous; the city's cultural greatness was underscored by Lee's inteviews with Wynton Marsalis, a force of nature of a musician who is in many ways a living embodiment of New Orleans.
But New Orleans is also a city that has been slowly dying for 100 years. Until World War II, it was the South's greatest commercial center, but it has long been eclipsed by Atlanta, Charlotte, Orlando, Miami, Houston and Dallas. The city's problems with crime and schools is well documented. The lack of progress in the rebuilding of New Orleans certainly says something about the competence of government at all levels, but it also says something about New Orleans. Three great, thriving American cities--Chicago in 1871, San Francisco in 1906 and New York in 2001--were famously traumatised. All three recovered remarkably quicky. Tokyo was leveled during World War II--and "miraculously" resumed its mantle of World's largest city.
New Orleans ceased being an economically competitive place a long time ago. This is why one of my most famous colleagues in urban economics has suggested it would be better to write a six-figure check to each victim of Katrina than it would be to spend the money necessary to rebuild New Orleans. From an economics pespective, this is surely right; from a national cultural perspecive, it is almost surely wrong.
And yet as I watched the Spike Lee film, I couldn't help but wonder whether the kids who were displaced out of New Orleans (with a high school graduation rate that barely exceeds 50 percent)into a welcoming small city in Utah weren't better off as a result. And I can't help but think about the fact that Wynton Marsalis now runs the Lincoln Center Jazz Orchestra--in New York.
One could say all kinds of things about Katrina and the government's response to it, and many already have. I would just like to focus on the contradiction that is New Orleans. I have been there something like a half-dozen times, and I have made sure that I have gotten out of the tourist areas at least a little bit.
New Orleans is a jewel and a shame. Outside of New York, it would be hard to place a city ahead of New Orleans in terms of importance to our national culture. The city's music, literature and food make it world famous; the city's cultural greatness was underscored by Lee's inteviews with Wynton Marsalis, a force of nature of a musician who is in many ways a living embodiment of New Orleans.
But New Orleans is also a city that has been slowly dying for 100 years. Until World War II, it was the South's greatest commercial center, but it has long been eclipsed by Atlanta, Charlotte, Orlando, Miami, Houston and Dallas. The city's problems with crime and schools is well documented. The lack of progress in the rebuilding of New Orleans certainly says something about the competence of government at all levels, but it also says something about New Orleans. Three great, thriving American cities--Chicago in 1871, San Francisco in 1906 and New York in 2001--were famously traumatised. All three recovered remarkably quicky. Tokyo was leveled during World War II--and "miraculously" resumed its mantle of World's largest city.
New Orleans ceased being an economically competitive place a long time ago. This is why one of my most famous colleagues in urban economics has suggested it would be better to write a six-figure check to each victim of Katrina than it would be to spend the money necessary to rebuild New Orleans. From an economics pespective, this is surely right; from a national cultural perspecive, it is almost surely wrong.
And yet as I watched the Spike Lee film, I couldn't help but wonder whether the kids who were displaced out of New Orleans (with a high school graduation rate that barely exceeds 50 percent)into a welcoming small city in Utah weren't better off as a result. And I can't help but think about the fact that Wynton Marsalis now runs the Lincoln Center Jazz Orchestra--in New York.
Urban Sprawl
An easy culprit to pick on for some of our urban ills is sprawl. This is the beginning of something I wrote that was printed in the University of Illinois Real Estate Newsletter and in the Wharton Real Estate Review (I will post the remainder later):
NINE CAUSES OF SPRAWL
Richard K. Green
Since the late 1990s, sprawl has become a leading public policy issue. But in the debate over sprawl, few policy makers seem interested in investigating the phenomenon’s root causes. This failure is disturbing, for without understanding sprawl’s causes, politicians and planners may make policy choices that exacerbate its effects, while voters are unable to make choices among a set of alternative outcomes. The paper that follows presents nine important causes of sprawl. The list is not exhaustive, but it explains a substantial share of the suburbanization that has characterized post-World War II United States.
I. THE RENT GRADIENT
Modern urban economics has its roots in models developed by William Alonso, Edwin Mills, and Richard Muth. These models show that two key determinants of urban land values are: the value of undeveloped land at the metropolitan area edge; and the cost of transportation. Put simply, it is desirable to be near the hub of commercial activity, so people who live near job centers pay more for land and those living near the periphery pay less.
Where land is relatively expensive, it makes sense to economize its use. Therefore, building densities will be high in places with high land values. For that reason, the densest developments tend to be near city centers. Conversely, the land on cities’ peripheries is relatively inexpensive, so building densities are low. A result is that at the relatively less expensive urban periphery, each home takes up more land (houses sit on larger lots), and therefore these areas generally exhibit lower density (that is, more sprawl) than do city centers. This tendency is not necessarily a problem, because relative prices reflect the relative scarcity of resources. After all, construction components such as timber and labor are scarce resources, too. The question is whether the relative prices of land and improvements appropriately take into account all resource costs.
II. DEMOGRAPHIC CHANGES
Land use is driven partly by the composition of households. Since the end of World War II, Americans are: waiting longer to marry; more likely to divorce; having fewer children; and living much longer after their children have grown. These demographic changes have caused the average U.S. household size to fall from 3.5 persons in 1940, to 2.5 persons today. Thus, even if population had remained constant and housing density had remained unchanged, the amount of land required to house the population would have risen by 40 percent between 1940 and today.
It might be argued that smaller households could occupy smaller housing units, resulting in higher unit density. However, accomplishing this increase in density would not be easy. Consider an older house in the middle of a city. The house is in good condition, but not easy to subdivide into multiple units, so it is occupied by (on average) 2.5 people, rather than 3.5. Multifamily units would likewise be difficult, if not impossible, to resize for smaller households. Until consumer tastes change and the existing housing stock is replaced, smaller household size will not, by itself, reduce the amount of land per capita needed for housing our population. This outcome is, arguably, benign.
III. GROWING AFFLUENCE
The U.S. has become a more affluent nation. Households at all economic strata are materially better off now than they were in 1945 (or in 1965, for that matter). At the top end of the spectrum, the number of households earning in excess of $100,000 in real income has increased sixfold over the last ten years alone.
The effect that affluence has had on land use is profound from two perspectives: an income effect and a substitution effect. The income effect could be called the “George Carlin effect,” that is, as people have more money, they want more “stuff,” including larger houses and larger lots. The substitution effect chiefly concerns transportation. For example, if a large share of household income is spent on transportation, a family might want to economize, or better still avoid its cost altogether, by living in the center of a city. Conversely, as transportation becomes relatively less costly, people might seek to economize on land cost, and will therefore move to places (the suburbs or exurbs) where the per unit price of land is low.
In the context of contemporary society, transportation costs are largely fixed; while acquiring and maintaining a car are costly, the cost per mile for driving is small (though this may ultimately change as gas prices keep rising). Therefore, while transportation concerns dictate location decisions for low-earners, transportation costs are relatively unimportant for high-earners. Thus, for high-earners, who are the chief market for new suburban housing, rising affluence leads to greater land consumption.
IV. TRANSPORTATION
According to Joel Garreau’s Edge City, “the maximum desirable commute, throughout human history, regardless of transportation technology is forty-five minutes.” When people in ancient times walked to work, cities could extend only a mile or two. Omnibuses and streetcars increased this distance. With the use of private automobiles, and average driving speeds of 30 miles per hour, people today can live ten miles or more from their workplace. Garreau demonstrates that development has responded to the desired 45-minute commute by placing office space on the periphery of cities, so that commuters can avoid the density and traffic of downtowns. As a result, the amount of office space in suburbs is now generally greater than the amount in traditional downtowns, and the most common commuting pattern in America today is from suburban home to suburban office. Households’ desire to reap the private benefits of low density while avoiding lengthy commutes has pushed cities to spread out.
This result would all be ideal if households bore the full costs of their commuting. But they do not. For example, the City of Milwaukee’s Department of Administration calculates that automobiles in that city cost society about $400 apiece each year beyond what their owners pay in licensing fees and gasoline taxes. These added costs relate primarily to congestion and pollution. What is remarkable about the $400 figure is that Milwaukee has relatively little congestion, as large American cities go. In many cities, the costs are certainly much higher.
One method for making commuters pay these costs is to increase fuel taxes. For instance, someone who drives 10,000 miles per year in a car that gets 25 miles per gallon uses 400 gallons of gasoline per year. Increasing the gasoline tax by $1 per gallon would internalize the costs of congestion. But according to this argument, in places such as rural areas where congestion costs are much lower, gasoline taxes should also be lower. This would give metropolitan area residents an incentive to drive outside their cities to buy their gasoline. An important question remains as to whether people’s time is sufficiently inexpensive that it is worth their while to go out of their way to buy gas.
Other potential methods for internalizing commuting costs include highway tolls and commuter taxes. It could be argued that all such taxes have strengths and weaknesses, and that all are politically difficult to implement. But the consequences of underpricing the social cost of automobile use have also led to politically unacceptable outcomes.
NINE CAUSES OF SPRAWL
Richard K. Green
Since the late 1990s, sprawl has become a leading public policy issue. But in the debate over sprawl, few policy makers seem interested in investigating the phenomenon’s root causes. This failure is disturbing, for without understanding sprawl’s causes, politicians and planners may make policy choices that exacerbate its effects, while voters are unable to make choices among a set of alternative outcomes. The paper that follows presents nine important causes of sprawl. The list is not exhaustive, but it explains a substantial share of the suburbanization that has characterized post-World War II United States.
I. THE RENT GRADIENT
Modern urban economics has its roots in models developed by William Alonso, Edwin Mills, and Richard Muth. These models show that two key determinants of urban land values are: the value of undeveloped land at the metropolitan area edge; and the cost of transportation. Put simply, it is desirable to be near the hub of commercial activity, so people who live near job centers pay more for land and those living near the periphery pay less.
Where land is relatively expensive, it makes sense to economize its use. Therefore, building densities will be high in places with high land values. For that reason, the densest developments tend to be near city centers. Conversely, the land on cities’ peripheries is relatively inexpensive, so building densities are low. A result is that at the relatively less expensive urban periphery, each home takes up more land (houses sit on larger lots), and therefore these areas generally exhibit lower density (that is, more sprawl) than do city centers. This tendency is not necessarily a problem, because relative prices reflect the relative scarcity of resources. After all, construction components such as timber and labor are scarce resources, too. The question is whether the relative prices of land and improvements appropriately take into account all resource costs.
II. DEMOGRAPHIC CHANGES
Land use is driven partly by the composition of households. Since the end of World War II, Americans are: waiting longer to marry; more likely to divorce; having fewer children; and living much longer after their children have grown. These demographic changes have caused the average U.S. household size to fall from 3.5 persons in 1940, to 2.5 persons today. Thus, even if population had remained constant and housing density had remained unchanged, the amount of land required to house the population would have risen by 40 percent between 1940 and today.
It might be argued that smaller households could occupy smaller housing units, resulting in higher unit density. However, accomplishing this increase in density would not be easy. Consider an older house in the middle of a city. The house is in good condition, but not easy to subdivide into multiple units, so it is occupied by (on average) 2.5 people, rather than 3.5. Multifamily units would likewise be difficult, if not impossible, to resize for smaller households. Until consumer tastes change and the existing housing stock is replaced, smaller household size will not, by itself, reduce the amount of land per capita needed for housing our population. This outcome is, arguably, benign.
III. GROWING AFFLUENCE
The U.S. has become a more affluent nation. Households at all economic strata are materially better off now than they were in 1945 (or in 1965, for that matter). At the top end of the spectrum, the number of households earning in excess of $100,000 in real income has increased sixfold over the last ten years alone.
The effect that affluence has had on land use is profound from two perspectives: an income effect and a substitution effect. The income effect could be called the “George Carlin effect,” that is, as people have more money, they want more “stuff,” including larger houses and larger lots. The substitution effect chiefly concerns transportation. For example, if a large share of household income is spent on transportation, a family might want to economize, or better still avoid its cost altogether, by living in the center of a city. Conversely, as transportation becomes relatively less costly, people might seek to economize on land cost, and will therefore move to places (the suburbs or exurbs) where the per unit price of land is low.
In the context of contemporary society, transportation costs are largely fixed; while acquiring and maintaining a car are costly, the cost per mile for driving is small (though this may ultimately change as gas prices keep rising). Therefore, while transportation concerns dictate location decisions for low-earners, transportation costs are relatively unimportant for high-earners. Thus, for high-earners, who are the chief market for new suburban housing, rising affluence leads to greater land consumption.
IV. TRANSPORTATION
According to Joel Garreau’s Edge City, “the maximum desirable commute, throughout human history, regardless of transportation technology is forty-five minutes.” When people in ancient times walked to work, cities could extend only a mile or two. Omnibuses and streetcars increased this distance. With the use of private automobiles, and average driving speeds of 30 miles per hour, people today can live ten miles or more from their workplace. Garreau demonstrates that development has responded to the desired 45-minute commute by placing office space on the periphery of cities, so that commuters can avoid the density and traffic of downtowns. As a result, the amount of office space in suburbs is now generally greater than the amount in traditional downtowns, and the most common commuting pattern in America today is from suburban home to suburban office. Households’ desire to reap the private benefits of low density while avoiding lengthy commutes has pushed cities to spread out.
This result would all be ideal if households bore the full costs of their commuting. But they do not. For example, the City of Milwaukee’s Department of Administration calculates that automobiles in that city cost society about $400 apiece each year beyond what their owners pay in licensing fees and gasoline taxes. These added costs relate primarily to congestion and pollution. What is remarkable about the $400 figure is that Milwaukee has relatively little congestion, as large American cities go. In many cities, the costs are certainly much higher.
One method for making commuters pay these costs is to increase fuel taxes. For instance, someone who drives 10,000 miles per year in a car that gets 25 miles per gallon uses 400 gallons of gasoline per year. Increasing the gasoline tax by $1 per gallon would internalize the costs of congestion. But according to this argument, in places such as rural areas where congestion costs are much lower, gasoline taxes should also be lower. This would give metropolitan area residents an incentive to drive outside their cities to buy their gasoline. An important question remains as to whether people’s time is sufficiently inexpensive that it is worth their while to go out of their way to buy gas.
Other potential methods for internalizing commuting costs include highway tolls and commuter taxes. It could be argued that all such taxes have strengths and weaknesses, and that all are politically difficult to implement. But the consequences of underpricing the social cost of automobile use have also led to politically unacceptable outcomes.
Thursday, August 27, 2015
If you want to be scared about subprime...
Read this:
http://bigpicture.typepad.com/comments/2015/08/cdo-insiders-we.html
The story I heard from a bond trader is that the Chinese were willing to buy paper at very low spreads just to keep the RMB from appreciating. I have no idea whether this is really true, but it makes for a good story.
http://bigpicture.typepad.com/comments/2015/08/cdo-insiders-we.html
The story I heard from a bond trader is that the Chinese were willing to buy paper at very low spreads just to keep the RMB from appreciating. I have no idea whether this is really true, but it makes for a good story.
Grocery Stores in the Inner City
Tim Noah's most recent Slate Column--http://www.slate.com/id/2148038/?nav=fix--is really good. But while he is surely correct that the entrepeneurial Jews, Koreans and Arabs who have run inner city bodegas are hardly exploiters getting rich off of ill-gotten booty, many poor Americans to not have access to supermarkets. Consequently, the poor pay more money for lower quality goods than their more affluent fellow-citizens. There can be no question that this is yet another unfair outcome for those Americans who already face many unfair outcomes.
But does Wal-mart make things better? I am with Noah that the jury is still out on this. Emek Basker at the University of Missouri is doing some great work on Wal-mart (http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=93768), but does not answer for me the question as to whether the prices it provides low income people makes up in a social welfare sense for the low wages it pays low income people. I do know that I have not seen convincing evidence that Wal-mart enjoys the sort of monopsony position in the labor market that would allow it to pay workers something less than their marginal product.
That said, Whole Foods, expensive as it is, may well provide low-income people with better food at lower prices than bodegas. Whole Foods usually shows up on lists of good places to work. The choice is therefore not necessarily between mom and pops and Wal-mart.
But does Wal-mart make things better? I am with Noah that the jury is still out on this. Emek Basker at the University of Missouri is doing some great work on Wal-mart (http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=93768), but does not answer for me the question as to whether the prices it provides low income people makes up in a social welfare sense for the low wages it pays low income people. I do know that I have not seen convincing evidence that Wal-mart enjoys the sort of monopsony position in the labor market that would allow it to pay workers something less than their marginal product.
That said, Whole Foods, expensive as it is, may well provide low-income people with better food at lower prices than bodegas. Whole Foods usually shows up on lists of good places to work. The choice is therefore not necessarily between mom and pops and Wal-mart.
The Armidale School (TAS) - collected posts
Photo: Main School Building, 1905
I have written a fair number of posts on several blogs referring in some way to TAS, The Armidale School. I know from searches that there is a fair bit of interest in the school. I thought that it might therefore be sensible to create a special post providing an entry point to some of the main posts.
This post is very much a work in progress since I have to go back through past posts, a process that will take me some time. I also have to work out the best way of ordering material to make it accessible. This will take a bit of experimentation.
In many cases the stories themselves are on other topics, but include references to TAS and its people. So you may need to scan to find the reference. In most cases, the references are personal.
From the Photo Archive - School and some other
- TAS school band, 1901
- TAS Dorm, 1913, establishment of school photo archive
- Armidale Demonstration School, Year 5, 1955. A number from this class went on to TAS.
- Gordon (GAF) Fisher, 1960
- TAS Second Fifteen, 1962, including brother David and I.
- Davis (Bill) Hughes. Bill opening the Nimmitabel water supply
Old Boys - General
- Alex Buzo's funeral, death of David Wright, meeting old friends
- A Very Sporting day - interesting but also odd
Old Boys - Specific
Barrett, Paul, (public servant, consultant), Belshaw, David (engineer), Busby, Rob (TAS OBU Sydney) (and here), Buzo, Alex (writer) (here, here, here, here), Cousins, Peter (G&S star, singer, founder Kookaburra National Music Theatre Company, Harrison, Brian (historian, priest), Kitley, Philip (academic), Kemp, Peter (G&S star, lawyer), Page, Geoff (poet), Taylor, Sir P G (aviator)
School life
Cadets - I did not like!, Sport - Rugby, TAS Seconds, - 1962, against Shore 2015, National Primary Rugby Carnival 2015, International students at TAS 2015,
Staff
Brownie, Peter and here, here (geography, economics), Crossle, RWL (George) and here (history, English), Fisher, Gordon (GAF), head, Hughes, Davis (Bill) (science, later Country Party parliamentarian and minister), Mattingley, Brian (Joe), here
Should we be excited about the July new home sales number?
The short answer is no. The July number was the worst July number since 1982; it just wasn't as bad as the June number, which wasn't as bad as the May number.
Everybody wants to know if we have hit bottom. There are three indicators suggesting we have--and three suggesting not. The good: prices in many markets have fallen below replacement cost (which is a pretty robust fundamental in the absence of population declines). Morris Davis at Wisconsin has shown that rent to price ratios have returned to be more in line with long term ratios, and given how low mortgage rates are, this is comforting. And resale inventories in California have dropped to under 4 months.
On the down side, we may have a lot of foreclosed houses coming at us in the next year. The employment picture is still atrocious. And if rents keep falling, prices will follow.
I would also guess that the first-time homebuyer tax credit is time-shifting sales, rather than raising them for the long term, but we shall see. On the other hand, the nature of investor sales is actually a positive indicator: investors are buying with cash and renting out units at decent rates of return. This is very different from the borrow, buy and flip model from the earlier part of this decade.
FWIW, I would assign a subjective probability of .7 that we are at bottom. On the other hand, around 2005, I assigned a .35 probability that we were about to face serious trouble.
Everybody wants to know if we have hit bottom. There are three indicators suggesting we have--and three suggesting not. The good: prices in many markets have fallen below replacement cost (which is a pretty robust fundamental in the absence of population declines). Morris Davis at Wisconsin has shown that rent to price ratios have returned to be more in line with long term ratios, and given how low mortgage rates are, this is comforting. And resale inventories in California have dropped to under 4 months.
On the down side, we may have a lot of foreclosed houses coming at us in the next year. The employment picture is still atrocious. And if rents keep falling, prices will follow.
I would also guess that the first-time homebuyer tax credit is time-shifting sales, rather than raising them for the long term, but we shall see. On the other hand, the nature of investor sales is actually a positive indicator: investors are buying with cash and renting out units at decent rates of return. This is very different from the borrow, buy and flip model from the earlier part of this decade.
FWIW, I would assign a subjective probability of .7 that we are at bottom. On the other hand, around 2005, I assigned a .35 probability that we were about to face serious trouble.
Zillow Rules
I am very fond of Zillow (www.zillow.com), a site that provides value estimates for houses around the country. It combines real estate voyeurism with lots of data and satellite maps, so I spend way more time on it than I should.
Beyond the fact that Zillow is fun, it is honest. It presents information on how accurate its estimates of home values are in a very user-friendly manner. First, it gives market statistics on accuracy at http://www.zillow.com/howto/DataCoverageZestimateAccuracy.htm. Two stats are key here--the median error Zillow makes when it estimates value, and the share of value estimates that are within 10 percent of ultimate sales price.
Second, it gives an range of estimates values for any particular house. While I have not been able to find exactly how Zillow comes up with this range, my reading between the lines suggests that it is the Zillow estimate of value plus or minus one standard deviation. What this means is there is about a two-thirds chance that a house will actually sell within the range of values reported on Zillow (if anyone has the scoop on this, please let me know).
I am reasonably sure one thing is true--more generic houses get more accurate values from Zillow than ideosyncratic houses. Have fun, and let me know what you think about how well Zillow values your house.
Beyond the fact that Zillow is fun, it is honest. It presents information on how accurate its estimates of home values are in a very user-friendly manner. First, it gives market statistics on accuracy at http://www.zillow.com/howto/DataCoverageZestimateAccuracy.htm. Two stats are key here--the median error Zillow makes when it estimates value, and the share of value estimates that are within 10 percent of ultimate sales price.
Second, it gives an range of estimates values for any particular house. While I have not been able to find exactly how Zillow comes up with this range, my reading between the lines suggests that it is the Zillow estimate of value plus or minus one standard deviation. What this means is there is about a two-thirds chance that a house will actually sell within the range of values reported on Zillow (if anyone has the scoop on this, please let me know).
I am reasonably sure one thing is true--more generic houses get more accurate values from Zillow than ideosyncratic houses. Have fun, and let me know what you think about how well Zillow values your house.
Was there a housing bubble? Is it deflating?
The housing market has finished a remarkable run of price increases and construction spending. Inflation-adjusted national price growth has been well above long-term trend for the past ten years, and the number of housing units built in 2005 was 1/3 higher than the number built in 2000--and we thought 2000 was a very good year.
Within the past couple of quarters, this all seems to have come to a screeching halt. According to the National Association of Realtors, the nominal median house price has been flat over the past year, meaning that in inflation-adjusted terms, prices are falling. Moreover, the median house price masks certain things--it doesn't take into account the mix of housing sold (people generally by bigger houses when prices are not rising), and doesn't take into account concessions such as free cable, closing-cost help, free cars, etc.
The question, then, is whether this means that a "bubble" has burst--that a sepculative frenzy in housing has wound or is winding down. The answer is likely "no."
A bubble implies an asset market that is out of equilibrium--that cannot be explained by fundamentals. In the case of housing, there are two basic fundamentals--rent (which is the dividend that housing pays) and the cost of capital. Even owners pay rent--they just pay it to themselves. As rents rise, so do house prices; as the cost of capital falls, house prices rise. In the vast majority of markets in the United States, it made economic sense for households to buy houses at market prices until recently; the exceptions were some places in California and Boston, about which I will say more in another post.
Two important fundamentals of changed over the past couple of years. First, mortgage interest rates have risen, and mortgage rates on adjustable rate mortgages have risen a lot. This fact by itself will depress house prices. A paper I wrote with Pat Hendershott and Dennis Capozza in the 1990s used data from 63 metropolitan areas to show that the relationship between house prices and rents is sensitive to the cost of capital. Second, planning boards have come to understand that the only way to make housing more affordable in areas with expensive land is to allow more density. We have consequently seen a boom in condominium construction. This places downward pressure on implicit rents. Hence the fundamentals have changed in a direction such that we would expect to see real house prices retreat.
The market is regulating itself somewhat already. Building permits are off 7 percent from last year, and will likely fall even further. This has serious macroeconomic consequences that I will discuss in another post. But it also is an important precurser to the housing market having a soft landing.
Within the past couple of quarters, this all seems to have come to a screeching halt. According to the National Association of Realtors, the nominal median house price has been flat over the past year, meaning that in inflation-adjusted terms, prices are falling. Moreover, the median house price masks certain things--it doesn't take into account the mix of housing sold (people generally by bigger houses when prices are not rising), and doesn't take into account concessions such as free cable, closing-cost help, free cars, etc.
The question, then, is whether this means that a "bubble" has burst--that a sepculative frenzy in housing has wound or is winding down. The answer is likely "no."
A bubble implies an asset market that is out of equilibrium--that cannot be explained by fundamentals. In the case of housing, there are two basic fundamentals--rent (which is the dividend that housing pays) and the cost of capital. Even owners pay rent--they just pay it to themselves. As rents rise, so do house prices; as the cost of capital falls, house prices rise. In the vast majority of markets in the United States, it made economic sense for households to buy houses at market prices until recently; the exceptions were some places in California and Boston, about which I will say more in another post.
Two important fundamentals of changed over the past couple of years. First, mortgage interest rates have risen, and mortgage rates on adjustable rate mortgages have risen a lot. This fact by itself will depress house prices. A paper I wrote with Pat Hendershott and Dennis Capozza in the 1990s used data from 63 metropolitan areas to show that the relationship between house prices and rents is sensitive to the cost of capital. Second, planning boards have come to understand that the only way to make housing more affordable in areas with expensive land is to allow more density. We have consequently seen a boom in condominium construction. This places downward pressure on implicit rents. Hence the fundamentals have changed in a direction such that we would expect to see real house prices retreat.
The market is regulating itself somewhat already. Building permits are off 7 percent from last year, and will likely fall even further. This has serious macroeconomic consequences that I will discuss in another post. But it also is an important precurser to the housing market having a soft landing.
Wednesday, August 26, 2015
Subprime--I was probably wrong
I long have taken a caveat emptor view about mortgage lending. I assumed borrowers understood that loan brokers where in sales, and they would therefore try to get as much money out of borrowers as possible. Just as one should be wary with a car salesman, so too should he be wary of a mortgage saleman.
The problem is that borrowers did not understand what the sales people where selling them. Loans are complicated--even the "sticker price," the APR, doesn't really tell the story. And so borrowers, particularly those without any financial training, are at a disticnt disadvantage when dealing with lenders.
I am not sure what to do about this. I have long thought that the sub-prime market could give borrowers access to cheaper credit than they would get elsewhere; nevertheless, the market also led people to make what were clearly bad decisions. I am not sure how reasonable it was to expect borrowers to understand how bad their decisions would turn out to be.
And so we must figure out a mechanism for helping borrowers navigate the mortgage waters better. I am not sure what that is. One possibility: tie loan broker compensation not just to loan origination, but loan performance. They don't get fully paid until the loan is fully paid. This would reduce the incentive for them to make loans that will turn into defaults.
The problem is that borrowers did not understand what the sales people where selling them. Loans are complicated--even the "sticker price," the APR, doesn't really tell the story. And so borrowers, particularly those without any financial training, are at a disticnt disadvantage when dealing with lenders.
I am not sure what to do about this. I have long thought that the sub-prime market could give borrowers access to cheaper credit than they would get elsewhere; nevertheless, the market also led people to make what were clearly bad decisions. I am not sure how reasonable it was to expect borrowers to understand how bad their decisions would turn out to be.
And so we must figure out a mechanism for helping borrowers navigate the mortgage waters better. I am not sure what that is. One possibility: tie loan broker compensation not just to loan origination, but loan performance. They don't get fully paid until the loan is fully paid. This would reduce the incentive for them to make loans that will turn into defaults.
Teaching and Research Again
I just read the introduction to Richard Feynman's Six Not So Easy Pieces. In it is a wonderful exposition of how great research can lead to great teaching.
Why Ben Bernanke was (and should have been) reappointed
The Ted Spread has returned to normal (actually, a little less than normal). The A2P2 spread is getting there.
Tuesday, August 25, 2015
Just dropped a kid off at NYU--and thought about the real estate.
So we just had the first one leave the nest for Greenwich Village (second one leaves in two weeks for Evanston). Two real estate thoughts hit me:
(1) NYU dorms are the bargain of the century. They are very nice (four young women share two bedrooms, a living room and a kitchenette) and have views that would command double the price per square foot in the standard, un-rent-stabilized NYC housing market. The hallway gives a great view up Lexington Avenue (you can see the Chrysler Building) and over the Williamsberg Bridge.
(2) People need to get over considering price-to-household-income as the key fundamental. Density in lower Manhattan is so much greater than nearly anywhere else in the country, it will of course be the case that the relative price of housing to anything else--including wages--will be higher there than elsewhere.
(1) NYU dorms are the bargain of the century. They are very nice (four young women share two bedrooms, a living room and a kitchenette) and have views that would command double the price per square foot in the standard, un-rent-stabilized NYC housing market. The hallway gives a great view up Lexington Avenue (you can see the Chrysler Building) and over the Williamsberg Bridge.
(2) People need to get over considering price-to-household-income as the key fundamental. Density in lower Manhattan is so much greater than nearly anywhere else in the country, it will of course be the case that the relative price of housing to anything else--including wages--will be higher there than elsewhere.
Monday, August 24, 2015
Maybe pigs can fly
If I am forced to bet on who is correct in an argument, and all that I know is that Paul Krugman is on one side of it, and Robert Samuelson is on the other, I will pick Krugman. I am guessing that the net expected value of an even money $1 bet would be something like $0.95.
I also happen to like trains. For the semester I commuted from Washington to Philadelphia, I was very grateful that I had Amtrak, for driving up I-95 several times a week would have been stressful. When I lived in Washington, Metro allowed me to keep my car at home on all but the rarest occasions. When I go to Atlanta, I use MARTA to get to downtown from the airport; when I go to San Francisco, I take BART, etc. I even try to take transit one day a week to get to work here in LA, because I feel that I should (although it takes a lot more time than driving).
All that said, I think Samuelson is correct that high-speed rail in the United States would a be wasteful expenditure. He makes the argument that because the US is less dense the Europe and Asia, rail makes less sense for intercity travel. I am sympathetic to this argument, as I have made it myself. Krugman replies that the Northeastern United States has density similar to Europe, and that Samuelson's comparison is therefore spurious. I noted this as well.
Krugman's argument has two problems. First, Obama's high speed rail plan includes several places outside of the Northeast, including the South, Texas, Chicago-St. Louis-Kansas City, where densities are considerably lower than in Europe, let along Asia. Second, even in the Northeast, cities are considerably less dense than in Europe. The graph below is from Alain Bertaud.
An advantage rail has over air in Europe is that large numbers of people live close to rail stations, while airports are generally on urban peripheries (lots more people live near the Gare de Lyon than Charles de Gaulle airport). No matter where a rail station is placed in an American city, it will be far from a lot of people, at which point the speed of an airplane overtakes the speed of a high-speed train, in terms of determining total trip length.
Finally, even taking external costs into account, air costs much less than rail in a place as dense as California. Let's turn it over to David Levinson, David Gillen, Adib Kanafani and Jean-Michel Mathieu from UC-Berkeley [correction--the paper was posted in a UC-Berkeley series. Levinson is from the University of Minnesota]:
Note that the full cost of rail (.23/pkt) is considerably more than air (.13/pkt) even though any pollution created by trains is attributed to the power plant that provides the electricity, rather than the train itself.
A couple of other points. I have yet to meet a transportation economist (and I talk to a fair number) who is thrilled by high-speed rail as a technology. John Kain was among the most rigorous and influential transportation economist of the past 50 years, and he was very skeptical about rail. I also think that we yet again have evidence that we don't come even close to internalizing the social costs of automobiles, but I see no political will for really reducing our dependence on the auto, in part because most people love their cars (this is hardly unique to America). High speed rail also seems to me to be a way to redistribute income from lower income Americans to higher income Americans, because lower-income Americans will choose Southwest Airlines (which will be cheaper) when they need to travel from one city to another.
Finally, I see that when Ed Glaeser expressed skepticism about high speed rail, he was accused of being a "hack," so I guess I will join his company. But while Paul Krugman is indeed much smarter than Robert Samuelson, I would have a very hard time choosing (not that I would want to) between Glaeser and Krugman.
I also happen to like trains. For the semester I commuted from Washington to Philadelphia, I was very grateful that I had Amtrak, for driving up I-95 several times a week would have been stressful. When I lived in Washington, Metro allowed me to keep my car at home on all but the rarest occasions. When I go to Atlanta, I use MARTA to get to downtown from the airport; when I go to San Francisco, I take BART, etc. I even try to take transit one day a week to get to work here in LA, because I feel that I should (although it takes a lot more time than driving).
All that said, I think Samuelson is correct that high-speed rail in the United States would a be wasteful expenditure. He makes the argument that because the US is less dense the Europe and Asia, rail makes less sense for intercity travel. I am sympathetic to this argument, as I have made it myself. Krugman replies that the Northeastern United States has density similar to Europe, and that Samuelson's comparison is therefore spurious. I noted this as well.
Krugman's argument has two problems. First, Obama's high speed rail plan includes several places outside of the Northeast, including the South, Texas, Chicago-St. Louis-Kansas City, where densities are considerably lower than in Europe, let along Asia. Second, even in the Northeast, cities are considerably less dense than in Europe. The graph below is from Alain Bertaud.
An advantage rail has over air in Europe is that large numbers of people live close to rail stations, while airports are generally on urban peripheries (lots more people live near the Gare de Lyon than Charles de Gaulle airport). No matter where a rail station is placed in an American city, it will be far from a lot of people, at which point the speed of an airplane overtakes the speed of a high-speed train, in terms of determining total trip length.
Finally, even taking external costs into account, air costs much less than rail in a place as dense as California. Let's turn it over to David Levinson, David Gillen, Adib Kanafani and Jean-Michel Mathieu from UC-Berkeley [correction--the paper was posted in a UC-Berkeley series. Levinson is from the University of Minnesota]:
The Full Cost of Intercity Transportation Page ES-1 This study evaluates
the full cost of three modes of intercity transportation: air, highway, and high
speed rail. The evaluation is done within the context of the California Corridor,
connecting the Los Angeles Basin and the San Francisco Bay Area. The purpose
of evaluating full cost is to compare the economic implications of investment in,
or expansion of, any of these three modes. The scope of the analysis is full
transportation cost. Full transportation costs includes external, or social cost,
in addition to the internal costs of construction, operation and maintenance. In
this study we include estimates of four types of external, social costs: accidents,
congestion, noise, and air pollution. The 677 kilometer corridor for which these
estimates are computed represents one of the alignments of a proposed high
speed rail system between Los Angeles and San Francisco. The methodology
used is to construct cost functions that relate costs to levels of output, as measured by passenger-kms. or vehicle-kms.
Different types of costs are estimated as permitted by available data. These include short run costs, in which the physical capacity is held fixed; and long run functions in which capacity is allowed to expand to meet higher levels of demand. Average and marginal costs are computed for highway and for air transportation. But given the absence of high speed rail systems in California only average costs are estimated. The highway and air cost models are developed from basic principles and are estimated
with actual data and system design characteristics observed in the California
corridor. Rail costs are estimated with models that have been adapted from
estimates for the French high speed rail system, the TGV, using available data
for their estimation. Based on the results summarized in Chapter 7 and shown
in Table 7.1, we find that the full cost of air transportation for the California
Corridor ($0.1315 per passenger-kilometer traveled (pkt)) is significantly less
costly than the other two modes. The full cost of high speed rail and highway
transportation cost approximately the same; rail costs $0.2350/pkt and highway
costs $0.2302/pkt. The internal, or private, monetary costs comprising
infrastructure, carrier, and vehicle operating costs are clearly highest for rail
($0.19/pkt), followed by air ($0.11/pkt) and then highway ($0.10/pkt). And as
is to be expected, user time costs are highest for the slowest mode, the highway
system, followed by rail and then air. Adding user travel time costs to the
monetary costs results in the total internal system costs per passenger-km. of
$0.124 for air; $0.233 for rail; and $0.198 for highway.
In other words, if we disregard external costs then we find that high speed rail is nearly twice as costly as air and that the highway is not far behind. However, if we look at social costs alone – congestion, air pollution, noise, and accidents – we find that high speed rail is clearly less costly than the other modes. In this research the only measurable social cost of high speed rail is that of noise, which at $0.002/pkt, is
significantly lower than that of air at $0.0043/pkt and highway at $0.0045/pkt.
Highway transportation, on the other hand, has a relatively high cost in terms
of air pollution and accidents, two externalities which are virtually absent in
high speed rail. In this study, we consider that the pollution resulting from the
electric power generation used to drive a train is to be allocated to the energy,
and not the transportation sector. Thus, any pollution externality associated
with high speed rail should be already internalized in a higher price for electricity.
Similarly, a 100% safe system, such as high speed rail, implies higher capital
costs due to construction of grade separations, more intelligent systems, etc...
Hence, the avoidance of accidents by high speed trains is not “free”. Therefore,
high speed rail, while more costly than highway transportation in terms of internal
costs, primarily due to its high capital cost, is significantly less costly than
highway in terms of social costs. This comparison is illustrated in the following
figure, where full costs are broken down into three categories: internal, travel
time, and external.
Note that the full cost of rail (.23/pkt) is considerably more than air (.13/pkt) even though any pollution created by trains is attributed to the power plant that provides the electricity, rather than the train itself.
A couple of other points. I have yet to meet a transportation economist (and I talk to a fair number) who is thrilled by high-speed rail as a technology. John Kain was among the most rigorous and influential transportation economist of the past 50 years, and he was very skeptical about rail. I also think that we yet again have evidence that we don't come even close to internalizing the social costs of automobiles, but I see no political will for really reducing our dependence on the auto, in part because most people love their cars (this is hardly unique to America). High speed rail also seems to me to be a way to redistribute income from lower income Americans to higher income Americans, because lower-income Americans will choose Southwest Airlines (which will be cheaper) when they need to travel from one city to another.
Finally, I see that when Ed Glaeser expressed skepticism about high speed rail, he was accused of being a "hack," so I guess I will join his company. But while Paul Krugman is indeed much smarter than Robert Samuelson, I would have a very hard time choosing (not that I would want to) between Glaeser and Krugman.
Sunday, August 23, 2015
Why I remain a New England New Stater 4 - Cockington Green
Note to readers: This post is one in a series using personal examples to illustrate why I continue to support both agitation for New England self-government and self-government itself. Agitation, because its very existence forces forces the Sydney Government to consider New England interests. Self-government, because there are some things that we cannot achieve without this.
When I was chair of Tourism Armidale, we set ourselves the target of doubling visitor spend to the city and surrounding regions. To do this, we needed to increase visitor numbers and the amount that people spent while visiting. Increasing the average length of stay was critical to the second.
During my time as chair there were a number of examples that I could use as illustrations in this series. This post deals with one, visitor statistics.
Effective planning starts with data about the current position. While out core focus was on the domestic Australian marketplace, we were also interested in international visitors. Here we found almost no usable information at all. The only New England data available was aggregated data on the Hunter and Coffs Habour.
When we investigated this, we found that the international visitor data was based on surveys and that, as part of this, each state or territory was allowed to nominate (from memory) twelve attractions for inclusion in the survey. New England got two of the twelve.
By contrast, Cockington Green (a miniature village in the ACT) was identified as an attraction in its own right. So we had very little information for an entire region, while the ACT obtained information on a relatively small local attraction.
There was no way to overcome this problem other than paying for our own survey, something that we could not afford as a community organisation. Any additional New England inclusions in the exiting system required a Sydney attraction to be dropped, and that was not going to happen.
This type of problem was replicated time and time again during my time as chair and still holds today. Clearly this is a case where self-government would have been a major help since the state of New England would have had its own section in the survey, including twelve attractions.
Saturday, August 22, 2015
Dhaka's getting worse
Students are protesting continuing military rule in Bangladesh. The military took power last January, allegedly in order to prepare the country for unrigged elections. Alas, this has not happened. http://news.bbc.co.uk/2/hi/south_asia/6958206.stm
When I visited Dhaka in 2004, it was a place of unspeakable poverty, and according to Transparency International, had among the world's worst corruption. But so far as I could tell, people could move, speak and organize reasonably freely. The press was certainly vigorous and regularly criticized the government. It was hardly a paragon of human rights. To me, human rights include the right to have enough to eat and the right of all children to go to school. But among all the world's poor countries, its human rights record was not too bad.
Still, I left Dhaka thinking that life would get better there. It has actually shown itself capable of competing in the textile business in the absence of the multifibre agreement. The people there were also remarkably gracious. I thought there was a chance for corruption to be reduced, and for the middle-class to grow. I hope that I will someday be proved correct, but today I don't have a lot of hope.
When I visited Dhaka in 2004, it was a place of unspeakable poverty, and according to Transparency International, had among the world's worst corruption. But so far as I could tell, people could move, speak and organize reasonably freely. The press was certainly vigorous and regularly criticized the government. It was hardly a paragon of human rights. To me, human rights include the right to have enough to eat and the right of all children to go to school. But among all the world's poor countries, its human rights record was not too bad.
Still, I left Dhaka thinking that life would get better there. It has actually shown itself capable of competing in the textile business in the absence of the multifibre agreement. The people there were also remarkably gracious. I thought there was a chance for corruption to be reduced, and for the middle-class to grow. I hope that I will someday be proved correct, but today I don't have a lot of hope.
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