Mark Thoma points us to Ed Glaeser on how Cities are treated Unfairly

Mark posts Ed's comments here.

Ed (with whom I often disagree on politics) is completely on the mark here. The question is, then, what to do about it? The core problems, as Ed sees it, are that driving is heavily subsidized, and that central cities are disproportionately responsible for providing services for the poor.

Solving the driving problem is not, in principle, difficult. Governments could use taxes and fees to internalize the cost of driving. Economists across the ideological spectrum agree that Pigou taxes (such as gasoline and carbon taxes) and congestion pricing of roads is a good idea. Politicians claim that people would rebel against such policies, but they have been implemented and are popular in Singapore and London. Michael Bloomberg would be willing to put such policies in place in New York, but he has not been able to get the permission of the New York State Legislature to do so. Washington, DC, which has to serve more workers per capita than any other large American city, should be allowed to put in place a commuter tax, but Congress forbids it from doing so. Funds from such fees and taxes could go to creating better transit.

The government services problem is more difficult. It might be appealing to set up metropolitan government structures, such as they have for Canadian cities, so that suburbs cannot use zoning to eliminate affordable housing and thus shirk their responsibilities to the poor. Toronto long ago merged with its suburbs, and it is a very successful city: economically dynamic and culturally vibrant.

But metropolitan government creates problems too. First, there is something to be said for having a myriad of municipalities compete with each other: such competition promotes efficiency and variety. For instance, here in the Washington area, there is a rich variety of suburbs, from urban places with town centers (such as Bethesda and Arlington) to places with large lots and large houses (such as Potomac). I like the former sort of places, but not the latter; there are people whose tastes are the opposite of mine. At the same time, when mayors and city councils are competing for tax bases, they have an incentive to do their job well.

Perhaps the best method for helping central cities is a shared revenue system whereby they get a foundation amount of revenue from an entity capable of redistribution (such as a state) but then pay their own way at the margin. The foundation amount should not just take into account differences in taxable land per capita (it is often lower in central cities than it is in suburbs), but also differences in required service provision.

A great subprime paper from Sufi and Mian

You can download it here.

The paper shows that places that had high mortgage rejection rates in the middle 1990s had higher than average price increase in the first half of this decade. The reason: the development of subprime enabled those who were preciously shut out of the housing market to enter the housing market. An important inference: looser credit standards got capitalized into house prices. This is an important lesson for the development of mortgage finance around the world: liberalizing credit not only increases the ability of people to buy houses, it makes houses more expensive.

Yet another study I wish I could do

I was listening to rap while driving down the 210 on Saturday. I don't listen to rap very often, but when I do, it is always while I am in the car. I notice that something always seems to happen when I do--my speed gets faster--sometimes much faster--and I need to slow down (because I do not wish to incriminate myself with the CHP, I will not get any more specific than that). On the other hand, when I listen to, say, Winton Marsalis, I seem to drive more slowly. I have noticed no clear pattern when I listen to news or classical.

So the study is--do people drive different speeds depending on what they are listening to in the car? It would be fun to test.

I Had a Very Nice Day at the Central Bank of Peru

The staff there are very smart and nice. I learned a number of interesting things: among them, the Central Bank invests in only sovereign and "agency" securities. I asked whether they would invest in a AAA corporate bond, and I was told no. Hence Fannie Mae and Freddie Mac, which do not have standalone AAA ratings, are preferred investments to, say, GE.

All of this makes it difficult for me to understand a quote from Daniel Mudd, CEO of Fannie Mae, in a Michelle Singletary story in the Washington Post recently. The relevant paragraphs are:

I

n an effort to help lower rates for borrowers needing jumbo loans, the recent economic stimulus bill included a provision to allow Fannie Mae and Freddie Mac to buy mortgages above the $417,000 limit.

The new jumbo loan limits won't be the same for all areas. The limits will vary but can't be more than $729,750.

Many jumbo loan holders are certainly anxious to know if rates will fall soon. However, Mudd wasn't sure that many homeowners with jumbo loans would actually see lower rates anytime in the near future.

"There will be some benefit," Mudd said. "How much? I don't know."

Mudd questioned whether investors would buy bundles of jumbo loans. Given the current mortgage crisis, investors might fear that these larger loans would be more risky, he said.

I am guessing that the reason that the Central Bank of Peru buys Fannie Mae notes is that the company has special status. I have gotten grief from many of my friends over the years because I have defended this status on the grounds that it is important to have the companies provide liquidity in times of mortgage market stress. If Mudd is arguing that his company is limited in its ability to restore liquidity to a rather important segment of the mortgage market (basically the entire East and West Coasts), one begins to wonder about the utility of his company's special status.