Urban Returns

Is it really necessary for the federal government to introduce new market distortions?

For the reasons I just gave, I don't believe that our past subsidies to suburban development justify maintaining those investments.  End them and let the chips fall where they may.

But even if reasonable people can disagree about that, I see no argument for creating new subsidies.  But that is exactly what our federal government is about to do.

The FHA is a major player in the mortgage business.  It insures mortgages for home buyers who otherwise would not be able to get credit or scrape together a down payment; this allows some to buy homes with as little as 3.5% down.  Without the FHA guarantees, the mortgage market would be much smaller.  A few years ago, its share of the market was 2.7%.  This seemingly small share had an outsized effect by scooping up the biggest credit risks and reducing the risk for private mortgage insurers.  In any event, its share of the market has ballooned recently:  according to Friday's WSJ, its market share reached 23% in the second quarter of this year.

And now the FHA is about to adopt new rules explicitly encouraging home buyers to purchase single-family, detached housing in the suburbs rather than attached (condos) in urban cores:

Until now, almost any condo development could apply to FHA for “approved” status, therefore making FHA financing available in that development.  In addition, in developments that were not approved, “spot approvals” were sometimes available for individual units.  (The lender applied for an approval for the unit you wanted to buy, in spite of the development not being approved).

Following are the new guidelines:  (This is not pretty, so prepare yourself)

1. There will be NO more spot approvals.

2. All development not considered primarily residential are out.  For instance, a development with more than 25% of the total floor area dedicated to commercial business use is out.

3. Noise issues is a new concern, so any development within 1,000 feet of a highway, freeway, or heavily travelled road, 3,000 feet of a railroad, 1 mile of an airport, or 5 miles of a military airfield will become ineligible for approval.

4. If the property has an “unobstructed view , or is located within 2000 feet of any facility handling or storing explosive or fire prone materials, it is not insurable - we're not talking just fireworks factories here.  A gas station 2 blocks away can disqualify this development.

5. Any property located within 3000 feet of a dump, landfill, or superfund site, is ineligible.

6. No more than 10% of the properties can be owned by a single investor, including builders or developers who are renting out or have not yet sold vacant units.  For 2-3 unit developments, no one can own more than one unit.

7. No more than 15% of the homeowners can be more than 30 days late on their homeowner dues.

8. For new developments, at least 50% of the units must be sold prior to applying for FHA approval (valid presales include those with purchase agreement and lender validation of an approved loan in process)

9. A minimum of 50% of the units must be owner occupied or sold to owners who intend to occupy as their principal residence.

10. Projects in designated wetland and flood zones will not qualify.

11. All current condominium project approvals will be invalid (with the exception of projects approved on or after October 1, 2008) and projects must be re-approved under the new options available.  Going forward, all projects will require recertification every two years.

Perhaps most insidiously, the FHA will no longer insure more than 30% of the units in a single condominium development.

I understand that the FHA has been taking large losses on its guarantees.  I also understand that condominiums are riskier to insure than single-family homes.  Some of these new regulations seem reasonable -- it's probably a bad idea to invest in a condominium when the condo association lacks the resources to pay for upkeep.  Higher risks justify higher premiums, too.

But these new regulations seem purposely designed to push new homeowners out of dense, urban areas to the suburbs.  They exclude many mixed-use developments (#2).  In a central city, it is hard to find a condominium not within 1,000 feet of a highway, freeway, or heavily travelled road, 3,000 feet of a railroad, or one mile from an airport (#3).  Allowing developers to tap into FHA guarantees for entire single-family subdivisions but only 30% of condominium units naturally will encourage developers to shift to single-family subdivisions.  These new regulations are fundamentally anti-urban.  

Even if it is somehow possible to defend our existing scheme of suburban subsidies, is it really possible to defend introducing new market distortions?   

(Cross-posted at Austin Contrarian; comment there.)

Path dependence

Ryan Avent has had some back and forth with Tyler Cowen and Will Wilkinson over roads and rail.  Tyler and Will acknowledge that, yes, our reliance on roads rather than rail has been influenced by long-standing government subsidies.  But by now we have sunk so much into roads, and have built up so much road infrastructure, that the marginal cost of adding to our road network is much lower than creating a viable rail network from scratch.  In other words, our past investments have had a lock-in effect, and there's no wishing it away.  

Ryan responds that Tyler and Will are committing the "sunk costs" fallacy, but I'm not sure that's right.  Past investments matter a lot because they have generated network externalities.   One million dollars spent extending an already extensive network is often worth more than one million sunk to build a network from scratch.  

But Ryan is right that past investments in suburban infrastructure do not require us continue throwing up barriers to denser developments:  

In practice, the US is far from done building.  Tens of millions of new homes will be built in the coming decades.  Hundreds of billions of dollars will be spent on transportation infrastructure.  The current built environment has, as a result of decades of government policy, taken on a rather suburban, auto-centric tilt.  So what?  No one is suggesting that we tear down all of that and replace it with something entirely new.  I, and others, are suggesting that making it easier (or, you know, legal) to build in a denser, more walkable fashion would be advantageous.  Similarly, given the burden of maintaining such a large and costly road infrastructure, it might be wise to devote a larger share of dollars for new construction to substitute technologies.

And bear in mind that a technology's lock on the market is not always as secure as it seems.  A small initial advantage allowed VHS to dominate the videotape market, all but squeezing out Betamax.  But it did not save VHS from the DVD, even though a vast infrastructure had been created to support VHS:  video players, Blockbuster, video cameras and a complete library of titles.  All wiped out by a superior technology.   

Now imagine the government had subsidized VHS to help it fend off insurgencies from new technologies.  At best, many of us would still be stuck with an inferior technology.  At worst, there would be no DVD.  The government should let these things work themselves out in the marketplace; that's the true libertarian position.

All of this means that the government should let denser development happen.  Stop the  subsidies and tax policies -- including subsidies to new highways -- that encourage shifts to the suburbs.  There are perfectly sound economic arguments for investing in rail lines in some situations; make those investments.  Many home buyers, probably most, will continue to settle in the 'burbs.   But we can't anticipate shifts in technology.  Nor shifts in preferences or energy costs.  We think we can.  But we really, really can't.   If the housing market would continue down today's path anyway, fine, but the government shouldn't lead it by the nose.  

(Cross-posted at Austin Contrarian.  Comment there.)

Yet another entry about high-speed rail

The national bloggers continue to debate the feasibility of a high-speed rail link between Houston and Dallas.  Up to bat:  Megan McArdle.

I think reasonable people can disagree about the feasibility of HSR, especially since we're just trading  back-of-the-envelope calculations of HSR's costs and benefits.  Although I've argued HSR opponents underestimate the benefits to business-class passengers, in the interest of fair and balanced coverage, let me point to Richard Green's discussion of a more rigorous effort to tote up the costs and benefits.  The authors of that particular study give HSR the thumbs down.

And while I'm in a contrary mood, let me suggest one other potential cost of a Houston-Dallas line.

Everyone agrees that in order for such a line to succeed, it must draw airline passengers to rail.  Lots and lots of airline passengers.  If the airlines lose, say, half of their Houston-to-Dallas traffic, they will have to cut the number of flights between Houston and Dallas.  Obviously.  Many consider that a feature, not a bug.

But what about the effect on other routes?  American is able to offer service from Dallas to virtually every American city because of the huge number of passengers flowing into DFW every day.  Cutting that inflow will reduce the economies of scale that support so many flights.  Ditto with Southwest out of Hobby.    Houston is a huge feeder for DFW, if the number of Bush-to-DFW flights is any indication.  Similarly, Love is a huge feeder for Hobby, judging by the 24+ daily flights.  Networks can be delicate things.  Shrinking one route could sicken other segments. 

HSR could very well make it easier to get from Houston to Dallas and vice versa.  But it could very well make it harder to get anywhere else.   

Cross-posted at Austin Contrarian; comment there.

The High Cost of Free Parking

I'm reading The Tome.  My favorite lines so far:

When planners set minimum parking requirements, they do not define demand and supply the way economists do.   For example, economists do not define the demand for food as the peak quantity of food consumed at free buffets where overweight diners eat until the last bite has zero utility.  Nor do economists, when asked for policy prescriptions, recommend that restaurants should be required to supply at least this quantity of free food no matter how much it costs.   Yet planners do define parking demand as the peak number of spaces occupied at sites with free parking, and cities do require developers to supply at least this number of parking spots, whatever the cost.

Cross-posted at Austin Contrarian.

Links

1.   Frumination works out the highway and parking capacity Manhattan would need to replace its morning rush hour subway capacity:

At best, it would take 167 inbound lanes, or 84 copies of the Queens Midtown Tunnel, to carry what the NYC Subway carries over 22 inbound tracks through 12 tunnels and 2 (partial) bridges. At worst, 200 new copies of 5th Avenue. Somewhere in the middle would be 67 West Side Highways or 76 Brooklyn Bridges. And this neglects the Long Island Railroad, Metro North, NJ Transit, and PATH systems entirely.

Of course, at 325 square feet per parking space, all these cars would need over 3.8 square miles of space to park, about 3 times the size of Central Park. At that point, who would want to go to Manhattan anyway?

See the neat map at the bottom of his entry showing how much land Manhattan would have to devote to parking.  Commuters of course would abandon Manhattan long before things reached this state.  But Manhattan would not be Manhattan in either case.  

Pointer from a reader.

(NB: Tyler Cowen thought this was interesting enough for a link . . . to Kottke, who merely quoted a snippet of Frumination's entry.  Jerk.  (Cowen, not Kottke.))

2.  A Detroit neighborhood reverts to prairie (images from DetroitYES):

(H/t the Urbanophile.)

3.  Professor Chris Nelson, Director of the Metropolitan Research Center at the University of Utah, projects  that the homeownership rate will fall to 63.5% by 2020, sparking intense demand for rban infill and redevelopment.   (Via Calculated Risk; no link to paper available.)

I think our homeownership rate is too high, a result of tax subsidies and land-use policies.  It ought to drop.  But it won't drop by several percent.   Richard Green, a professor at the Marshall School of Business at the University of Southern California (and no conservative), fisks Nelson's study. 

The new parking doctrine

For self-declared free-marketeers, we Americans have developed some deeply socialistic tastes.  We simply can't abide rationing some things by price.  Water.  Roads.  Parking.  Roads especially, but especially parking.

San Francisco's Livable City has put together a nice chart comparing standard American parking doctrine to a more market-oriented, or at least economically rational, doctrine:

Here's a fun exercise.  Go through the chart and replace "parking" with "roads."  The chart remains just as valid.   

Superficially, there is one significant difference between roads and parking:  government is the exclusive supplier of roads (except for subdivision streets); private developers supply most parking.  The market must be "choosing" the efficient amount of parking.  But this difference is an illusion, as everyone understands by now.  The government uses its own money to build too many roads or, more commonly, roads with too much capacity.  It uses minimum parking requirements to force private developers to build too much parking.  In fact, since it costs the government much more to build excess road capacity than to mandate excess parking capacity,  we should expect a greater oversupply of parking than of road capacity.

(Cross-post and comments at Austin Contrarian.)

Sorting

I've written recently about Glaeser and Resseger's research showing that workers in skilled cities tend to become more productive as their cities grow while workers in unskilled cities do not.   I've also written about Abel et al.'s paper showing that while workers in all cities tend to become more productive as their cities grow denser, workers in skilled cities are especially likely to benefit.  The latter  receive, on average, three times the productivity gains of workers in the least skilled cities.  Growth and densification are good if yours is a highly skilled city.  

But the Glaeser and Abel papers also raise another possibility:  perhaps skilled cities are better off keeping out the unskilled than growing without bound.   

This is arguably an implication of their work. (And one I don't like, by the way.)   Both Glaeser and Abel define highly skilled cities to be those with high percentages of college-educated workers.  The higher the ratio of B.A.s to high school grads, the more skilled the city under their definition -- and the more the workers benefit as the city grows.

One way to keep a high ratio of skilled to unskilled is to price out the unskilled.  The most effective way to price unskilled workers out of a city is to keep the cost of housing high.  And, indeed, the highly-skilled cities on the coasts are adept at (and notorious for) using rigid land-use regulations to inflate home prices.  (Or were until recently; more on that later.)   The incumbent homeowners in these cities of course benefit from a tight housing supply since it raises the value of their properties.  But perhaps their skilled workers benefit too.

I speculated about this  last October without the benefit of Glaeser ir Abel's research:

Perhaps the elites in the superstar cities sense it is better to surround themselves with a uniformly high-quality workforce.  They want to spend their time with other elites; letting in lots of less-skilled workers would introduce so much static, just as if Harvard were to throw open its doors to anyone with a half-decent high school transcript.  In other words, an influx of less-skilled workers might dilute the experience for the high-skilled.

I got my undergraduate degree from Ole Miss and my law degree from Yale.   I studied harder at Ole Miss, took harder classes and spent a lot more time with my professors.  I thought law school was mostly boring and had a suburban home and the premium cable channels by my third year.  But I probably got a better education at Yale than Ole Miss merely by hanging around a bunch of people who were smarter than me.  There were economists, physicians, mathematicians, political scientists, a Broadway actor, an Olympic miler  and, of course, a bunch of smart new college graduates  from all over the country (but mostly from the Ivy League, Standford and Berkeley.).  It was a small class of 175.  It was impossible not to keep up with new ideas or trends because someone you bumped into would know about them.  I wasn't paying a gazillion dollars for the law school classes, I was paying for the spillovers.  It was a fair price.

The housing markets in  LA, San Francisco and New York function as giant sorting machines.  By setting home prices so high, they weed out all but the most skilled -- except for the class of relatively unskilled who are supported by price controls or subsidies.  They're using the  Ivy League model.

So are they better off?  Yes, clearly, if they can shunt the less skilled elsewhere and  continue to grow and densify.  But it's hard to do both.  High prices, in fact, require that the housing supply be kept tight  in order for prices to stay high.  Otherwise, the new supply of housing would drop home prices and the riff-raff (from their perspective) would come flooding back in.  But perhaps merely increasing the density of skilled workers will yield the productivity gains yielded by  growth and densification.  Their motto could be, "We get smarter, not bigger."

I think this is probably wrong, though.  What matters is being close to other people with the same skill set; that's where the knowledge and productivity spills occur.  A software developer benefits from having a lot of other smart software developers around; a musician benefits from having a lot of other good musicians around.  Adding more software developers or musicians who aren't quite as skilled shouldn't dilute this benefit because we city-dwellers largely control whom we interact with.  Firms, in fact, segregate themselves by quality all the time.  Deepening the labor pool simply can't hurt.  I think cities like San Francisco and New York would be even more productive if they loosened their growth restrictions and allowed in more people.

And even if were true that the San Francisco model can achieve greater productivity without growth, there's always the risk that its  sorting machine might break. To wit, a housing market collapse.  Skilled workers cash out what they can and move elsewhere.  Lower home prices attract the less-skilled who had been priced out of the market.  A political and regulatory climate makes the city less hospitable entrepreneurs, who benefit from cheap space and light regulation.

It will be interesting to see what happens to productivity in these wealthy, slow-growth cities as the recession wears on.  My guess is that they will have to begin growing vigorously again if they want to recapture the productivity they had at the peak of the housing boom.

Environmentalists should advocate water pricing, not conservation campaigns

Environment Texas is lobbying City Council to increase its water conservation budget by one-third.  We're in a severe drought, you know.  Just like we were last year.

We're also in a recession.  The city has no spare change lying around.  Why, it's even offering an on-line budget "simulator" so ordinary citizens can see first-hand the hard trade-offs the city must make.

If only there were a way to encourage deeper conservation during this parching drought while simultaneously protecting our city budget.  If only there were some way to make our good residents understand just how precious water is right now without another million-dollar advertising campaign by the city.

There is, of course.  Just raise the price.  I assure you -- no, I swear to you -- that there is a price that will bring water use down to the necessary level.  As a bonus, the city will garner more revenue that it can use to plug its budget gap.  As a bonus on the bonus, the city can dispense with its costly conservation and rebate programs and use that money to plug the budget gap.  And as a triple bonus, Austin's residents can get out from under the stringent water restrictions.  They will be able to water their yards when they want -- but they will use a lot less water, if they choose to water at all.

I understand the political opposition to raising prices, even if I despise it.  The suburban lawn-watering lobby is a powerful player in this town.  But I don't understand why environmentalists refuse to get on board.

I know that some of them do support price increases and some of them helped push through price increases last year.  But those price increases were not nearly high enough and, anyway, prices need to be flexible.  We should charge high prices during a drought and lower prices when water is plentiful.  I haven't seen any environmentalists pushing that pricing scheme.

But the real problem with the environmentalists' approach is their willingness to buy both boots and suspenders.  Even those who want to raise prices also want to impose watering restrictions and pay gobs of money for conservation programs.  If we price water right, these last two are unnecessary.  In fact, they are a dead-weight loss.  They make us collectively poorer without providing any corresponding cost-justified gain.

So why don't environmentalists support pure water pricing?  I think it is the kumbaya spirit that animates many environmental groups.  A kind of "we're all in this together" mentality.  And a tinge of moralizing, which makes them more comfortable with imposing a code of conduct like the city's watering restrictions and issuing solemn commandments such as, "Thou shalt not waste water."

I'm not mocking them.  Well, I sort of am, but I don't mean to be mean-spirited.   Environmentalists' collective action and earnest commitment are valuable commodities in a society that often seems determined to squander its natural resources as quickly as possible.  But communitarianism is very, very expensive.

(Cross-posted at Austin Contrarian.  Comment there.)

Back and forth

It never surprises me to hear suburban commuters bash congestion tolls.  But I am surprised when a sophisticated transit blogger bashes them.  Yonah Freemark, who writes the very good the transport politic, is the guilty party.  He and Ryan Avent have been going back and forth and back again.  

Yonah's objection is equity:

A huge percentage of the U.S. population pays far too much for transportation; to put it simply, most working adults have no choice other than to own a vehicle and often to drive it dozens of miles every day. Making driving more expensive is a great way to devastate the already impoverished.

It’s true, tolling highways would save “money, time, lives, and emissions.” But it would also sacrifice the mobility of a large segment of America, because the reduced congestion would be a result of the poor and the middle class choosing not to drive because of expense, not because of choices made by the wealthy.

He argues that our public transit systems are too underdeveloped in most places to cure this inequity.

Ryan responds with several good points, but I want to elaborate on why the regressivity argument leaves me cold.

First, congestion tolls are less regressive than toll opponents claims.   The low-income do pay tolls, which means they value the time savings more than the price of the toll.   Plenty of low-income drivers take the toll lanes on SR 91 in California, for example.  The reason many do is that they have little flexibility in their schedules.  They have to be at work or at the daycare center at a specific time.  To compensate for congestion, they must leave much earlier to guarantee a timely arrival.  They thus suffer two types of costs:  scheduling delays and travel delays.  (The value of scheduling delays is very hard to measure, which means that studies like the TTI report almost surely understate the cost of congestion.)  Affluent professionals often have more flexibility.

Second, tolls encourage a number of shifts.  Yes, shifts to transit, which seems to be Yonah's main concern, at least when the transit system is underdeveloped.  But they encourage other shifts, too.  Shifts to other routes and shifts to other times.   Commuters are the least likely to be nudged to other routes or times.  The most sensitive are those who use congested roads for local trips.  Take the soccer mom who hops in the SUV and enters a congested highway to get to the grocery store a mile down the road.  She imposes enormous costs on others.  Tolls make her internalize those costs and nudge her to use the local streets. 

Perhaps this is regressive.  But it doesn't evoke much sympathy from me.  A congestion toll is a charge for getting in everyone else's way.   Behind every claim of regressivity is the assumption that drivers are entitled to get in everyone else's way even when it is not worth all that much to them. 

And that leads to my last point.  The regressivity argument wouldn't move me even if it were true. This is one of those cases in which our desire for efficiency should trump our concern with regressivity.

Here's an apt analogy.  An amusement park owner decides to throw open the gate to all comers on a first-come, first-serve.  Naturally, a long line forms.  But this isn't a typical line where newcomers go to the back of the line.  No, in this queue, newcomers elbow their way to the front of the line and force everyone behind them to wait a little longer.  

Naturally, chaos ensues.  No one leaves for the park knowing how long it will take to get in.   There is "queue rage" and general aggravation.  The park owner loses business.  And many low-income parents find themselves worse off because they have a smaller window of free time and dislike the chaos and aggravation as much as anyone else.  (I've always thought it patronizing to assume that low-income drivers put such a low value on their time and aggravation.)

Now, in the real world, the queue would never work this way.  Those at the rear of the line would use informal sanctions (fist fights) to deter queue jumpers.  And, in fact, there would be only a short  line to get into the park in the first place because the owner would charge for admission.

But this is exactly the crazy system we use to ration highway access.  For whatever reason, our cultural norms have evolved to tolerate a free-for-all.  In almost every other situation we ration scarce goods using price.  Sure, that's regressive in the sense that the poor have less money to spend on things.  But we tolerate some regressivity elsewhere because we recognize that (1) the gains in efficiency outweigh the equity concerns; and (2) there are better ways to ensure an egalitarian distribution of wealth than creating artificial shortages, chaos and mayhem.

Regressivity is not the be all and end all.

Skilled cities II

While I'm in this nerdy mood, let me point to this paper by Jaison Abel, Ishita Dey and Todd Gabe:

We estimate a model of urban productivity in which the agglomeration effect of density is enhanced by a metropolitan area’s stock of human capital. Using new measures of output per worker for U.S. metropolitan areas along with two measures of density that account for different aspects of the spatial distribution of population, we find that a doubling of density increases productivity by 10 to 20 percent. Consistent with theories of learning and knowledge spillovers in cities, we demonstrate that the elasticity of average labor productivity with respect to density increases with human capital. Metropolitan areas with a human capital stock that is one standard deviation below the mean level realize around half of the average productivity gain, while doubling density in metropolitan areas with a human capital stock that is one standard deviation above the mean level yields productivity benefits that are about 1.5 times larger than average.

This is a little technical, so let me translate:   Cities tend to become more productive as they grow denser.   On average, a city's workforce becomes 10% more productive when the city doubles in density.   But that average obscures the importance of skills.   Less skilled cities benefit a lot less than skilled cities from densification.   In fact, skilled cities, on average, enjoy three times the productivity gain from denser growth than less skilled cities.   This is yet more evidence of the increasing returns and agglomeration benefits from density.

This is a nice complement to the Glaeser and Resseger paper.  Glaeser and Resseger found that workers in skilled cities become more productive as the city grows, while workers in unskilled cities do not.   Abel et al find that workers in skilled cities become more productive as the city grows denser; workers in unskilled cities, less so.

The authors also test their conclusions using a variant of weighted density. They find even greater productivity gains (20% on average) when a city doubles its weighted density.

The authors use a coarse form of weighted density.  They weight urbanized area density by county subdivisions.  But how you chop up a city matters when calculating weighted density.  In order to calculate weighted density, you first divide the city into a bunch of smaller regions.  You then assign each region's density a weight equal to its share of the populations.  In general, weighted density increases as you chop up the city into smaller regions.

I used census tracts for my weighted densities.  There are many more census tracts than county subdivisions.  I thus got a lot more stratification than they did -- e.g., their top weighted density was 19,000 ppsm, while mine was 33,000.  How you divide a city for calculating weighted density is somewhat arbitrary, but I think using census tracts makes more sense than county subdivisions, which are more or less arbitrary.  I suspect the authors would have found even greater returns to density had they weighted density by census tracts rather than by county subdivisions.  

H/t Richard Florida.