Austin Contrarian

Rethinking Federal Housing Policy

Ed Glaeser and Joseph Gyourko's e-book (pdf) on federal housing policy really is worth a read.  

Glaeser and Gyourko argue that federal housing policy wrongly treats every jurisdiction alike.  The country really has three different housing markets.

First, there are markets with high demand but elastic supply -- e.g., Houston and Atlanta.  Housing in these markets closely tracks the cost of construction.  Because developers cannot supply housing more cheaply than this over the long run, it makes no sense for the federal government to intervene directly in these markets -- there simply is no market failure.  (For the poor, Glaeser and Gyourko suggest outright transfers so they can buy more housing, or housing vouchers as a second-best solution). 

The second kind of market is the low-demand market -- Detroit, for instance --where housing can be had for less than the cost of construction.  It is silly to subsidize the construction of new housing in these places.

The third kind of market is the high-demand, inelastically-supplied market -- the West Coast, the Amtrak corridor in the northeast, and a few other markets in the country's interior.  These markets exhibit government-created market failures.  Tight zoning regulations in these markets combined with high demand have raised the cost of housing well above the cost of construction, sometimes by hundreds of thousands of dollars.  New construction permits amount to a tiny fraction of the housing stock.

The market failures in these jurisdictions endure because local governments have no incentive to increase the supply of new housing:  the benefits from new housing go mostly to non-residents, while the costs from polution and congestion -- not to mention the effect of new competition on housing prices -- fall on existing residents.  

Federal housing policy -- particularly the mortgage interest deduction -- has different effects depending on the market.  In elastically-supplied markets like Houston or low-demand markets like Detroit, the mortgage interest deduction increases consumer demand and stimulates the construction of more housing.

In high-demand, inelastically-supplied markets, though, the benefits of the mortgage interest deduction flow to existing homeowners.  The mortgage interest deduction paradoxically makes housing in these markets less affordable.   

Glaeser and Gyourko argue that federal housing policy ought to target the broken markets.   The goal, they suggest, should be to incentivize the high-demand, inelastically-supplied markets to allow more housing.

They propose capping the home mortgage interest deduction at $300,000 for households in these markets.  (They would phase out the deduction for current existing mortgages for equitable reasons.)  This cap would generate additional tax revenue.  The federal government would then refund that revenue to the local governments (via the states) provided the local governments made sufficient progress toward increasing their housing supply.  Glaeser and Gyourko essentially propose bribing local jurisdictions with their homeowners' tax dollars. 

Needless to say, I think this is a great idea.  Rich housing markets are becoming increasingly stratified by income.  The lower and middle classes are being run out of these markets by high home prices.  Their allegedly progressive citizenry, embarrassed by the increasing inequality, flail about for solutions.  But they won't allow the one thing that would improve affordability over the long-term.   

Incentivizing new development in these cities would benefit the rest of us, too.  The high-demand cities have high demand because they make their citizens more productive.  Restricting access to them creates a net welfare loss for the country as a whole.  

But Glaeser and Gyourko's proposal will be dead on arrival.   The costs of their proposals would fall on a small, clearly identifiable group -- wealthy homeowners in high-priced markets.  These homeowners would suffer a double-whammy, through the loss of their tax deductions and the loss of home value due to increased supply.  Everyone else would benefit, of course, but those benefits would be diffuse.  Local governments would benefit from the extra revenue, but local governments don't vote for senators or congressmen.  If this proposal were enacted, Barbara Boxer would hear the howls of Marin County homeowners from her seat on the Senate floor.  

Congestion pricing part 36: I'm not a loon

I've argued before that TxDOT screwed up by tolling State Highway 130 while leaving I-35 free.  TxDOT built SH 130 around Austin's eastern edge ostensibly to relieve congestion on I-35.  But by tolling SH 130 and leaving I-35 free, it guaranteed that SH 130 would be (relatively) lightly traveled, particularly since SH 130 is the longer route.  (Things could get better once TxDOT conencts the southern leg of SH 130 to I-35.)  It would have been smarter to toll I-35 and leave SH 130 free, using the money from the I-35 tolls to pay for SH 130 and other highway and mass transit improvements.

Some evidence that I'm not crazy:

Paying off construction is not a good argument for tolls (althouogh if demand is elastic enough the right toll will pay for the right amount of construction); regulating traffic flow is.  There's no good reason to have a toll on an empty stretch of new road that hasn't been paid off; there's plenty of reason to have one on a congested road that has been paid off.  Since roads are generally uncongested right after they're built and become more congested as they become older (it takes time for people to find out about new roads, learn their advantages, and then adjust where they live and work), the idea that tolls should be used to pay off a road's costruction cost leads to the worst possible allocation of resources:  high tolls at first that discourage trips that should be made, and no or low tolls later that encourage waiting that should not be done.  It's like taking a vile-tasting medicine when you're young and healthy, and stopping it when you get sick and it could help you.

This is from City Economics by Brendan O'Flaherty, a professor of urban economics at Columbia.  The entire textbook is written in this conversational style.  It's fun to read, and it's the only textbook I've ever read cover to cover.  (I admit that I enjoy books that confirm my preconceived opinions.)

The Gridlock Economy

In American suburbs, home owners are the voting majority; in cities, renters may be the crucial pressure bloc.  Local officials, wanting to keep voters happy, create more and more mechanisms to restrict development:  environmental impact reviews, architectural review boards, subdivision regulations, historic preservation districts, landmark commissions, building permit requirements, rent controls -- all part of the multilayered gauntlet of American land-use controls.  Think of each of these mechanisms as a phantom tollbooth along the road to real estate development.  Each tollbooth may have made sense on its own terms when initially enacted.  Collectively, however, regulatory layering adds up to gridlock with mind-boggling costs for society.

That's from The Gridlock Economy, by Columbia law professor Michael Heller.

Lots  of people are familiar with the "tragedy of the commons," in which a shared resource is overused because no single decision maker can exclude use by others. Examples are overfished oceans, overharvested lobster beds, and congested highways.  Heller analyzes the "anti-commons," in which a resource is underused because ownership is too fragmented.  When too many people have a veto, one of them is bound to exercise it.  Drug development, for example, is stymied by a thicket of patents on basic genetic research.

Land-use policy is rife with anti-commons.  Fragmented parcels of land are next to impossible to assemble for large redevelopment; the only existing solution is often the troubling exercise of eminent domain by the state.  Regulatory approvals are not technically property rights, but they have the same effect when highly fragmented; too many cooks spoil the broth.  (Heller calls these "BANANA republics" -- "build absolutely nothing anywhere near anyone.")

Heller also points out an often overlooked consequence of overregulating land-use markets.  By driving out the least sophisticated, small-scale developers, brambles of regulations make the markets more profitable for sophisticated developers:

Although they are bad for society as a whole, BANANA republics, like most forms of gridlock, offer profit opportunities for savvy investors -- in this case, regulatory arbitrageurs.  As the New York Times noted a few years ago, "Some of the largest publicly held real estate investment companies say they would rather own property in Boston than in Atlanta and Dallas.  Steven Roth, the chief executive of Vornado Realty Trust, says there is an easy way to explain this seeming paradox.  It is difficult to build in Boston where land is scarce, residents are vocal, and zoning disputes can last years.  The opposite is true in Atlanta and Dallas,  'Whenever it's almost impossible to add supply,' Mr. Roth said, "that's where I want to invest.'"

Big developers enjoy economies of scale that allow them to invest in regulatory expertise.  It's the local developers who suffer most from the regulatory gauntlet.

Marx on McMansions, and "No One Makes You Shop at Wal-Mart"

A house may be large or small; as long as the neighboring houses are likewise small, it satisfies all social requirement for a residence.  But let there arise next to the little house a palace, and the little house shrinks to a hut.  The little house now makes it clear that its inmate has no social position at all to maintain, or but a very insignificant one; and however high it may shoot up in the course of civilization, if the neighboring palace rises in equal or even in greater measure, the occupant of the relatively little house will always find himself more uncomfortable, more dissatisfied, more cramped within his four walls.

That's Marx from Wage Labour and Capital, as quoted in Tom Slee's No One Makes You Shop at Wal-Mart.  McMansions evidently were getting people worked up as far back as 1849.

By the way, if you want an enjoyable, leftist-ish critique of markets, I recommend Slee's book.  It's an attack on "MarketThink," his vaguely Orwellian term for the belief that markets and consumer choice always produce the best result.  (The title of the book is ironic -- the people who say such things are his targets.)  His main point is that everyone's choices are tangled together, so that each person's choice affects everyone else.  As a result, there's no guarantee that even perfectly rational individual choices will make you happy.

Slee sets up his share of straw men.  Still, his book is a clean, elegant exposition of different types of market failures.  Some of them are almost trite, such as the "tragedy of the commons"-type market failure that causes congested roads and littered parks.  Others are fresher.  When buyers can't get reliable information about product quality until they buy the product, low-quality products may drive high-quality products out of the marketplace.  This, he claims, explains why fast-food restaurants, with their predictable but mediocre food, drive higher-quality local restaurants out of business.  Network effects may force consumers to choose sub-optimal products -- e.g., business people use Microsoft Word because everyone else uses it, not because it is necessarily very good word processing software. 

Zoning and trade

I've been reading Don't Call It Sprawl: Metropolitan Structure in the 21st Century by economist William Bogart.  Despite its title, it's not really another ideological entry in the sprawl debate.  He uses techniques from trade theory to analyze zoning's impacts.

His basic point is this:  A city's neighborhoods trade with one another just like countries do.  The typical downtown imports labor and buildings, and exports, say, financial and legal services.  A bedroom community exports labor and imports services.

One of the effects of open trade is to encourage specialization by creating larger markets for services.  The larger markets make it feasible to offer more diverse services.  This is why big cities offer lots of diversity and small towns don't.  It's also why you find furniture stores clumped with other furniture stores:  an area that specializes in furniture "exports" can support a bunch of specialized niche stores. 

"Binding" zoning acts like a tariff on the import of labor and the factors of production -- mainly buildings.  (Zoning is binding when  (1) someone wants to build something that the zoning won't allow; and (2) the city won't change the zoning to allow it.)   By limiting the import of people and buildings, zoning limits a neighborhood's exports of goods and services.  In many ways, binding zoning acts like a tariff on exports.

Restricting exports from one neighborhood to the rest of the city is not costless.  Trade is inevitably shifted elsewhere -- perhaps to a place with fewer natural advantages.  And it stunts the economies of scale that  permit a rich offering of goods and services.

Another way of thinking about it is this:  Unless we want the city to be merely a collection of small towns, we need neighborhood commercial centers that serve the entire city.  This is the only way to get the specialization that makes a city more attractive (to some) than living in a small town.

Reading this book of course made me think of Northcross.  Despite RG4N's claims, the Northcross area is not "neighborhood" retail.  One day while waiting on a delayed flight, I totaled up the commercial and retail square footage in the Anderson/Burnet/Steck area.  I got nearly 2 million square feet without even counting all the little stuff.  This area is one of the city's main commercial and retail centers.

It is also the principle "exporter" of furniture to the rest of the city.  There are lots of small, specialty furniture stores in the area that would not exist without the Northcross area's agglomeration of furniture stores and other retail.  RG4N is effectively asking the City to impose export restrictions on this important trading center.  (What distinguishes this from most zoning cases is that RG4N is asking to impose new trade restrictions; usually, the neighbors are fighting the relaxation of existing trade restrictions.)

The trade perspective points up the conflict inherent in most zoning disputes.  If we consistently give in whenever local residents demand restrictions on trade, we cripple the diversity that makes the city a real city. 

Last Harvest

If you're following the Mueller development, take a look at Last Harvest by Witold Rybczynski.  It's about a "neotraditional development" in the Philadelphia exurbs.  Rybczynski is an architectual writer who teaches at Penn's School of Design.  In other words, he writes as someone who cares about good design.  He covers the developer's acquisition of the land, the first homeowners' move in, and the four years in between. 

The development, New Daleville, is a lot smaller than Mueller, and it's out in the middle of nowhere rather than in the middle of a city.  But it will give a sense of the problems that these Mueller-type developments face.  (You might want to skip the book if Catellus-bashing is a hobby you'd like to keep.)