Austin Contrarian

Randal O'Toole reviews The Gated City

Here:

Didn’t we read this book already? Only last time it was called The Triumph of the City and it was written by Edward Glaeser, a fine economist whose view of cities is slightly shaded by the fact that he grew up in Manhattan.  Avent’s bio doesn’t say whether he grew up in New York [AC: Raleigh, NC], but he did go to school in London and currently lives in Washington.  I can’t help but feel he is another city boy who loves cities so much he wants to impose them on everyone else.

The Antiplanner would never step into another city again if I didn’t have to as a part of my work.  But I don’t think everyone would be better off living my lifestyle; I just think people ought to have a choice.  Avent’s book simply stimulates the smart-growth advocates who want to impose all sorts of policies on urbanites and suburbanites to force them to live in denser communities.

I infer from this that (i) O'Toole didn't read the book; (ii) he didn't read the book carefully, or (iii) he did read the book carefully but is misrepresenting the conclusion.  Ryan does not advocate any coercive policies in The Gated City.  He asks that the housing market be allowed to function like it's supposed to:   the market should be allowed to supply more housing when and where there is demand for more housing which means -- gasp -- places should be allowed to grow denser when there is demand for it.  It's sad that it takes an economics-laden, research-intensive book to justify this principle, and even sadder that so many self-described libertarians denounce this principle, but such is the state of land-use policy in the United States today.

Like O'Toole, "I just think people ought to have a choice."  People do have different preferences.  Some people like dense, bustling, noisy places.  And some people -- including, by his own admission, O'Toole -- hate them.  The problem is that the people who hate cities try to impose their preference on the places where cities want to be. 

After all, only a small portion of even the densest metropolitan area is genuinely urban.  Most "city" dwellers actually live in places that are relatively sparesely populated.  This would still be true even if the law allowed the demand for urban places to be fully satiated, even in places like San Francisco and San Jose.  People who hate dense environments have and will always have thousands of suburbs and small towns to choose from.  If you don't like dense places, don't live in dense or densifying places. 

The libertarian position accordingly ought to be that we should allow the market to provide density where and when people want it; the people who don't like that particular product can buy a different product.  That occasionally might require a density-hating libertarian to accept change to his own neighborhood.  It occasionally might require him to move to another neighborhood if he finds the change too uncongenial.  But libertarians are supposed to embrace dynamic markets.  They deride people who fight market-driven change as "statists."   Don't preach creative destruction for me but not for thee.

The view that we should accommodate density ought to be the progressive position, too.  Allowing housing to keep up with demand keeps home prices low, which certainly is more equitable and egalitarian than propping them up.  Allowing housing to keep up with demand lets people move freely from low-opportunity cities to high-opportunity cities.  Allowing housing to keep up with demand facilitates the density necessary to support transit, preserves open space on the city's periphery, and probably reduces VMT and the other things that environmentalists should care about.  Fighting to preserve a neighborhood just because you happen to live there and like it the way it is is not only statist, it's selfish, even if you can't identify the specific people who will be hurt.

I've always thought that the libertarian position and the progressive position on land-use policy ought to be approximately the same.  Thus it is not surprising per se that so many "libertarians" and "progressives" agree on land-use policy.  What is strange is that so many "libertarians" and "progressives" agree because the libertarians turn into command-and-control statists  and the progressives into regressive elitists.  

The Gated City

If you generally agree with me that anti-density restrictions hurt cities, you should read The Gated City by The Economist's Ryan Avent. If you generally disagree with me that anti-density restrictions hurt cities, you should read The Gated City to see why you are wrong.

Ryan's central thesis is that tight growth restrictions in the highly-productive coastal markets have inflated housing prices there, driving people to less productive but cheaper parts of the country.  Local zoning decisions, when aggregated, reduce innovation, dampen productivity and sap our wealth.  Micro decisions have macro effects; there are trillion dollar bills on the sidewalk.

I've tried to make many of the same points here over the years, although with a particular focus on Austin:

• Wealthy cities are innovative cities.
• Density promotes innovation.
• Density increases productivity.
• Dense concentrations of people allow richer, deeper, more varied markets.
• Anti-density regulations pushed by NIMBYs drive up home prices in high-demand cities.
• Anti-density regulations pushed by NIMBYs are bad for the environment because they drive people from cities with mild climates to cities with hot climates, increasing average per capita energy use. 
• NIMBYism's root cause is homeowner risk aversion.

Ryan does not try to identify the one optimal density, or even claim that there is such a thing.  He doesn't argue that we all should live at New York or San Francisco densities.  Rather, he argues that cities benefit from rising density, whatever their baseline.  That's right. 

He's an eloquent writer who backs up his claims with academic studies.  I don't have any significant criticisms because I agree with him down the line.  I found a couple of nits to pick.  In the introduction, he states he has estimated that anti-density restrictions in the coastal markets have knocked 0.25 to 0.5% off GDP growth but didn't return to that point.  I would like to see more about this calculation.  Any discussion of rising demand for central cities should acknowledge the role of falling crime rates.  And he spends little space detailing the many ways cities restrict density.  Although it was not necessary to his argument, it would have been entertaining to read about some of San Francisco's more absurd regulations. 

The Gated City is a Kindle single but I understand it can be downloaded to your computer or phone even if you do not own a Kindle.  It is short.  It is half the price of a venti latte at Starbuck's.  Buy it.  Read it.

P.S.  When discussing density, Ryan usually used weighted density rather than standard density, and was kind enough to throw me a cite.

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.

Walmart will be just fine

A common meme around the internets is that high gas prices will  spell the end of Walmart sooner or later.   Expensive fuel will kill Walmart's business model of importing cheap Chinese goods on fuel-guzzling container ships and then hauling them all over the country on Walmart trucks.

And according to this Bloomburg review of $20 per Gallon (which I haven't read), so does author Christopher Steiner, who imagines how life will change at each $2 jump in gas prices:

At $6 a gallon, Americans will embrace diesel engines. At $8, many airlines will shut down, leaving Southwest Airlines Co. and JetBlue Airways Corp. as the dominant domestic carriers.

At $10, car ownership rates will plummet. At $12, exurbs will start becoming ghost towns. At $14, Wal-Mart Stores Inc. will die; its business model is built on cheap oil.

This a claim I frankly don't understand.  Walmart will do just as well -- or no more poorly than anyone else -- when gas prices climb to $10 or $12 or $14 per gallon.  Steiner and many others don't understand the Walmart model.  

The Walmart model is to ruthlessly minimize a function of product cost and transportation costs.  That is the model it has followed since its birth in the 1970s and its rapid expansion in the decades since.  Only recently (the last 10 or 12 years) has Walmart shopped in China for the vast quantities of goods it sells.  Walmart buys Chinese because it can get the goods to the United States, including the cost of freighting them over, at less than the cost of buying them in the United States.  Should labor prices rise in China, or bunker fuel become too expensive to run 1,000 ft container ships profitably, then Walmart will turn to other suppliers who can get its goods to the United States at the lowest possible cost.

And the new suppliers might very well be American producers.  If Youngstown Steel Tubing & Toasters becomes the low-cost maker of toasters, Walmart will buy its toasters there.  By the truckful.  It will carry them off by the truckful to one of its giant distribution centers, which will dispatch truckloads of toasters and coffee pots and other things to other distribution centers around the country.  And these in turn will stock the local stores and Sam's Clubs.

Because this is Walmart, Youngstown Steel Tubing & Toasters will quickly feel pressure to cut its prices.  Walmart will have helpful suggestions on how to do that.  Some good.  ("Couldn't you figure out how to use less packaging?) Some a little more sinister.  ("Your toaster springs maker sure has a fat contract.")  If Youngstown wants to be a long-term supplier, odds are its prices will go down.

Because this is Walmart, goods move from manufacturer to distribution center  to distribution center to store efficiently, more efficiently than any other retailer can manage.  Walmart is constantly looking for ways to squeeze waste out of its transportation costs.   For example, it redesigned the loading bays in its warehouses so outgoing trucks load on one side of the building and incoming trucks offload on the other, which sped up the turnaround time.

What fools people, I think, is the sheer number of Walmart trucks on the highway.  So many trucks mean so much fuel.  Walmart therefore must be vulnerable to a sustained spike in gas prices.

But every retailer depends on goods delivered via highway.  Some retailers (smaller ones, usually) have their goods delivered by a UPS truck (which perhaps took the goods off a UPS plane).  Some have their goods delivered -- by truck -- from a regional wholesaler, who restocks its supply of goods . . . by truck.  Unless that toy store has its toys handtrucked in by a bunch of elves from a shop around the corner, its toy shipments are moving by road.  Walmart uses the highway more efficiently.   And -- this is the killer -- Walmart does not have to deliver to 20,000 or 2,000 locations in a city, as UPS or a wholesaler might.  Walmart gets the goods to a regional distribution center which  gets them to the few dozen stores in the area.  All retailers have to worry about the "last mile" of transportation costs, but Walmart has fewer "last miles" to worry about.

If gas prices do become too high for truck-hauling, then Walmart can switch to rail more easily than anyone else.   It would be  easy for Walmart to build giant distribution systems near rail lines.  (Walmart could build its own railroads if it wanted.)  Walmart's system of moving huge loads of goods from one large center to another would mesh nicely with rail.

One last point:  If Walmart can indeed continue delivering the lowest-priced goods even after gas prices rise, then it will increase its market share.  Consumers will effectively be poorer becausethey will be spending a large percentage of their budgets on energy costs.  This will make them more price sensitive, and Walmart always benefits when customers get pickier about price.  That's why Walmart does well during recessions.  High gas prices thus won't kill Walmart; it might even thrive.

(Other reviews of Steiner's book at Infrastructurist and FuturePundit.)

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.)