Rent isn’t a four-letter word

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Inspired by the publication this week of NYU scholar Alain Bertaud‘s critical new book Order without Design: How Markets Shape Cities (MIT press), Sandy Ikeda‘s pre-book development series Culture of Congestion over at Market Urbanism, and London YIMBY, here is a note on housing reform.

Classical liberals see the economic solution to housing as relatively simple: increase supply to better meet demand. By contrast, the political economy of housing is almost intractably complex. The reason for this is that there are endless externalities associated with new housing: access to light, picturesque landscape, open space and uncongested roads just for starters. These gripes and grievances are the bread and butter of local politics. Unlike consumer product markets, housing cannot be disentangled from these social, political and legal controversies. A successful market-based housing policy must establish institutions that not only encourage housing supply growth but navigate around these problems while doing so.

Policy reform proposals that deliberately favour increasing owner-occupied single-family homes, as tends to be the focus among market liberals in the UK (and to some extent in the US), are currently self-defeating. As justified as they were in the past to achieve a more market-friendly political settlement, they are now a barrier to achieving plentiful, affordable housing. This is because every new homeowner becomes an entrenched interest, a potential opponent to subsequent housing development in their area. They impose more political externalities than renters. I propose we cut the link between support for home ownership and housing supply policies. This would free up policymaking to focus on expanding provision by all available market-compatible means.

This should include greater encouragement of institutional landlords, especially commercial enterprises. Commercial landlords have more incentive and capability to expand supply on estates that they own, while long-term renters (unlike homeowners) have an interest in keeping rental costs low. The lack of private firms dedicated to supplying housing in England compared to much of the rest of the world is startling and yet often overlooked even by friends of free enterprise.

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A quick rant on NY’s Excelsior Scholarship

Long Island Business News had a cover story last week: “Free for all?

And the answer is no.

NoL readers don’t need to be reminded that there ain’t no such thing as a free lunch. But I want to focus on the “for all” aspect. And the answer there is also no. This is a program that benefits the middle class and simply won’t be available for the poorest kids in the state.

There are a lot of different programs for paying for schooling costs, and I don’t want to get bogged down in specifics. So here’s (roughly) how this new program works: full time students whose family income is below (approximately) the 75th percentile get more money for school. That money goes away if they stop meeting those criteria.

This is not going to be helpful to poor students who don’t have to resources necessary to go to school full time. It sounds inclusive, but they might as well make the income requirement family income between the 60th and 75th percentile.

In the best case scenario, we might end up getting a positive return on this program (generating more tax revenues from more productive workers). But we still have to ask about what alternatives were possible.

Here are three problems with that outcome:

  1. If those kids were going to go to school anyways, then we’re just creating a common pool problem where costs and benefits aren’t compared by the relevant decision makers.
  2. If some of those kids weren’t going to go to school otherwise, then we’ve increased the pressure on poor kids to get a college degree without helping them out. And if we’re thinking of this like an investment, the returns would be higher on getting more poor kids to go through school.
  3. If this program doesn’t have a return on investment high enough to offset the costs, then that budget line has to compete with some other program (tax returns would be nice, or investment in infrastructure, or something else).

I don’t expect any legislation to solve the problem once and for all. But this program is more likely to make the underlying problems worse, at the expense of poor people, and with little net gain. Not only is this bad economics, it’s not even in line with the more honorable goals of progressives. It’s simply a way for politicians to buy votes with other people’s money.

Inequality and Regional Prices in the US, 2012

I have just completed a short piece on the impact of regional prices on the measurement and geographic distribution of low income individuals. Basically, Youcef Msaid and myself* used the March 2012-CPS data combined the BEA’s regional purchasing power parities database to correct incomes.

We found is that the level of inequality is very modestly overestimated (0.5%). Now this is a conservative estimate since we used state-level corrections for price differences. This means that we took price corrections for New York state as a whole even if there are wide differences within New York state. Obviously, with more fine-grained price-level adjustments we would find a bigger correction but it is hard to imagine that it could surpass 1-3%.

That was not our most important result. Our most important result relates to where the bottom decile of the income distribution is geographically located. We find that instead of being found disproportionately (relative to their share of the total US population) in poorer states, the bottom decile is disproportionately found in rich states. The dotted black line in the figure below illustrates the change in the number of individuals who are, nationally, in the bottom 10%. New York and California have significant increases while West Virginia has a large decrease. The dark black line shows the same for the top 10%.

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Another way to grasp the magnitude of this change is to relate the change to the population shares of each decile by state. For example, New York had 6.29% of the US population in 2012 and 6.61% of all Americans in the bottom 10% of the income distribution before adjusting for regional purchasing parities. After adjusting however, New York’s share of the bottom 10% surges to 7.88%.

Why does it matter? Because most of the cost difference adjustments come from differences in housing costs. The first obvious point is that housing is a crucial aspect of any discussion of inequality. The second, but less obvious point,  is that these differences are massive barriers to migration within the United States and the poorest are those for whom these barriers are the heaviest. Unfortunately, the high-cost areas are also high-productivity areas (New York, San Francisco for example) whose high costs are largely the result of restrictions on the supply of housing. This means that high-productivity areas – which would raise the wages of low-skilled and low -income workers are inaccessible to them. It also means that those who were present before the increase in productivity of these areas capitalized the gains in more valuable real estates (even if this means lower real incomes).

In this light, the geographic reallocation of the bottom 10% is consistent with an emerging literature that argues that inequality is in great a result of housing policy (see notably Rognlie’s reply to Piketty in the Brookings Papers).  This small modification (I consider it small) that me and Youcef made has important logical ramifications.

* Thank you to my friends Rick Weber (who blogs here at NOL and whose research can be seen here) and Ryan Murphy (whose research can be found here) who provided good comments to bring the paper to the stage where we are ready to submit.

Free lunch: college edition

Andrew Cuomo recently proposed making college free taxpayer funded for middle class New Yorkers. He argues that college is a “mandatory step if you really want to be a success.” For the sake of argument, let’s assume that he’s making adequate adjustments for vocational training.

As a SUNY employee, I’m not sure how to feel about this. On the one hand, it means an increased demand for my services. On the other hand, it means increased pressure to keep costs down, which could mean a fall in my future earnings potential. Increased admissions pressure means I might have easier to teach students, but also probably means less chances for the low-income students coming from the worst public schools.

At best, we’re looking at a middle-class to middle-class transfer that will trade off the benefits of market pressure against the benefits (to families paying for school) of not having to think too hard about how to manage a large expense.

I won’t go into the issue of signaling (see Bryan Caplan), or the sheer wastefulness of having people get bachelor’s degrees for jobs that don’t need them (see Dick Vedder… esp. table 1). These are important points, because they get at the root problem Cuomo is misdiagnosing. College is mandatory because of subsidies and subsidies will only make it worse. But we don’t even need to be that sophisticated to understand why this plan is a problem.

Here’s my basic problem with “free” college tuition: it’s too good to be true. I get the desire to help out poor people, but the average household in NY makes just under $60K/year and this plan is for all households making less than $125K. That’s “free” tuition to a lot of households that would be sending their kids to school anyways. That money has to come from somewhere. The people paying for this program will largely overlap with the people benefiting from it.

If everyone thinks their kids should go to school, then what’s the point in taking away their money to send their kids to school?! We all like burritos, so give me your money and I’ll buy us all the burritos we want. Doesn’t make sense! Giving up control of your spending can only make you worse off, so this will ultimately be a bad thing for the middle class. And that lack of control from middle class helicopter parents will likely be a bad thing for the working poor people who could have been net beneficiaries (hopefully… I’m not certain this won’t back fire on net). Even if subsidizing higher-ed were a good idea, this is almost certainly a terrible way to go about it.

A Drip of Local Flavor

The city of Little Falls, New York is missing nearly 400,000 gallons of water.

Located about twenty-five miles from me; the small central New York city is unable to locate over half of water that had been distributed in 2011. This amounts to about $300,000 dollars in wasted tax payer dollars and on top of that the city is expected to raise water rates.

Unsure whether the losses are caused by leaks, faulty meters or anything else the lead plant operator Daniel Benett says “”Some of it may be going in the ground. Some of it may be not captured by meters. We don’t really know. That’s why we’re out trying to fix as many leaks as we can.”

The cost of replacing the system is reported at a million dollars a mile which Benett assured citizens “The labor is the smallest cost ’cause the guys have to be here to work anyhow.”

Which  leads me to wonder what are those workers doing on a regular basis if it would cost no additional labor hours to do additional work.