Welcome back to Sunday reading. This week, let’s start off with an impressive rant from Newshub reporter Lachlan Forsyth: “Auckland’s housing market is broken and it’s a lie to deny it“:
Why is an entire generation being shut out of the housing market? Did all those people suddenly up their expectations? Or was it because supply dried up, and house prices started rocketing?
Anyone denying it’s now harder to buy a house is lying, stupid, or quite possibly both.
Older generations, you know, the ones who received free healthcare, education, and superannuation for their ENTIRE LIVES, now sit snug in their homes, enjoying tax-free, triple-digit capital gains; while subsequent generations are being left out in the cold, watching helplessly as their home ownership dreams dissipate into the air.
Let me simplify things even further. They’ve done okay for themselves, pulled up the ladder behind them, and are now blaming their kids and grandkids for the situation they find themselves in.
“Lower your expectations!”
“We started at the bottom of the ladder!”
“Interest rates were much higher back then!”
A question: at what point did half-a-million dollars become synonymous with affordable? When did ‘affordable Auckland housing’ come to mean a house in Waikato?
Those who advocate urban sprawl bemoan the cost of the infrastructure and connections that requires.
“Building on the city fringes is so expensive! Better sell some assets!”
But any plan to intensify within the city, where utilities and infrastructure already exist, is met with further opposition by those who don’t want to see their lifestyle or leafy neighbourhoods impinged.
“Build out, not up! Why ruin the city with three-storey apartments?!”
Forsyth makes an excellent point on the political economy of urban growth that I seldom see people acknowledge. Current homeowners have little incentive to vote for intensification, as constraints on housing supply keep their property prices high and reduce change in their area. But they have even less incentive to vote for lots of urban sprawl, as it means paying higher rates (or central government taxes) in exchange for a policy that will, if it succeeds, reduce the value of their homes.
In the long run, I wonder whether solving these issues will take new governance models and policy tools. That’s what US law professor David Schleicher argues. The Economist, which takes an interest in urban planning from time to time, reviews some of his ideas:
Most onerous planning restrictions reflect the difficult political economy underlying urban growth. Would-be migrants to rich cities stand to benefit handsomely from access to lucrative jobs, but lack a political say in the places that are building too little. Within cities the balance of costs and benefits favours NIMBYs. Everyone in the city stands to gain from growth; productivity in skilled cities rises with population, so when more people move in, all workers’ incomes should rise. But the gains from any particular property development are relatively small and thinly spread, whereas the costs are highly concentrated.
Those in the immediate vicinity of a big new project must put up with noise and other inconveniences during construction, and increased competition for parking spaces and places in good schools after it, not to mention blocked views. Because affected residents live near each other and often share local-government representatives, the cost of organising opposition to new projects is low (and the motivation to do so is high). Even those who see urban growth as a positive have strong incentives to oppose development in their own backyards. Since almost every part of a city is someone’s backyard, far too little construction takes place.
Clever policy, however, can help balance the concerns of NIMBYs with the broad benefits of growth in productive places. One approach is simply to neutralise local opposition to development by compensating neighbours for the costs they bear when new construction is approved—to bribe, them, in effect. David Schleicher, a professor of land-use law at Yale Law School, has proposed the use of “tax increment local transfers”, or TILTs. New buildings normally generate extra property-tax revenue for the city once they have been completed. Some portion of the expected rise in the tax take associated with a proposed new development (the tax increment) could be promised to nearby residents in the form of a temporary property-tax rebate, scheduled to last ten years, say, if the development went ahead. As Mr Schleicher notes, TILTs would enhance the signalling value of local opposition to new projects: residents who fight against a proposed development despite the prospect of direct financial gain from it are more likely to have reservations worth addressing.
Interesting ideas. If they worked, they could make a big difference to the way our cities functioned. They could, for example, bring us back to the halcyon days of the early 1900s – a period in which we simply built more (tall) buildings. Michael Andersen at Bike Portland reviews the historical record:
Portland’s “huge population boom” and “explosive growth” have driven such a painful housing shortage that it’s not uncommon these days to hear Portlanders wish the city would stop creating so many jobs.
Since 2008, the city’s population growth rate has been about 9,000 net new residents per year, or 1.5 percent.
But when many of the buildings that continue to define northwest Portland were built, Portland’s population was growing by 7 percent every year for years on end. In the decade of the 1900s, the city that started at 90,000 residents added 11,679 new ones every year on average…
Portland’s situation wasn’t unique. Seattle grew even faster in the same decade, and Los Angeles faster still. San Francisco’s similar boom came in the 1870s. For St. Louis it was the 1850s; for Philadelphia the 1860s; for Chicago the 1890s; for Detroit the 1910s.
How did cities survive population booms four or five times larger than Portland is going through today?
And why, somewhere around 1920, did U.S. cities never see population booms again — even in an age of deep geographic inequality that is watching smaller cities like Urbana, Illinois continue to shed jobs while some bigger ones, including Portland, add them hand over fist?
You can see the answer any time you ride a bike through northwest Portland. Growing cities built and built and built — because until 1920 or so, there were no laws that said you couldn’t.
Incidentally, Auckland’s a bit different than Portland (and the other west coast US cities)… it was a comparatively slow starter. A quick look at the urban population database produced by Motu a few years back suggests that Auckland’s growth – in terms of added people per year – accelerated after World War 2 and is now accelerating again. However, growth in percentage terms was much, much higher in the early part of the 20th century – between 1901 and 1926, Auckland’s population grew at an average of 4.3% per annum. Big changes.
— urbandata (@urbandata) April 18, 2016
On a completely different note, it turns out that people react differently to you depending upon how you solve the trolley problem. (No, not Auckland LRT, although we’re always looking for new answers to that one!) Cornell University researchers have been studying the social implications of classic moral dilemmas:
Imagine that an out of control trolley is speeding towards a group of five people. You are standing on a footbridge above, next to a large man. If you push him off the bridge onto the track below, his body will stop the trolley before it hits the five people. He will die, but the five others will be saved. Should you push the man off the bridge?
Before you make your decision, you should know that your popularity could depend on it. According to a new study of more than 2,400 participants, which we carried out with David Pizarro from Cornell University, the way you answer the “trolley problem” can have a big impact on how much people trust you…
Statistically, more people think that it’s wrong to push the man off the bridge to save the five others. On one level, this makes sense – we shudder at the thought of a friend or partner doing a cost-benefit analysis of whether you should be sacrificed for the greater good. So why do more people prefer this rule-based approach to morality?
Some scholars have argued that deontological intuitions arise from “irrational” emotional responses. But we thought there might be another explanation: namely, the power of popularity. We proposed that if people who stick to moral rules are considered to be better social partners, that might explain why more people take a deontological view.
There probably aren’t too many implications for transport policy, other than the obvious, which is to design transport systems that don’t kill people.
Elsewhere, a seemingly new blog (The Aspiring Economist) writes a good review of an essential paper on the New Zealand economy: Phil McCann’s “Economic geography, globalisation, and the New Zealand productivity paradox“. Worth a read:
This leaves us with some kind of a puzzle: New Zealand has been outperformed by comparable OECD peers but pursues best practice in many regulatory and institutional areas, as assessed by the Doing Business and World Governance Indicators. This phenomenon is also known as New Zealand’s productivity paradox…
What McCann argues is that New Zealand’s position in the international marketplace has worsened in the globalisation era in which the world has become flat. The cause for this worsening is New Zealand’s unusual economic geography compared to other advanced economies. What do we mean by ‘unusual’? Hendy (2010) names four indicators for New Zealand:
- Low population density
- Large share of primary/ agricultural goods in exports for an advanced economy
- Low export diversity compared to other advanced economies: New Zealand’s Export Diversification Index were at 2.28 in 2010 (IMF, 2014)
- High geographical isolation
Let’s look at this in more detail. Where is the link between these indicators and the productivity paradox? For McCann this stems from the fact that there are low value-added and high value-added goods in today’s international marketplace. For the former he assumes falling spatial transaction costs in the era of globalisation. For high value-added goods, however, spatial transaction costs have actually increased coupled with increasing economies of scale…
While we’re on the subject of economists, Paul Krugman had some pretty interesting thoughts on policies for addressing climate change. His key argument is that we shouldn’t avoid implementing workable policies in favour of theoretically pure ones:
Econ 101 tells us that if you want to reduce emissions of a pollutant, the most efficient way to do that is to put a price on emissions, so that all possible routes to reduction are taken, and the marginal cost is the same for all routes. It’s a real insight, and has had positive impacts on real-world policy — cap-and-trade has worked very well at reducing acid rain.
That said, there are reasons Econ 101 may not be right here. There is some evidence that consumers aren’t hyper rational when it comes to conservation, that they may pass up conservation opportunities even when it would save them money — and in that case rule rather than prices may be the right way to make them change. And to the extent that we’re talking about innovation, the Econ 101 case says nothing at all: the efficiency case for carbon pricing is about making best use of existing technology, not about providing incentives to develop better technology.
But leave all that aside, and ask: how *important* is it that our carbon-emissions strategy take the form of a universal or near-universal price on carbon?
The answer, in principle, is that it depends on the complexity of the required response. If reducing emissions really has to involve moving on many fronts, anything that looks like an administrative solution — telling, say, power companies what to do or not to do — is going to be much more costly than carbon pricing that exploits all the possibilities. But if a large part of the solution is going to involve a fairly limited set of measures — such as putting a quick end to the practice of burning coal to generate electricity — getting to broad-based carbon pricing is much less central.
Krugman’s really just elaborating on the implications of the “theory of the second best” in climate policy. But this is an insight that has broader applicability – say, for transport policy. I’ve argued in the past that efficient congestion pricing would be a great “first best” solution to many problems of urban transport. But there are a number of practical roadblocks to actually getting there – not least the cost of setting up a congestion charging system!
Does this mean we have to give up on the idea of efficiently managing congestion? No, not necessarily. But it might mean cobbling together a raft of policies that look unrelated at first glance – a mix of transformative investments in rapid transit and cycling, bus lanes or high-occupancy-toll lanes on more roads, and changes to parking policies. Could be interesting.
But is congestion really that bad? That’s also a good question. The fact that so many people participate in it suggests that perhaps it’s not as big a problem as we assume.
Over at Vox, Libby Nelson does the maths on Free Cone Day at the Ben & Jerry’s ice cream chain. It’s a classic value of time question – people spend time to get something (an ice cream cone) that they could buy instead. But is it worth it?
Even if the federal government is right, and a half-hour of leisure time is only worth $6.45, that’s still more than it would have cost to just buy the ice cream cone another day and use the time to do something more fun than standing in line.
But the cold economics of the value of time don’t allow for the joy of getting something for free that you’d otherwise have to pay for. And, yes, there’s psychological research to back up the commonsense conclusion that people love free stuff.
In a paper written at the Massachusetts Institute of Technology in 2006, Kristina Shampan’er and Dan Ariely argued that people like free stuff so much that they don’t just think of it as a smaller price to pay, but as an added benefit.
According to Shampan’er and Ariely’s research, a free ice cream cone isn’t the same as an ice cream cone you paid for — it’s better. And that means that wasting your time standing in line for it might mean you’re still getting a pretty good deal.
This has important implications for congestion pricing. Feel free to discuss in comments!