Detroit’s art assets have made news as Emergency Manager Kevyn Orr is evaluating the city’s assets for a potential bankruptcy filing. Belle Isle, where Rod Lockwood recently proposed a free city-state may be on the chopping block, but according to a Detroit Free Press poll, residents are most concerned about the city auctioning pieces from the Detroit Institute of the Arts’ collection.
I’ve written previously about the downsides of publicly funding art from the perspective of free speech, but the Detroit case presents a new reason why cities are not the best keepers of artistic treasures. Pittsburgh’s Post-Gazette contrasts the Detroit Institute of Art’s situation with the benefits of a museum funded with an endowment:
As usual, Andrew Carnegie knew what he was doing.
The steel baron turned philanthropist put the City of Pittsburgh in charge of operating the library he gave it in 1895, but when he added an art museum to the Oakland facility just one year later, he kept it out of city hands.
“The city is not to maintain [the art gallery and museum],” Carnegie said in his dedication address. “These are to be regarded as wise extravagances, for which public revenues should not be given, not as necessaries. These are such gifts as a citizen may fitly bestow upon a community and endow, so that it will cost the city nothing.”
Museums and other cultural amenities are a sign of a city’s success, not drivers of success itself. The correlation between culturally interesting cities and cities with strong economic opportunities is often mistakenly interpreted to demonstrate that if cities do more to build their cultural appeal from the top down, they will encourage job growth in the process. Rather, a productive and well-educated population both demand and supply these amenities. While an art museum may increase tourism on the margin, it is unlikely to draw additional firms or individuals away from other locations. Detroit is sitting on an estimated $2.5 billion in art, enough to put a dent in its $15 billion long-term obligations.
On a recent episode of Econtalk, Ed Glaeser explains that over investing in public amenities relative to demand is a sign of continued challenges for municipalities:
It is so natural and so attractive to plunk down a new skyscraper and declare Cleveland has ‘come back.’ Or to build a monorail and pretend you are going to be just as successful as Disney World, for some reason. You get short-term headlines even when this infrastructure is just totally ill-suited for the actual needs of the city. The hallmark of declining cities is to have over-funded infrastructure relative to the level of demand in that city.
Similarly, cities throwing resources at museums and other amenities designed to attract the “creative class” are highly likely to fail because bureaucrats are poorly-positioned to learn about and respond to their municipalities’ cultural demands. When cities do successfully provide cultural amenities, they are catering primarily to well-educated, high-income residents – not the groups that should be the targets of government programs.
I think it’s highly unlikely that Detroit will sell off any taxpayer-owned art to pay down its debts based on the media and political blow back the possibility has seen. However, seeing the city in a position where it owns enough art to cover a substantial portion of its unsustainable long-term debts demonstrates why municipalities should not be curators. Tying up municipal resources in art is irresponsible. The uncertainty that the city’s debt creates for future tax and service provision is clearly detrimental to economic growth. While assets like museums are nice for residents, they do not attract or keep residents or jobs.
Detroit does have an important asset; new ideas need cheap rent. Detroit’s affordable real estate is attracting start ups with five of the metro area’s young companies making Brand Innovator’s list of American brands to watch. While these budding businesses could be key players in the city’s economic recovery, top-down plans to preserve and increase cultural amenities for these firms’ employees will not.
Adam, Stephen, and I have previously written on some of the downsides of homeownership from an urbanist perspective; owner-occupied units are biased toward being single family homes, and when owner-occupied units are condos, they carry many detrimental characteristics for redevelopment. Despite the negative outcomes of homeownership from a market urbanist perspective, the pervasive conventional wisdom remains that an owning a home is a path to financial well-being. Even including the government policies designed to improve homeownership as an investment, from the mortgage interest tax deduction, to subsidized home loans, to the capital gains tax break for homes, owning a home is still not the fool-proof investment that many people seem to believe it is.
A recent Times Dispatch article reveals this commonly held belief. The reporter quotes the CEO of the Richmond Association of Realtors without noting that her profession depends on the buying and selling of owner-occupied homes:
“Homeownership always trumps rental when it comes to the accumulation of equity and wealth over time,” Lafayette said.
Given that interest rates remain near historic lows, a monthly mortgage payment for many households makes more sense than paying rent, she said.
While it is true that paying down mortgage principal is a form of forced saving, this analysis does not take into account the opportunity cost of what else households could be doing with their home equity, such as investing it in the stock market in a tax-advantaged retirement account. For example, this New York Times rent vs. own calculator does not take into account an accurate opportunity cost of making a downpayment. In the default example, the owner pays a $34,400 downpayment, but the calculator does not take into consideration the renter’s potential return on investing $34,400 over the same time period in a tax-advantaged retirement account. While many people believe that putting this money into a home is a prudent and low-risk choice, in fact putting a large chunk of individual net worth into a single asset is much higher-risk than purchasing shares of, say, an index fund. Some homes will appreciate in value more quickly than the stock market, but placing a bet on a single home even appreciating more quickly than the rate of inflation is risky. Homes in cities with tight supply restrictions are in a better position to see rapid appreciation, but a homeowner in any city faces the risk that a regional downturn will impact both his job security and net worth simultaneously.
It is true that homeowners often increase their net worth more rapidly than non-homeowners, but correlation is not causation. Mortgage payments act as forced savings, and it seems that many Americans are not naturally disposed to saving a substantial piece of each paycheck without a commitment to paying a mortgage. However, many people having a propensity to save little does not indicate that “investing” in an owner-occupied home is a smarter move than renting financially. Personal finance writer Jim Collins explains the characteristics of owner-occupied homes that make them a poor investment, including their illiquidity and high transaction costs.
Of course there are many non-financial benefits that some people see in homeownership — caring for outdoor space, freedom to remodel as desired, and psychological benefits of greater community ties — all valid traits that lead people to want to live in owner-occupied homes. The decision to own or rent should be centered around these characteristics, though, not around the belief that homeownership is the road to financial stability.
This post originally appeared at Neighborhood Effects, a Mercatus Center blog about state and local policy and economic freedom.
At The Atlantic Cities, Emily Badger writes about a new program from the Rockefeller Foundation called 100 Resilient Cities, focused on equipping cities with a new employee called a Chief Resiliency Officer. The program states its goals as follows:
Building resilience is about making people, communities and systems better prepared to withstand catastrophic events – both natural and manmade – and able to bounce back more quickly and emerge stronger from these shocks and stresses.
[. . .]
There are some core characteristics that all resilient systems share and demonstrate, both in good times and in times of stress:
- Spare capacity, which ensures that there is a back-up or alternative available when a vital component of a system fails.
- Flexibility, the ability to change, evolve, and adapt in the face of disaster.
- Limited or “safe” failure, which prevents failures from rippling across systems.
- Rapid rebound, the capacity to re-establish function and avoid long-term disruptions.
- Constant learning, with robust feedback loops that sense and allow new solutions as conditions change.
In his book Antifragile: Things that Gain from Disorder, Nassim Taleb defines antifragile as something that not only recovers from shocks, but becomes stronger after recovery, in line with the stated objectives of 100 Resilient Cities. Following its Great Fire of 1871, Chicago demonstrated antifragility. It rebounded rapidly from a disaster that killed 300 people and left one-third of city residents homeless, many without insurance after the fire bankrupted local insurers or the blaze destroyed their paperwork. Despite this great loss, residents of Chicago quickly rebuilt their city using private funding and private charity that was small relative to the amount of damage, but without any government funding. In rebuilding, Chicago developed safer building techniques both through entrepreneurship and with new insurance requirements and new municipal building codes. The city invested in a better-equipped fire fighting force to lower the risk of fire damage in the future. Despite not having the telecommunications that seem critical to allowing fast disaster recovery today, Chicagoans began building new, safer buildings immediately, investing $50 million in the year after the fire, and tripling the real estate value of the burned blocks within 10 years. Its difficult to imagine a twenty-first century city allowing property owners to move so quickly through the approval process, and its difficult to imagine a Chief Resiliency Officer widening this bottleneck.
A bureaucrat like a Chief Resiliency Officer would not be able to learn the lessons from a natural disaster that the residents of Chicago did in their rebuilding efforts because this knowledge is dispersed, only to be discovered by individuals acting in what they believe to be their own best interest. Taleb describes bureaucrats as fragilistas because they do not suffer from downside risks and therefore cannot learn and grow stronger from shocks. If a disaster strikes a city equipped with a Chief Resiliency Officer and it turns out the city was ill-prepared, he or she will not be held accountable for failing to predict what may have been a very low-probability event. In fact, we often see government efforts toward making cities more resilient introducing fragility contrary to their stated intentions. For example, federal flood insurance minimizes the downside risk of owning flood-prone property. In turn, this encourages more people to live in the highest risk areas, putting them at greater risk when disaster strikes. Cities will not have an opportunity to learn from this to better prepare for future flooding because their rebuilding is subsidized; however, bureaucrats cite this insurance as a success because it facilitates rebuilding without adapting to risk.
The Transportation Security Administration offers a preview of what bureaucratic disaster prevention looks like; top down planning for low-probability events results in attempts to prevent the catastrophic events that we’ve seen in the past without realizing that we’re unlikely to see these same events in the future. As TSA critic Bruce Schneier explains:
Taking off your shoes is next to useless. “It’s like saying, ‘Last time the terrorists wore red shirts, so now we’re going to ban red shirts,’” Schneier says. If the T.S.A. focuses on shoes, terrorists will put their explosives elsewhere. “Focusing on specific threats like shoe bombs or snow-globe bombs simply induces the bad guys to do something else. You end up spending a lot on the screening and you haven’t reduced the total threat.”
Likewise, preparing for low-probability natural disasters, such as 100-year storms, is not something that can be done from the top down. To the extent an event is foreseeable, some individuals and firms will prepare for it, as we saw with Goldman Sachs’ generator and sand bagging efforts in the aftermath of Hurricane Sandy. The disaster revealed successful preparation methods, allowing more individuals and the city as a whole to learn and be better prepared for the next disaster. Chief Resiliency Officers are unlikely to accurately foresee low-probability shocks to their cities. To the extent that they protect cities from these shocks, they will likely take away the learning process that would make cities better able to withstand larger shocks, introducing fragility instead of greater resiliency.
906 H Street NE
On Monday, Fundrise will make their newest offering at 906 H Street NE in DC available to investors. Many real estate journalists have covered this innovative investment company’s crowdsourcing strategy, with Urban Turf naming Fundrise a top real estate trend of 2012. This development is the company’s second crowd-sourced project and their third property on H Street. Without special approval, publicly advertised offerings can only seek funding from accredited investors, but Fundrise has has gone through a cumbersome process through DC, Virginia, and federal securities regulators to permit any individual to invest in their newest offering with a $100 minimum investments.
Because of the high regulatory hurdles standing in the way of marketing public offerings to a broad audience, Fundrise is currently the only group in the country doing so. Daniel Miller, Co-Founder of Fundrise, explained that he thinks crowdfunding has significant potential to improve incentives for focusing on the long run in development. From an urban development perspective, one benefit of crowdsourcing is that small companies do not face the same pressure to post quarterly profits that larger, publicly-traded firms do. Because real estate is a long-term investment that doesn’t always demonstrate profits on a timetable that’s attractive to Wall Street investors, crowdsourcing provides an opportunity for development financing that will not have a short-term bias. The difficulty in getting legal approval for small investors, however, demonstrates the regulatory bias in favor of large firms. Daniel said:
When you’re invested in a broader portfolio like a REIT that owns 400 or 500 malls, it’s very difficult to measure success because there are only financial indicators. But if you’re invested in a single property — the tenant is open, he’s paying rent, he has good sales — it’s much easier to measure success. There’s transparency in reporting. A lot of these big companies don’t give you a lot of information on individual properties. We think that this blend of a single asset that is easier to understand with transparent reporting is going to make people focus less on short-term profits and actually understand the individual asset.
Both financial regulations and local entitlement processes have created bias toward large developers and toward repetitive development patterns. Crowdsourcing offers an opportunity for smaller scale projects with the potential to be simultaneously more innovative and lower risk. Daniel pointed out that crowdsourcing connects a development to its customers. “Over time as there are more crowdfunded projects, we think those are more likely to be successful in terms of having better sales, in terms of having support from the neighborhood, and in terms of getting through entitlements,” he said. “I think that local investors are going to take a lot of risk out of the project. By better linking supply and demand and having more people support that investment, we think that provides a better chance of that business succeeding.”
From a tax perspective, crowdsourcing in real estate offers investors the same well-publicized advantages that they can achieve in a REIT. Daniel explains, “Right now we are structured as an LLC, but we have the same tax advantages as a REIT. There’s no double taxation — income and losses are passed through to the investor, so it’s about the most tax efficient vehicle possible. A REIT was created to allow the general population to invest in real estate, so in some ways what we’re doing is a return to the original REIT concept. But we’re focused on individual properties rather than nationwide portfolios because we think that when people invest in their own neighborhood, there are social benefits to that.”
In addition to introducing increased transparency into measuring development success or failure, crowdsourcing may help projects make it through the entitlement process. Daniel said this may have been the case with Fundrise’s first crowdsourced project. “We had a bunch of investors email the permit office for 1351 H Street and email their council member to help get the permits. Particularly with entitlements and liquor licenses, we think that transparency and having investors communicate with permit offices is really going to help move it forward and speed up the process.”
If you’re a DC or Virginia resident interested in investing in 906 H Street NE, create an account at Fundrise and register to get priority access. “I think it’s exciting that this is most people’s first chance to invest in commercial real estate,” Daniel said.
I recently finished The Power Broker by Robert Caro after many months of Metro reading. I loved the book, and can’t recommend it enough. Caro provides an overview of Robert Moses’ policies here. If you don’t want to invest in reading the full 1162 pages, I would particularly recommend the chapters that explain the impacts of Robert Moses’ policies on what were cohesive neighborhoods: “Changing,” “One Mile,” and “Rumors and the Report of Rumors.”
While reading The Power Broker, I was repeatedly reminded of the massive coercion involved in road building despite the commonly held belief among many advocates of limited government that road provision is one of the least offensive government practices. Oftentimes the small government tolerance of road building seems to stem from the relatively small subsidies that roads require. Randal O’Toole has often demonstrated that automobile travel is cheaper per passenger mile than mass transit and that the bulk of these costs are born by drivers. While he advocates moving to a vehicle mile tax that would more closely tie road costs to their users and allow for the devolution of transit funding, he does not challenge that road building is a legitimate state and local government function.
However, as Stephen, Adam and others have previously pointed out, these accounting costs of road building don’t take into consideration the opportunity cost of the land dedicated to roads, which in areas with high real estate prices is considerable. Moses notoriously bulldozed valuable developments for highways and while he made operating profits on tolls, he put land to lower value use in the process.
For example, Moses used eminent domain and government funds to transform what was once a privately operated elevated rail system into an elevated highway on Brooklyn’s Third Avenue, destroying property values and a neighborhood in the process. We have no way of knowing whether privately run mass transit systems would have continued to thrive in United States cities without the onslaught of government road building and transit regulations, but the fact that government roads are today more cost effective than government transit does not demonstrate that supporters of the market process should tolerate government intervention in urban form, even if it’s covered by user fees.
Caro explains how coercive government policies produced suburban development around New York that favored transportation by car:
The building of public works shapes a city perhaps more permanently than any other action of government. Large-scale public works shape a city for generations. Some public work — most notably the great bridges and highways that open new areas to development and insure that these areas will be developed on the low-density pattern fostered by highways as opposed to the high-density patterns fostered by mass transportation facilities — shape it for centuries if not, indeed, forever.
Obviously not all roads are built with Moses’ complete disregard for neighborhoods, and in a free market it’s likely that automobile transportation would still be the favored mode of transportation for many people. That said, comparing per passenger mile costs in a world where the urban form is determined by the state does not provide evidence that mass transit would necessarily be unprofitable in a free market or that government-provided roads are always less distortive than government-provided transit.
Anthony Ling of Rendering Freedom fame will be visiting New York from Brazil this weekend. We’ve planned a meetup in Williamsburg Brooklyn at 5:30 pm this Sunday, April 21. (venue to be determined) Come meet Anthony and some of the Market Urbanism crew. All are welcome.
Hope to see you Sunday,
Update: Per Stephen, we’ll meet “outside of Crif Dogs at Driggs & North 7th…it’s a specialty hotdog place (very Williamsburg).:
Yesterday, the Mercatus Center released the third edition of Freedom in the 50 States by Will Ruger and Jason Sorens. The authors break down state freedom among regulatory, fiscal, and personal categories. At the study’s website, readers can re-rank the states based on the aspects of freedom that they think are most important, including some variables related to land use and housing. The available variables include local rent control, regulatory takings restrictions, the Wharton Residential Land Use Regulatory Index, and an eminent domain index.
Using only these “Property Rights Protection” variables, Kansas ranks as the freest state, followed by Louisiana, Indiana, Missouri, and South Dakota. Texas, sometimes cited as the state without zoning, comes in at 18th. The least free state is New Jersey, with Maryland at 49th, followed by California, New York, and Hawaii. This result — states with some of the most expensive cities being the most regulated — is unsurprising.
In the places with the freest land use regulations, where a developer would be able to build walkable, mixed-use neighborhoods without going through a burdensome entitlement process, there isn’t demand for dense development. This may be one reason why the Piscataquis Village project, an effort to build a traditional city, is happening in a sparsely populated Maine county because new development of this sort is simply not permitted near any population centers.
As Stephen recently pointed out, public opinion in New York tends to see city policies as wildly pro-development:
In spite of the popular impression of New York as a builder-friendly city that’s constantly exceeding the bounds of rational development, the city’s growth over the past half-century has been anemic, and has not kept pace with the natural growth in population.
This ranking of New York near the bottom of the index demonstrates what urban economists already know — new development is not permitted to be built where rents are highest and it’s most needed in spite of perception of pro-development policies. Does anyone have development experience in some of the freest states? Does this ranking match your perception?
Update: For full disclosure I was a project manager on Freedom in the 50 States.
After receiving years of praise for its work in post-Katrina recovery, Brad Pitt’s home building organization, Make It Right, is receiving some media criticism. At the New Republic, Lydia Depillis points out that the Make It Right homes built in the Lower Ninth Ward have resulted in scarce city dollars going to this neighborhood with questionable results. While some residents have been able to return to the Lower Ninth Ward through non-profit and private investment, the population hasn’t reached the level necessary to bring the commercial services to the neighborhood that it needs to be a comfortable place to live.
After Hurricane Katrina, the Mercatus Center conducted extensive field research in the Gulf Coast, interviewing people who decided to return and rebuild in the city and those who decided to permanently relocate. They discussed the events that unfolded immediately after the storm as well as the rebuilding process. They interviewed many people in the New Orleans neighborhood surrounding the Mary Queen of Vietnam Church. This neighborhood rebounded exceptionally well after Hurricane Katrina, despite experiencing some of the city’s worst flooding 5-12-feet-deep and being a low-income neighborhood. As Emily Chamlee-Wright and Virgil Storr found [pdf]:
Within a year of the storm, more than 3,000 residents had returned [of the neighborhood's 4,000 residents when the storm hit]. By the summer of 2007, approximately 90% of the MQVN residents were back while the rate of return in New Orleans overall remained at only 45%. Further, within a year of the storm, 70 of the 75 Vietnamese-owned businesses in the MQVN neighborhood were up and running.
Virgil and Emily attribute some of MQVN’s rebuilding success to the club goods that neighborhood residents shared. Club goods share some characteristics with public goods in that they are non-rivalrous — one person using the pool at a swim club doesn’t impede others from doing so — but club goods are excludable, so that non-members can be banned from using them. Adam has written about club goods previously, using the example of mass transit. The turnstile acts as a method of exclusion, and one person riding the subway doesn’t prevent other passengers from doing so as well. In the diagram below, a subway would fall into the “Low-congestion Goods” category:
In the case of MQVN, the neighborhood’s sense of community and shared culture provided a club good that encouraged residents to return after the storm. The church provided food and supplies to the first neighborhood residents to return after the storm. Church leadership worked with Entergy, the city’s power company, to demonstrate that the neighborhood had 500 residents ready to pay their bills with the restoration of power, making them one of the city’s first outer neighborhoods to get power back after the storm.
While resources have poured into the Lower Ninth Ward from outside groups in the form of $400,000 homes from Make It Right $65 million in city money for a school, police station, and recreation center, the neighborhood has not seen the success that MQVN achieved from the bottom up. This isn’t to say that large non-profits don’t have an important role to play in disaster recovery. Social entrepreneurs face strong incentives to work well toward their objectives because their donors hold them accountable and they typically are involved in a cause because of their passion for it. Large organizations from Wal-Mart to the American Red Cross provided key resources to New Orleans residents in the days and months after Hurricane Katrina.
The post-Katrina success of MQVN relative to many other neighborhoods in the city does demonstrates the effectiveness of voluntary cooperation at the community level and the importance of bottom-up participation for long-term neighborhood stability. While people throughout the city expressed their love for New Orleans and desire to return in their conversations with Mercatus interviewers, many faced coordination problems in their efforts to rebuild. In the case of MQVN, club goods and voluntary cooperation permitted the quick and near-complete return of residents.