Urban[ism] Legend: The Free Market Can’t Provide Affordable Housing

Over at Greater Greater Washington, Ms. Cheryl Cort attempts to temper expectations of what she calls the “libertarian view (a more right-leaning view in our region)” on affordable housing.  It is certainly reassuring to see the cosmopolitan left and the pro-market right begin to warm to the benefits of liberalization of land-use.  Land-use is one area the “right,” in it’s fear of change, has failed to embrace a widespread pro-market stance.  Meanwhile, many urban-dwellers who consider themselves on the “left” unknowingly display an anti-outsider mentality typically attributed to the right’s stance on immigration.  Unfortunately, in failing to grasp the enormity of the bipartisan-caused distortion of the housing market, Ms. Cort resigns to advocate solutions that fail to deliver widespread housing affordability.

Yes, adding more housing must absolutely be a part of the strategy to make housing more affordable. And zoning changes to allow people to build taller and more usable space near transit, rent out carriage houses, and avoid expensive and often-unnecessary parking are all steps in the right direction. But some proponents go on to say relaxing zoning will solve the problem all on its own. It won’t.

Well, if “relaxing” zoning is the solution at hand, she may be right – relaxing will only help a tad…  While keenly aware of the high prices many are willing to pay, Cort does not seem to grasp the incredible degree to which development is inhibited by zoning.  “Relaxing” won’t do the trick in a city where prices are high enough to justify skyscrapers with four to ten times the density currently allowed.  When considering a supply cap that only allows a fraction of what the market demands, one can not reasonably conclude “Unlimited FAR” (building density) would merely result in a bit more development here and there. A radically liberalized land-use regime would deliver numbers of units several times what is permitted under current regulation.

Ms. Cort correctly concludes that because of today’s construction costs, new construction would not provide housing at prices affordable to low income people.  This will certainly be the case in the most expensive areas where developers would be allowed to meet market demands by building 60 story skyscrapers.  Advocates of land-use liberalization who understand the costs of construction would not claim that dense new construction will house the poor.  But if enough supply is allowed to come to market today, today’s new construction will become tomorrow’s affordable housing.  And this brings us to the more meaningful discussion: filtering.  Here’s where Ms. Cort’s analysis completely falls apart.

It is true that increasing supply eases upward pressure on all prices. But the reservoir of naturally cheaper, older buildings runs out after a while.

Tragically, Ms. Cort is using the current radically supply-constrained paradigm to analyze a free-market counter-factual.  If development at levels several times the current rate were allowed over the past few cycles, the reservoir of cheaper, older buildings would have remained plentiful and affordable.  If the market were allowed to meet demand for high-end units in the form of dense new construction, there would be little or no market pressure for unsubsidized market-rate units to be converted into luxury units.  The 1400 Block of W Street NW example she gives would almost certainly still be affordable.

On a larger scale, the increased supply of housing in the area helps absorb demand for more housing, but it’s not enough to stem the demand for such a sought-after location. Between 2005 and 2011, the rental housing market’s growth added more than 12,500 units. But at the same time, $800/month apartments fell by half, while $1000/month rentals nearly doubled. Strong market demand will shrink the availability of low-priced units. That’s what has happened over the last decade as DC transformed from a declining city into a rapidly growing one.

But, 12,500 units is the amount of supply added under the current over-regulated regime.  This amount of development is minuscule in a large city. (see diagram below)  What if DC allowed as much supply growth as Austin or Miami?  The 12,500 figure would triple.  Further, since Austin and Miami are far from free-market, the development rate in a truly free-market DC would certainly exceed a tripling.  If you consider the amount of supply that would have been added over the last several decades in an unlimited FAR DC, Ms. Cort’s position starts to sound quaint.  Conservatively assuming 50-100,000 units of rental housing would have been developed over the last few decades of DC’s growth, rents certainly would not have doubled.  I’ll go out on a limb and estimate that average rent growth would be close to inflation.

Chart by the Citizens Budget Commission (via NYYIMBY)

Chart by the Citizens Budget Commission (via NYYIMBY)

Ms. Cort wants housing to be less than 30% of gross income for nearly all residents.  Will the market provide new housing affordable to minimum wage earners at the most expensive intersection in Georgetown?  Probably not, and I hope she isn’t setting the bar that high.  While nobody is wise enough to know whether a free-market in land use would accomplish this, a free-market DC could be affordable to 50-100,000 more people than the zoned-to-death DC of today.  Will stock of units deemed affordable to low wage earners be of the quality, location, and size acceptable to Cort?  The necessity for further intervention is a subjective preference.

While acknowledging the validity of liberalization in her critique of supply-and-demand denialism, Cort’s conclusion fails to look at supply and demand wholistically:

Supply matters, but it’s not the whole story

Wrong. Supply really must be part of the whole story.  A city is only affordable to the number of residents it houses affordably.  Failure to recognize this only shifts the burden from one demographic to another. (and it won’t be the rich who pays the price)  If a zoning-plagued city fails to provide 1,000 units demanded, 1,000 people can no longer afford to live there.  Even if that city chose to subsidize housing for 2,000 people at 50-80% of AMI, that doesn’t change the fact that 1,000 people who wanted to live in that city must leave.  Any viable solution (free-market or otherwise) must involve increasing supply significantly, either through creating supply directly or subsidizing demand through vouchers, which induces new development.  But, this simply can’t happen if overall supply is capped through zoning.

Only 2 Ways to Fight Gentrification (you’re not going to like one of them)

Tompkins Square Riots in 1988

Gentrification is the result of powerful economic forces. Those who misunderstand the nature of the economic forces at play, risk misdirecting those forces in ways that exasperate city-wide displacement.  Before discussing solutions, it is important to accept that gentrification is one symptom of a larger problem.

Anti-capitalists often portrays gentrification as class war, painting the archetypal greedy developer as the culprit:

Gentrification has always been a top-down affair, not a spontaneous hipster influx, orchestrated by the real estate developers and investors who pull the strings of city policy, with individual home-buyers deployed in mopping up operations.

Is gentrification a class war?  In a way, yes.  But the typical class analysis mistakes the symptom for the cause, and ends up pointing the finger at the wrong rich people.  There is no grand conspiracy concocted by real estate developers, though its not surprising it seems that way.

Real estate developers would be happy to build in already expensive neighborhoods where demand is stable and predictable.  They don’t because they are typically not allowed to.  Take Chicago’s Lincoln Park for example.  Daniel Hertz points out that the number of housing units there actually decreased 4.1% since 2000 and the neighborhood hasn’t allowed a single unit of affordable housing to be developed in 35 years. The affluent residents of Lincoln Park like their neighborhood the way it is and have the political clout to keep it that way.

Given that development projects are blocked in upper class neighborhoods, developers seek out alternatives. Here’s where “pulling the strings” is a viable strategy for developers. Politicians are far more willing to upzone working class neighborhoods. These communities are far less influential and have far fewer resources with which to fight back. The end result is that rich, entitled, white areas get down-zoned, while less-affluent, disempowered, minority areas are up-zoned. Politicians appease politically influential neighborhoods through limited growth, and then appease developers who see less influential neighborhoods as the only viable place for new construction.

Too often, the knee-jerk response is to fight development in these gentrifying neighborhoods. The consequences of this are two-fold. First, economics 101 tells us that capping supply will only cause prices to rise. Instead of newcomers filling newly-constructed units, they will quickly flood the existing stock of housing, quickening gentrification. Second, thwarting development shuts the release valve that alleviates housing price pressures that caused gentrification in the first place. Since not building is not an option, politicians would prefer to funnel new construction into disadvantaged neighborhoods instead of letting it happen where there is market demand. Development suppressed, gentrification swiftly captures the neighborhood and moves on to the next neighborhood in its path.

When considering gentrification, we must accept the fact that rich people don’t just vaporize by prohibiting the creation of housing for them.  If housing desires cannot be met in upscale neighborhoods, the wealthy can and will outbid less affluent people elsewhere.  With that in mind, there are only 2 solutions to stem the tide of gentrification.  The first solution is widespread liberalization of zoning.  This is particularly needed in already desirable locations where incumbent residents have effectively depopulated their neighborhoods over several decades.  The only other solution is to eradicate rich people altogether. This, I hope, is not what people have in mind when they declare class war.

Whether you are a class warrior or Market Urbanist, here are some tips to more effectively fight gentrification:

  • The battlefield is not in the gentrifying neighborhoods.  It is in the more wealthy neighborhoods where empowered residents fight to keep new people out.
  • The enemy is not the gentrifiers or developers trying to serve them.  It is the rich people who use their influence to thwart development in their neighborhoods.  The more they fight to depopulate desirable neighborhoods, the more people are left seeking alternative neighborhoods.
  • The mechanism of gentrification is not development.   It is zoning, and other regulations that thwart development in currently desirable areas.
  • The solution is not to fight development in currently gentrifying areas.  It’s to call for radical liberalization of zoning in already wealthy areas, and to stand up to neighborhood groups who try to abuse zoning to prevent that.
  • The reason people gentrify is not to disrupt ethnic or economically-challenged neighborhoods.  It is likely because they have been priced out of the neighborhood they desire.

 

Urban[ism] Legend: Transportation is a Public Good

In a recent post, commenter Jeremy H. helped point out that the use of the term “public good” is grossly abused in the case of transportation.  Even Nobel economists refer to roads as “important examples of production of public goods,” ( Samuelson and Nordhaus 1985: 48-49).  I’d like to spend a little more time dispensing of this myth, or as I label it, an “Urban[ism] Legend.”

As Tyler Cowen wrote the entry on Public Goods at The Concise Library of Economics:

Public goods have two distinct aspects: nonexcludability and nonrivalrous consumption. “Nonexcludability” means that the cost of keeping nonpayers from enjoying the benefits of the good or service is prohibitive.

And nonrivalrous consumption means that one consumer’s use does not inhibit the consumption by others.  A clear example being that when I look at a star, it doesn’t prevent others from seeing the same star.

Back when I took Microeconomics at a respectable university in preparation for grad school, I was taught that in some cases roads are public goods.  We used Greg Mankiw’s book, “Principles of Economics” which states the following on page 234:

If a road is not congested, then one person’s use does not effect anyone else. In this case, use is not rival in consumption, and the road is a public good. Yet if a road is congested, then use of that road yields a negative externality. When one person drives on the road, it becomes more crowded, and other people must drive more slowly. In this case, the road is a common resource.

This explanation made sense, but I was skeptical – something didn’t sit right with me.  Let’s take a closer look.

First, Mankiw uses his assertion as an example of rivalrous vs nonrivalrous consumption, while not addressing the question of excludability.  Roads are easily excludable through gates or any other mechanism that could restrict access.

Furthermore, Mankiw’s assertion that an uncongested road is nonrivalrous is simply confusing rivalrousness with the fact that the road is under-utilized and/or over-supplied at certain times.

For a silly example: if the government literally manufactured mountains of marshmallows free for the taking, Mankiw would have to consider marshmallows equally as non-rivalrous and non-excludable as uncongested roads in the US.  Would he then call marshmallows a public good?

Thus we can clearly see that all roads (when done right) are neither nonrival nor non-excludable.   We can use the diagram below (from Living Economics) to see that a congested (or tolled to prevent congestion) road is a private good, and in the case that a roadway is oversupplied, it is simply a “low-congestion good”, often called a “club good.”

I found this diagram at a very helpful site: livingeconomics.com

Roads are the more commonly misused example of a public good, but we can apply the same logic to transit.  First, most transit operations in the US already use a method of exclusions: the turnstyle.  Second, we can see that non-rivalrousness is simply a function of over-supply in the case of the subway car that isn’t full to capacity.

As economist, Don Boudreaux puts it :

So I’m more than sympathetic to the claim that government provision of roads, bridges, and highways distorted Americans’ decisions over the years to drive and live in suburbs.  But my sympathy for this claim comes from my rejection of the classic, naive case for government provision of public goods — and once that case is rejected, it cannot then be used to argue for government provision of, say, light-rail transport.

Does this alone prove that roads should be privatized? No, but the fact roads are either private goods or grossly oversupplied help weaken anyone’s case that transportation is government’s business in the first place.

I should warn you, if your Microeconomics professor teaches you this misconception unchallenged (perhaps using the Mankiw book), and gives you a true/false exam question of whether an uncongested road is a Public Good, you may want to answer “true”, or else be prepared to dispute your grade.  (And feel free to send your professor a link to this post.)

Next time you catch a commenter repeating this Urban[ism] Legend (like Jeremy H. did), refer them to this post.  Here are a few other links to back you up:

Are Roads Public Goods, Club Goods, Private Goods, or Common Pools? by Bruce Benson, Floria State University

Privatizing Roads by Tim Haab, “Environmental Economics” (blog)

Public Goods and Externalities: The Case of Roads by Walter Block, Loyola University

Highways Are Not (Economic) Public Goods by Rob Pitingolo, “Extraordinary Observations” (blog)

Public Goods from an Austrian Economics perspective


Private Buses: Econtalk Takes A Second look at Santiago

Back a couple years ago, I noted an Econtalk podcast with Russell Roberts and Duke University Professor Mike Munger on the private bus system in Santiago, Chile.  This week’s episode starts with Munger’s update on the Santiago transportation system after visiting for three weeks and spending a lot of time traveling the city’s buses and transit.  This discussion comes at a perfect time to follow-up on Stephen Smith’s post on private busing in New York.

Munger and Roberts discussed the advantages and problems of the evolution of the system over the years.  In the case of the private system with over 3,000 competing private bus companies, accidents and injuries were common, and pollution was problematic.  However, the regulation and publicization of the buses led to unintended consequences that were probably far worse than the drawbacks of the private system.  Unfortunately, although the administration has apologized for the failures of the system, it would be politically impossible to revert to some of the beneficial aspects of the private system.

NY Rent Control Revival

In an act of pure legislative idiocy in the face of overwhelming consensus among economists against rent control, the New York State Assembly started the ball rolling to strengthen rent regulation. NY Times:

The Democratic-led Assembly passed a broad package of legislation designed to restrain increases on rent-regulated apartments statewide. The legislation would essentially return to regulation tens of thousands of units that were converted to market rate in recent years.

In addition, the legislation would reduce to 10 percent, from 20 percent, the amount that a landlord can increase the rent after an apartment becomes vacant; limit the owner’s ability to recover a rent-regulated apartment for personal use; and increase fines for landlords who are found to have harassed their tenants as a way of evicting them.

The legislation would also repeal the Urstadt Laws’ provision that in 1971 effectively took away most of New York City’s authority to regulate rents and transferred it to the state. Opponents of the legislation are concerned that the New York City Council, known for its pro-tenant leanings, would enact laws that are unfavorable to landlords.

Expect some amazingly ignorant quotes from legislators while this is debated:

Linda B. Rosenthal, an assemblywoman who represents the Upper West Side, said that unless rent-regulation laws were changed, middle class people were at risk of being driven out of the city.

Actually, rent control drives out the middle class, making housing only affordable to the rich and beneficiaries of subsidies and rent controls. New housing will be nearly impossible for middle class tenants to find. Plus, for those who favor one particular class of people over others, rent control increases class tensions

“Pretty soon we’re going to end up with a city of the very poor and the very rich,” Ms. Rosenthal said. “Our social fabric will have been torn apart. And that is not what we want in the city of New York.”

Well, she’s right about that, but Rosenthal is co-culprit. Let’s take a collection for her to enroll in a basic Microeconomics course. She can even take it at The New School, for all I care.

There is hope. Democrats have a slim 32-30 majority in the Assembly, so I wouldn’t expect any series regulations to pass without a fight.

Assembly Speaker Silver declared 2009, “The Year of The Tenant”. Market rents in New York are falling quickly due to the financial mess, but I don’t think that’s what he means.

As Harvard Economist Ed Glaeser so eloquently puts it, “Rent control is bad, bad, bad.”

Yes, Virginia, government roads really are government subsidized, and no, they don’t approximate freed-market outcomes

Recently, I came accross an article by Charles Johnson, who blogs at Rad Geek.  The article had linked to a Market Urbanism post about how user fees and gas taxes fall well short of funding road use in the US. Charles’ article further debunks the Urbanism Legend asserted by free-market imposters that a free-market highway system would be similar to the system we see today.
I like the post so much that I asked Charles about posting it at Market Urbanism.  Charles requested that I, “indicate that the post is freely available for reprinting and derivative use under the terms of the
Creative Commons Attribution-ShareAlike 1.0 license.” I am happy to comply, and must admit that I haven’t taken the time to acquaint myself with Creative Commons.  So, here it is, in it’s original form, and feel free to read the comments in the link:

Yes, Virginia, government roads really are government subsidized, and no, they don’t approximate freed-market outcomes

by Charles Johnson, RadGeek.com

When left-libertarians argue with more conventionally pro-capitalist libertarians about economics, one of the issues that often comes up is government control over roads, and the ways in which state and federal government’s control over roads has acted as a large subsidy for economic centralization and national-scale production and distribution networks (and thus, to large-scale “big box” retailers, like Wal-Mart or Best Buy, dependent on the crafty arrangement of large-scale cross-country shipping as a basic part of their business model). People who have a problem with this analysis sometimes try to dispute it by arguing that government roads aren’t actually subsidized — that heavy users of government roads are actually getting something that roughly approximates a freed-market outcome, because users of government roads pay for the roads they get, in proportion to how heavily they use them, because government roads are funded by gasoline taxes, tire taxes, and government-imposed licensing fees, which all go up in cost more or less proportionally to increases in use of government roads. Thus (the argument goes), funding for government roads is more like a fee-for-service transaction on a freed market than it’s like a classic case of government subsidies. But in fact, this argument is completely bogus, for at least three reasons.

The first reason is that, contrary to popular misconception, government-imposed gasoline taxes and “user fees” on road users do not actually fully fund the costs of government road-building and maintenance; government funding of roads actually includes a substantial subsidy extracted from taxpayers independently of their usage of the roads. Government budgets for road building and maintenance in the US draw from general funds as well as from earmarked gas taxes and “user fees”, and those budgets are subsidized by state, local, and federal government to the tune of about 20–70 cents per gallon of gasoline expended.

The second reason, which ought to be obvious to libertarians given how much we have talked about the use of eminent domain over the past few years, is that government road-building is substantially subsidized by the fact that government can — and routinely does — use the power of eminent domain to seize large, contiguous stretches of land for road building at arbitrarily fixed rates below what the land-owners could have demanded in a free market land sale. Even if it were the case (as it is not) that usage-based levies like gasoline taxes and government licensing fees were enough to cover the budget for government road building and maintenance, that budget has already had a massive, unmentioned government subsidy factored into it due to the use of eminent domain.

The third reason is that a freed market is able to match the supply for roads to the demand at something like the appropriate cost not only because people pay for the roads in proportion to their use of the roads, but also because the prices for road use are set by negotiations between road users and road builders in a competitive market, and because the ownership and management patterns of roads are determined by patterns of free economic decisions to buy, sell, lease, develop, abandon, reclaim, and subdivide land. Freed markets aren’t just a matter of paying for what you get (as important as that is); they also have to do with the freedom to get what you get by alternative means, and with patterns of ownership and control based on consensual negotiation rather than on force. No matter how roads are funded, there is no way to approximate freed-market results with government monopoly on sales or politically-determined allocation of ownership. (Again, this is something that ought to be obvious; it is just the socialist calculation problem applied to the market for road transportation.)

And roads funded by government-imposed gasoline taxes will always be either noncompetitive or subsidized: if there were any significant private roads competing with roads funded by government gasoline taxes, the taxes on the gasoline that drivers burn on those roads become a subsidy to the government-controlled roads. The more users use the non-government roads, the more they would be subsidizing the government roads.

Further, the ownership and management patterns of government roads are determined by electoral horse-trading and arbitrary political jurisdictions, not by free economic actors. As a result, decisions about what roads to build, how to direct funds to those roads, how to price the use of those roads, etc. are typically made by state or federal legislatures, or state or federal executive bureaus. Governments are far more responsive to political than to economic pressure; governments generally will not, or cannot, sell off roads or spin off control over local roads to the people who use them most and can best manage them; state and federal governments exercise centralized control over far larger fiefs than it would ever be possible or profitable to amass on a free market. Thus, for example, because the building and maintenance of roads in Las Vegas is controlled, not by free market actors in Las Vegas, but rather by the Nevada state government, we have Las Vegas drivers paying in 70% of the state’s gas taxes and getting back only 61% of the state’s spending on roads (which is an increase over the 2003–07 average of 53%) — meaning that we are forced to turn tens of millions of dollars over to subsidizing highway building and maintenance in the rest of Nevada. Here’s NDOT’s reasoning as to why we should get stuck with the bill:

If NDOT based its road building program strictly on usage, [NDOT assistant director of engineering Kent] Cooper said, then no new highways would be built outside of Clark County.

He noted that freeways in Las Vegas attract 150,000 to more than 200,000 vehicles a day. No other area in the state has such high use.

Ed Vogel, Las Vegas Review-Journal (2008-11-26): Southern Nevadans get less bang for their road tax buck

Now, maybe Kent Cooper thinks that it is just and wise to force Las Vegas drivers to pay tens of millions of dollars in subsidies so that NDOT can build expensive roads that nobody wants to use.

Maybe he’s right about that, and maybe he’s wrong. But whatever the case may be, the only way to get freed market results in roads is by freeing the market. Under government ownership, government funding, and government control, roads are subsidized by taxes that are levied independently of road usage, built using a subsidy created by forced seizure of land, and users of high-volume local roads are typically forced to subsidize expensive, long-distance cross-country roads that they aren’t using. This kind of allocation of resources for long-distance, non-local highways — which further distorts an already subsidy-distorted system by distorting the flow of money within that system away from the heavily-used local roads and into the high-cost, high maintenance long-distance roads, can certainly not be called any kind of approximation of a freed market in roads.

© by Charles Johnson
This post is freely available for reprinting and derivative use under the terms of the Creative Commons Attribution-ShareAlike 1.0 license.

Market Meltdown and Bailout Videos

Wow! This market is a mess.

As a great follow up to his posts at CafeHayek on government’s intervention in the housing market, Russell Roberts discusses the situation and bailout with reason.tv:

Also…

Here’s the video from an Economics forum discussion at MIT (my Alma mater) on Wednesday: The US Financial Crisis What Happened? What’s Next?

And another forum at USC. [HT Richard’s Real Estate and Urban Economics Blog]

Russell Roberts on Government Intervention in Housing

Russell Roberts of George Mason University, CafeHayek, and Econtalk wrote of series of Cafe Hayek posts on the various federal interventions in the housing market:

Housing markets without the benefit of hindsight

Fannie reaches its goals–sort of

Zero Down!

Fannie and Freddie’s other mission

Section 8

Bill cared too

Affordable equals “subprime”

Calm down

And don’t forget Andrew Cuomo

Shiller and fundamentals

The role of the CRA

It’s not the CRA

No money down, revisited

Bear Stearns, the CRA, and Freddie Mac

Stiglitz on the crisis