Rothbard The Urbanist Part 6: Traffic Control

Maybe the delay in posts led you to believe the Rothbard Series was complete.  The good news is that there are a few more posts to go, and the ones coming up next should be the most interesting to urbanists. 

If you haven’t kept up with our discussion, Murray Rothbard’s classic For A New Liberty can be downloaded free from Mises.org as pdf, web page, and audio book read by Jeff Riggenbach, and you can read the first five posts:

Rothbard the Urbanist Part 1: Public Education’s Role in Sprawl and Exclusion
Rothbard the Urbanist Part 2: Safe Streets
Rothbard the Urbanist Part 3: Prevention of Blockades
Rothbard the Urbanist Part 4: Policing

Rothbard the Urbanist Part 5: Diversity and Discrimination 

Not long ago, I posted a video from a friend showing one traffic intersection in Cambodia that appears to function well without any signaling.  Here are some other resources on the emergent order of traffic without signals:

I caught some flak from a commenter who considered it “disingenuous” to present the video of the intersection as evidence “of a workable intersection.”  Of course I had to remind the commenter that I don’t consider these types of intersection something that I advocate as a “free market” solution: 

Don’t mistake me as an advocate of a world without traffic signals. I am quite certain that some sort of traffic signaling would likely emerge from a free-market street system. But, my bigger point is that when information is dispersed widely among decision-makers without government monopoly, sustainable solutions emerge from the uncoerced behavior of individual agents over time.

This is a case where governance is needed, but not necessarily provided by government.  Some sort of cooperation would emerge among road operators, just like with technologies such as USB, DVD, or plain old electrical outlets and light bulbs.  A coercive government authority is not needed to dictate to manufacturers to use certain standards, manufacturers choose to produce industry-standardized equipment simply because it is what the customer desires.  If a lighting manufacturer decided to make a bulb that did not fit into standard sockets, who would buy it?  Probably nobody. 

I see roads as no different.  Road customers will likely choose to avoid intersections as nerve-wracking as the one in the Cambodia video if they have a more stress-free option.  Thus road operators will work to optimize flow through their intersections while minimizing unpleasantly stressful situations. 

Of course, Professor Rothbard communicates this more elegantly. I find the railroad example particularly interesting:

The principle that property is administered by its owners also provides the rebuttal to a standard argument for government intervention in the economy. The argument holds that "after all, the government sets down traffic rules — red and green lights, driving on the right-hand side, maximum speed limits, etc. Surely everyone must admit that traffic would degenerate into chaos if not for such rules. Therefore, why should government not intervene in the rest of the economy as well?" The fallacy here is not that traffic should be regulated; of course such rules are necessary. But the crucial point is that such rules will always be laid down by whoever owns and therefore administers the roads. Government has been laying down traffic rules because it is the government that has always owned and therefore run the streets and roads; in a libertarian society of private ownership the private owners would lay down the rules for the use of their roads.

However, might not the traffic rules be "chaotic" in a purely free society? Wouldn’t some owners designate red for "stop," others green or blue, etc.? Wouldn’t some roads be used on the right-hand side and others on the left? Such questions are absurd. Obviously, it would be [p. 208] to the interest of all road owners to have uniform rules in these matters, so that road traffic could mesh smoothly and without difficulty. Any maverick road owner who insisted on a left-hand drive or green for "stop" instead of "go" would soon find himself with numerous accidents, and the disappearance of customers and users. The private railroads in nineteenth-century America faced similar problems and solved them harmoniously and without difficulty. Railroads allowed each other’s cars on their tracks; they inter-connected with each other for mutual benefit; the gauges of the different railroads were adjusted to be uniform; and uniform regional freight classifications were worked out for 6,000 items. Furthermore, it was the railroads and not government that took the initiative to consolidate the unruly and chaotic patchwork of time zones that had existed previously. In order to have accurate scheduling and timetables, the railroads had to consolidate; and in 1883 they agreed to consolidate the existing fifty-four time zones across the country into the four which we have today. The New York financial paper, the Commercial and Financial Chronicle, exclaimed that "the laws of trade and the instinct for self-preservation effect reforms and improvements that all the legislative bodies combined could not accomplish."3

3. See Edward C. Kirkland, Industry Comes of Age: Business, Labor, and Public Policy, 1860-1897 (New York: Holt, Rinehart, and Winston, 1961), pp. 48-50.

Rothbard the Urbanist Part 5: Diversity and Discrimination

This 5th installment of the Rothbard Series dovetails well with the most recent post on segregation by guest blogger, Stephen Smith, as well as a post back in July over at Austin Contrarian

If you haven’t kept up with our discussion, Murray Rothbard’s classic For A New Liberty can be downloaded free from Mises.org as pdf, web page, and audio book, and you can read the first four parts:

Rothbard the Urbanist Part 1: Public Education’s Role in Sprawl and Exclusion
Rothbard the Urbanist Part 2: Safe Streets
Rothbard the Urbanist Part 3: Prevention of Blockades
Rothbard the Urbanist Part 4: Policing

In the comments of the first post of this series on public education’s roll in segregation, the discussion delved into the topic of discrimination.  Bill Nelson and I shared our thoughts on discrimination by co-op boards, while another guest inquired about my statement, “elitist institutions often exclude others to their own detriment”  (Rothbard’s words further below make a similar case)  I also referred the guest to a great article on the economics of discrimination and a snippet from an article discussing how private streetcar companies fought discrimination:

The Market Resists Discrimination

The resistance of southern streetcar companies to ordinances requiring them to segregate black passengers vividly illustrates how the market motivates businesses to avoid unfair discrimination. Before the segregation laws were enacted, most streetcar companies voluntarily segregated tobacco users, not black people. Nonsmokers of either race were free to ride where they wished, but smokers were relegated to the rear of the car or to the outside platform. The revenue gains from pleased nonsmokers apparently outweighed any losses from disgruntled smokers.

Streetcar companies refused, however, to discriminate against black people because separate cars would have reduced their profits. They resisted even after the passage of turn-of-the-century laws requiring the segregation of black people. One railroad manager complained that racial discrimination increased costs because it required the company to “haul around a good deal of empty space that is assigned to the colored people and not available to both races.” Racial discrimination also upset some paying customers. Black customers boycotted the streetcar lines and formed competing hack (horsedrawn carriage) companies, and many white customers refused to move to the white section.

In Augusta, Savannah, Atlanta, Mobile, and Jacksonville, streetcar companies responded by refusing to enforce segregation laws for as long as fifteen years after their passage. The Memphis Street Railway “contested bitterly,” and the Houston Electric Railway petitioned the Houston City Council for repeal. A black attorney leading a court battle against the laws provided an ironic measure of the strength of the streetcar companies’ resistance by publicly denying that his group “was in cahoots with the railroad lines in Jacksonville.” As pressure from the government grew, however, the cost of defiance began to outweigh the market penalty on profits. One by one, the streetcar companies succumbed, and the United States stumbled further into the infamous morass of racial segregation.

From Jennifer Roback, “The Political Economy of Segregation: The Case of Segregated Streetcars.” Journal of Economic History 56, no. 4 (December 1986): 893–917.

So, now we get to hear what Professor Rothbard had to say about discrimination:

Street Rules

One of the undoubted consequences of all land areas in the country being owned by private individuals and companies would be a greater richness and diversity of American neighborhoods. The character of the police protection and the rules applied by the private police would depend on the wishes of the landowners or street owners, the owners of the given area. Thus, suspicious residential neighborhoods would insist that any people or cars entering the area have a prior appointment with a resident, or else be approved by a resident with a phone call from the gate. In short, the same rules for street property would be applied as are now often applied in private apartment buildings or family estates. In other, more raffish areas, everyone would be permitted to enter at will, and there might be varying degrees of surveillance in between. Most probably commercial areas, anxious not to rebuff customers, would be open to all. All this would give full scope to the desires and values of the residents and owners of all the numerous areas in the country.

It might be charged that all this will allow freedom "to discriminate" in housing or use of the streets. There is no question about that. Fundamental to the libertarian creed is every man’s right to choose who shall enter or use his own property, provided of course that the other person is willing.

"Discrimination," in the sense of choosing favorably or unfavorably in accordance with whatever criteria a person may employ, is an integral part of freedom of choice, and hence of a free society. But of course in the free market any such discrimination is costly, and will have to be paid for by the property owner concerned.

Suppose, for example, that someone in a free society is a landlord of a house or a block of houses. He could simply charge the free market rent and let it go at that. But then there are risks; he may choose to discriminate against renting to couples with young children, figuring that there is substantial risk of defacing his property. On the other hand, he may well choose to charge extra rent to compensate for the higher risk, so that the free-market rent for such families will tend to be higher than otherwise. This, in fact, will happen in most cases on the free market. But what of personal, rather than strictly economic, "discrimination" by the landlord? Suppose, for example, that the landlord is a great admirer of six-foot Swedish-Americans, and decides to rent his apartments only to families of such a group. In the free society it would be fully in his right to do so, but he would clearly suffer a [p. 207] large monetary loss as a result. For this means that he would have to turn away tenant after tenant in an endless quest for very tall Swedish-Americans. While this may be considered an extreme example, the effect is exactly the same, though differing in degree, for any sort of personal discrimination in the marketplace. If, for example, the landlord dislikes redheads and determines not to rent his apartments to them, he will suffer losses, although not as severely as in the first example.

In any case, anytime anyone practices such "discrimination" in the free market, he must bear the costs, either of losing profits or of losing services as a consumer. If a consumer decides to boycott goods sold by people he does not like, whether the dislike is justified or not, he then will go without goods or services which he otherwise would have purchased.

All property owners, then, in a free society, would set down the rules for use of, or admission to, their property. The more rigorous the rules the fewer the people who will engage in such use, and the property owner will then have to balance rigor of admission as against loss of income. A landlord might "discriminate," for example, by insisting, as George Pullman did in his "company town" in Illinois in the late nineteenth century, that all his tenants appear at all times dressed in jacket and tie; he might do so, but it is doubtful that many tenants would elect to move into or remain in such a building or development and the landlord would suffer severe losses.

While Rothbard had some good things to say on how the free market enables diversity in terms of racial discrimination and diversity among and within districts, he missed the opportunity to specifically address ideas relating to Jane Jacobs’ generators of diversity within urban districts other than stating, “commercial areas, anxious not to rebuff customers, would be open to all.”  Jacobs generators of diversity:

  1. The district, and indeed as many of its internal parts as possible, must serve more than one primary function; preferably more than two.  These must insure the presence of people who go outdoors on different schedules and are in the place for different purposes, but who are able to use many facilities in common.
  2. Most blocks must be short; that is, streets and opportunities to turn corners must be frequent.
  3. The district must mingle buildings that vary in age and condition, including  a good proportion of old ones so that they vary in the economic yield they must produce.  This mingling must be fairly close-grained.
  4. There must be a sufficiently dense concentration of people, for whatever purposes they may be there.  This includes dense concentration in the case of people who are there because of residence.

Obviously, Jacobs wasn’t referring to racial diversity, and I’m glad she wasn’t because the abuse of the concept has gotten tiresome to me.  She was referring to the types of diversity in the built environment that are necessary to make a urban places vibrant. Nonetheless, Rothbard’s analysis of racial discrimination and diversity could be applied to the built environment, because a landlord would have market incentives to provide as much space as is economically optimal to as many potential tenants as possible, likely forgoing personal preferences and prejudices. Thus, mixing of uses is likely to occur when a landlord is unlikely to discriminate one use over another or give undeserved preference to one type of tenant over another.

I can see a system of fully private ownership emerging into two very distinct patterns: – aglomerative consolidations and bottom-up dispersion of ownership, each existing in certain circumstances.

  • One could argue that Jacobs’ generators of diversity would likely exist within large privately-owned districts, but a landowner would likely need to consolidate a significantly-sized district in order to properly capture the positive externalities associated with diversely mixed uses.  At the same time, large, privately-owned gated communities would likely exist in less centralized locations where private space and separation could meet the desires of those who are willing to pay a premium for the extra space.
  • In other locations it would be optimal for land to be owned by smaller dispersed entities.  In this case, diversity would simply emerge bottom-up through the free-market process, as it had prior to zoning.  I could imagine that, left unhampered by government coercion, diverse patterns that meet people’s specific needs and natural pursuit of interaction would inevitably emerge through dispersed and competitive ownership of smaller parcels.  (See Mathieu Helie’s Emergent Urbanism)

I would think the larger-scale commercial activity and gated communities will occur in the former, and just about everything else, the later. 

Redistribution (a follow up)

I threw up Friday’s Redistribution post somewhat hastily during my break, but there isn’t much more that I haven’t said before.  As a follow-up, I’d like to tie it in with some other interesting reads.

Ryan Avent at The Bellows agreed with Yglesias’ post and added:

Anyway, I saw in Google reader that libertarian intellectual Will Wilkinson had shared Matt’s post, presumably because he agreed with it. And indeed, this is one of those times when libertarians and liberals can find common cause. On the other hand, most of Cato’s planner types vigorously defend suburban sprawl and highway construction, and vigorously oppose smart growth and transit construction, despite the obvious point that it takes an immense web of regulations and subsidies to support rapid suburban and exurban growth.

Over here! Ryan, Will! We’re over here!…

Definitely check out The Bellows post. Will Wilkinson stopped in to comment, too.

I think the “common cause” concept was conveyed well in Ed Glaeser’s recent NY Times piece, called The Case for Small-Government Egalitarianism. Harvard’s Glaeser reaches out for “common cause” between libertarians and progressives – kinda like the links between Free-Markets and Urbanism:

Libertarian progressivism distrusts big increases in government spending because that spending is likely to favor the privileged. Was the Interstate Highway System such a boon for the urban poor? Has rebuilding New Orleans done much for the displaced and disadvantaged of that city? Small-government egalitarianism suggests that direct transfers of federal money to the less fortunate offer a surer path toward a fairer America.

and

Many of my favorite causes, like fighting land use regulations that make it hard to build affordable housing, aid the poor by reducing the size of government. In the wake of Hurricane Katrina, I also argued that it would be far better to give generous checks to the poor hurt by the storm than to spend billions rebuilding the city, because those rebuilding efforts would inevitably help connected contractors more than ordinary people.

Urbanism is an area where free-market folks and progressive city dwellers can work together and share knowledge on so many concepts – I think we’ll find we have more in common than what’s on the surface.  As Noah Millman puts it:

But forgive me if I question the proposition that any political group is actually purely rational, and actually acting entirely out of concern for the common good. People who are, fundamentally, more distrustful of big government because they are convinced it will inevitably become the tool of special interests against the common good will be more alive to the kinds of things that can go wrong with big-government solutions than will other kinds of liberals who lack that basic distrust. By the same token, libertarians might be more likely to be won over to liberal perspectives if liberals can articulate arguments that libertarians would respect about how their policy proposals will actually limit government capture by special interests.

The Story of I’On: Struggles of a New Urbanist Project

43 John Galt Way

43 John Galt Way

27 Mises Street

27 Mises Street

I recently googled upon a post at a blog called “Rub-a-Dub” that mentioned a land development project in Mount Pleasant, SC called I’On

I imagine the developers of the I’On “Traditional Neighborhood Development” (TND) community are sympathetic with Market Urbanism, as they named streets after John Galt (of Ayn Rand’s Atlas Shrugged), free-market economists Ludwig Von Mises and Thomas Sowell, as well as urbanist writer Jane Jacobs. (ironically, Jane Jacobs Street doesn’t have sidewalks yet according to google street views)


View Larger Map

Who says New Urbanists and free markets can’t mix?  (well, I’m sure we all can name at least one such person…)

What I found interesting was the story of the development shared in the comments of the post by Vince Graham, Founder and President of the development company.  The story really conveyes the struggles developers go through to get projects through the approval process; especially when the standard 20th century, auto-centric layout is being challenged by innovative development solutions.

The reason why there is only single family homes and a limited amount of commercial space in the neighborhood is due to unfortunate compromises necessary to get the neighborhood approved through the arduous political process. Here is a summary:

A Summary of the Political Background and Permitting History for I’On.

    Background:

The traditional walking neighborhood of I’On is located on a 243-acre infill site in Mt. Pleasant, SC located 5 miles from Charleston’s historic district and 3 miles from the Old Village of Mt. Pleasant. The site is surrounded by conventional subdivision development of the 1950’s, 60’s, 70’s, and 80’s. Approximately 60% of I’On’s acreage was originally comprised of former agricultural fields, 30% was 30-40 year old hard wood growth, and 10% took the form of three man made lakes. The design workshop for I’On took place in May of 1995. I’On received approval in March of 1997, and ground was broken on infrastructure in June of 1997, and on the first house in March of 1998. As of January 1, 2003, approximately 300 homes were occupied in I’On, with another 60 homes or so under construction. 19,000 s.f. of commercial space is complete and occupied with another 8,000 s.f. under construction. Two civic buildings have also been completed.

Mt. Pleasant is a bedroom community of Charleston. It has a population of approximately 50,000 people spread over 26,000 acres (roughly the size of Hilton Head Island or Nantucket Island). In 1992, well in advance of the initial design workshop for I’On, the Town Council of Mt. Pleasant unanimously adopted a town-wide Master Plan incorporating Traditional Neighborhood Design (TND) principles. This plan, known as the Redmon-Johnson Master Plan, praised the Old Village of Mt. Pleasant with its mix of civic, commercial, and residential uses as the development model to emulate. It even recognized the site upon which I’On was to be built as an ideal location for a TND. In addition, the Town had adopted and unanimously approved a Strategic Plan in 1994, which also encouraged future development to take the form of compact, traditional neighborhood like the Old Village of Mt. Pleasant. Unfortunately, the Town’s zoning had never been modified to make it consistent with the Master Plan or the Strategic Plan. The underlying zoning for the site was “R-1” specifying 10,000 s.f. minimum lot sizes with accompanying requirements of conventional development (minimum lot widths, setbacks, etc). Thus, to develop the property as a TND required a zoning change to “Planned Development”.

The Founders retained Dover Kohl and DPZ as land planners for the neighborhood. The Founders led the combined firms on a tour of the best models of urbanism in the region including Savannah and Charleston, as well as the historic areas of lesser known coastal towns like Beaufort, Rockville, and the Old Village of Mt. Pleasant. In addition, the group toured Newpoint, a three-year-old TND the Founders were currently building in Beaufort.

Over the next seven days, the group worked to develop a design code and plan comprising 800 single-family lots, 440 multi-family units, 90,000 s.f. of commercial space, and a number of civic sites. Andres Duany presented the plan to a standing room only crowd at the Mt. Pleasant Town Council chambers in mid-May of 1995.

The Founders spent the next few months working with members of DPZ and Dover Kohl to fine tune the plan and code to ready them for rezoning application submission. The rezoning application was submitted in August, 1995. After several public meetings, it received a 7-2 recommendation for approval by the Mt. Pleasant Planning Board. Prior to being reviewed by Mt. Pleasant’s Town Council, compromises were made to the rezoning application reducing single-family lots to 730, and multi-family units to 120. These 850 units worked out to a density of 3.5 units/acre. 3.5 units/acre met the Town’s definition of “low density” [Note: this definition has since been revised downward to 2.8 units/acre.]. Despite more citizens speaking in favor of the project than in opposition at the Mt. Pleasant Town Council meeting held in December of 1995, the application was rejected by a 5-4 vote.

Among other concerns, several residents from the adjacent subdivisions of Hobcaw Point, Molasses Creek, and Heron Pointe feared that the smaller lots would depress their property values, the proposed roundabout would be a “circle of death”, some of the planned streets would be too narrow for fire equipment to use, the parks and apartments would attract “undesirables”, and traffic from I’On would overwhelm Mathis Ferry Road.

After much debate, the Founders elected to continue with option payments to purchase the property. They worked to decipher what kind of plan would be supported by those council members who voted against the application. They also worked with planners to make further compromises to the plan such as removing the multi-family component, reducing the number of proposed thoroughfare types from 11 to 4, reducing commercial from 90,000 s.f. to 30,000 s.f., eliminating a vehicular connection to the adjacent neighborhood, and reducing the total unit count to 759. The Founders had deep regrets about making these compromises as they felt the neighborhood would be less diverse and less affordable, thus reducing the overall quality of I’On. However, political circumstances made these compromises necessary to get anything approved.

Note: 759 units on 243 acres works out to a density of 3.1 units per acre. For comparison, the Old Village of Mt. Pleasant has 3.7 units per acre, Charleston south of Broad Street has 5.2 units per acre, and a conventional R-1 subdivision in Mt. Pleasant has about 2.7 units per acre.

The compromises alleviated the concerns of a large portion of the opposition. However, there was still a core group of four or five individuals lead by Vince Adams who were determined to defeat the development proposal. Opponents argued that the neighborhood plan would generate too much traffic on Mathis Ferry Road. They refused to believe a traffic impact study prepared for the project, which found that because of the off-sight improvements being made by the developer (which included a new connector road between Mathis Ferry Road and U.S. 17) the traffic impact from new homes in I’On would be less than it would be from a conventional subdivision development where no connector road was required. This study also found that the level of service (a qualitative measure of traffic flow conditions) on Mathis Ferry Road would not change once the development was fully built out. Nor would opponents believe the Town of Mt. Pleasant’s own traffic engineering consultant who reviewed the study and concurred with its findings.

The opponents’ claimed the I’On Founders were being deceptive, and the maximum number of units that could be built on the property using R-1 guidelines was between 450 and 500 units. Their basis for this claim was a land plan that had been prepared for the property in the early 1990s, which opponents would cite in public meetings and letters to the Planning Board and Town Council. This plan, which showed 450 units, had been commissioned by Bob Miller, a developer with strong political connections, who had been building conventional subdivisions in the Town for many years. Miller had worked on this plan with Dick Jones, a former Mayor of the Town.

This new plan and rezoning application was submitted in December, 1996. After the requisite public hearing, it received a 7-1 recommendation for approval by the Mt. Pleasant Planning Board in January, 1997, followed by a 7-2 first reading approval by Town Council in February of 1997. The plan and rezoning application received 6-3 final approval by Town Council in March of 1997 (one council member who had supported the rezoning in February, switched his vote after intense lobbying by rezoning opponents). As with the 1995 application, the majority of citizens who came to speak at public hearings voiced support for the plan for I’On.

Infrastructure construction began in the summer of 1997 (two years after the initial design workshop took place) and ground was broken on the first house in March of 1998. Homes in the neighborhood have ranged in price from $160,000 to $1,700,000, and lots range in size from 1/20th to one half of an acre. It is worth noting that some of the more expensive homes sold in the neighborhood are located on some of the smallest lots. Quantity is not quality, and thus, does not necessarily translate into a higher price.

During the time the Planned Development ordinance received first reading approval in February of 1997 and infrastructure ground breaking in the summer of that year, the opponents of the project gathered a petition of 3,500 registered voters, which they presented to Town Council requesting that governing body overturn the approved ordinance, or otherwise, hold a referendum enabling the citizenry to vote on the zoning. The Founders challenged this action, and a Circuit Court Judge placed a Temporary Restraining Order (TRO) on the Town prohibiting them from acting on this petition. This TRO was subsequently lifted, and while the Town Council voted 6-3 against overturning the rezoning, they did schedule a Town-wide referendum be held in October of 1997.

The Founders continued their legal challenge, while preparing a campaign to win support for I’On at the polls in October of 1997. Site work construction continued unabated throughout despite the opponents’ legal attempts to stop it. One week prior to the scheduled referendum, Circuit Court Judge Markley Dennis ruled that a municipality could not hold a referendum on zoning issues. The Town was satisfied with the decision, but the opponents were not and intervened to appeal this decision. The appeal was heard by the South Carolina State Supreme Court in December of 1999. In January of 2000 the Supreme Court ruled unanimously to affirm the lower court decision.

The principal opponents of I’On targeted the incumbent supporters for defeat. In subsequent elections, five of the six council members who had voted to support the rezoning of I’On were defeated at the polls, and the other member of Council who had voted to support the rezoning, elected not to run. Despite all its aesthetic, economic, environmental and social successes, I’On was effectively used as a galvanizing issue for the anti-growth forces of the Town to defeat incumbents.

Since its approval, I’On has received numerous local, state and national awards for environmental sensitivity, sustainability, and design, including a Stewardship Award from the South Carolina Department of Natural Resources, and the National Association of Home Builders “Best Smart Growth Community” in the country in 2002. It has also received national and international recognition from media outlets ranging from CNN to National Geographic magazine. The neighborhood has played host to college groups, city councils and planning staffs from other municipalities in the Carolinas, and developers from as far away as Europe, Japan, and Australia. They come to learn more about smart growth principles in action.

The political fervor has died down over the years as I’On’s residential property values have consistently outperformed the market and are easily the highest of any new community in Mt. Pleasant. However, from time to time a new controversy will arise. A 2001 proposal to connect with the new subdivision of Braemore to the southwest was fought by Council. Another 2001 proposal to allow up to 80 of the 762 approved homes to take the form of “Rainbow Row” styled townhouses was voted down by Town Council 9-0. In January of 2002 the Town chose to fight a Montesorri School’s decision to locate on one of the sites designated for civic use in I’On, by arguing that a school is not a civic use. A circuit court judge ruled that the Town cannot exclude a school from its definition of civic use, but despite this, the Town asked its city attorney to appeal this decision to the S.C. Court of Appeals in April of 2002. In October of 2003 the Court of Appeals handed down a unanimous decision affirming the lower court’s decision, which opens the door for a school to be built in the neighborhood.

    A few observations.

As discussed, the neighborhood is located in close proximity to two historic districts that are, if price is any measure, the most sought after places to live in the area; through its Master Plan and Strategic Plan the Town had adopted a clear vision for the kind of development they wanted; we had two of the best, if not the best, planning teams in the country creating the initial plan; no less than four environmentally oriented groups endorsed the plan along with a substantial number of community leaders; and the developer had a track record of successful TND development within a 90-minute drive of the subject property.

It is important to recognize that our society has politicized property rights and democratized land use to the point that most re-zonings now involve a political campaign. Even with great built examples such as the historic area of Charleston and the Old Village of Mt. Pleasant, one should not make the naïve mistake of assuming that citizens or their elected leaders will understand the concept after hearing a lecture or reading a few articles on Traditional Neighborhood Development. Some may take years to understand the concept, while others may never understand it. And there are some who feel that accepting the design principles of TND involves an admission that what has been built over the last 50 years was a mistake. They may be unable or unwilling to make such an admission. Also, one should not assume that if a politician or appointed board member likes a project or thinks it is “the right thing to do” they will necessarily support it in a public forum. Few are those who possess the political will or guts to stand up to an angry room full of NIMBYs, or a well-connected citizen.

It is extraordinarily difficult to win such a political campaign in most areas of the country for several reasons: (1) Prior to World War II people were excited about growth. Their expectations were that what was built would be beautiful and contribute to their quality of life. However, the overall quality of the built environment of the last 50 years has been poor. This makes people distrustful of anything new, and gives rise to a legitimate belief that anything new will, by association with most of what has been built over the last 50 years, will necessarily be bad; (2) the private/exclusive mindset embodied in the suburban mentality (which has spread to many urban areas) leads people to believe that any more development will degrade their privacy and exclusivity; and (3) it is in the best short-term economic interests of existing property owners because limiting supply of new homes, puts upward pressure on existing home prices.

There are many bright spots in the I’On story that those involved in campaigning for, building, and living in the neighborhood can view with pride. As mentioned, the neighborhood continues to grow in aesthetic, economic, and social value. It attracts people from around the world interested in smart growth principles, and demonstrates that it is still possible to build in a beautiful manner.

The present Town Council of Mt. Pleasant attempts to address growth by widening roads, and mandating lower densities and segregated land uses. This has the effect of spreading new growth out to the fringes of Town, requiring longer travel times, mandating the need for a car to meet daily needs, and thus exacerbating the problem of traffic congestion. There are however, many municipalities taking aggressive measures to address the problems of sprawl. For example, the Founders have been welcomed by other municipalities and their citizens in South Carolina and North Carolina to participate in building new neighborhoods. With I’On and other examples of mixed-use development now taking shape across the country, the future looks bright for an expanded availability of housing choice.

Vince Graham
The I’On Company
vince@iongroup.com

Talking points on the housing bubble

By Sandy Ikeda

Last week I spoke to a standing-room-only crowd of students and faculty about the current economic and financial turmoil.  I shared the podium with three of my colleagues, who range all the way from far to the left of Barack Obama to very, very far to the left of Barack Obama.  Needless to say, they all blamed, to a greater or an even greater degree, “the free market.”

Now, I do think it’s possible in principle for wide-spread mal-investments to occur in an unfettered market.  (F.A. Hayek writes about the possibility in his Monetary Theory and the Trade Cycle, which you can read online here.)  But enormous speculative bubbles, of the sort we’ve just witnessed in the housing market, are typically the result of government interventions and policies.

So in my talk on this highly complex issue I tried to make three points:  (1) the immediate cause of the financial panic on Wall Street was the housing bubble with its sudden rise in mortgage defaults; (2) the free market, which stands for minimal government and the absence of privilege or discrimination, did not create this bubble; and (3) government (and Fed) policy and pressure did, by undermining lending standards across the board and pushing lending rates artificially low.

This blog has already referenced Russell Roberts’s fine collection of blog posts on the problem, and if you’re already familiar with the issues then obviously there will be nothing new here for you.  But I think it might be useful to have a list of “names and dates” that make the above case.  The following is not meant to be exhaustive (e.g., it doesn’t even mention important international factors), but is only an outline of the major legislation and policies relevant to the housing bubble.

(Caveat:  My expertise in economics is not in finance, but I did study a lot of this stuff at one time.)

***

LEGISLATIVE & POLICY TIMELINE

1913:    An act of Congress creates the Federal Reserve System, America’s first true central bank, to act as the government’s bank and as a lender-of-last resort for its members.

1920s:    The Fed quickly discovers that by buying and selling Treasury obligations (i.e., “open-market operations”) it can increase and decrease the supply of money and credit and thereby manipulate market rates of interest.  The Fed inflated the money supply by 60% in the 20s, which resulted in economic boom as well as systemic malinvestment, and rampant speculation on margin on Wall Street.  (Sound familiar?)  The best account of the episode is Murray Rothbard’s America’s Great Depression.

1929-33
:  As we know, the economy then crashed and burned.  But that was a necessary stage in the economic recovery from the previous decade’s massive malinvestments, as producers tried to re-align their decisions with consumer preferences.  Unfortunately, a slew of policies, such as the Fed’s 30% contraction of the money supply, and legislation, such as the Smoot-Hawley tariff, delayed recovery for twelve years.

1938
:  FDR creates the Federal National Mortgage Association (“Fannie Mae”), which is charged with buying and insuring residential mortgages in order to lower interest rates and promote home ownership.  Home ownership rises from 43% in 1949 to 62% in 1960.

1970:  Congress creates the Federal Home Loan Mortgage Corporation (“Freddie Mac”) that, together with a re-constituted Fannie Mae, bundles home mortgages into “mortgage-backed securities” (MBSs) for sale to investors.

•    Fannie and Freddie are known as Government Supported Enterprises (GSEs).

•    By 2008 Fannie and Freddie had issued more than 60% of MBSs, of which they themselves held $1 trillion and insure about 50% of all MBSs.

•    The perception that the federal government guarantees Fannie and Freddie’s viability further lowers the cost of risk and increases their profit margin, on the order of about $2 billion per year, as estimated by the Congressional Budget Office and the Treasury Department.

•    This implicit guarantee is realized in part, when beginning in 2006 rising loan defaults jeopardize Fannie and Freddie and prompts President Bush to nationalize them in August 2008.

1975
:    Congress passes the Home Mortgage Disclosure Act (HMDA), requiring lenders to provide detailed information about mortgage applicants.

1977
:  Jimmy Carter signs the Community Reinvestment Act (CRA), requiring banks to conduct business across the entirety of geographic areas in which they operate, in an attempt to combat “redlining.”

1991: Bill Clinton expands HMDA to include comparisons of rejection rates by race.

1992:    The Boston Fed promotes the government’s mandate to increase home ownership, specifically among minorities, by advocating a relaxation of lending standards, including:

•    Eliminating a lack of credit history as a barrier.
•    Permitting a lower share of income than the standard (28/36) on mortgage payments.
•    Permitting lower down payment and closing costs.
•    Nontraditional sources of income are OK, including unemployment benefits.
•    Banks can be punished by fines if HMDA data show higher rejection rates of minorities.

(One of my colleagues at this point accused me of blaming minorities for the housing crisis.  Be very careful, people will play this card!  Clearly, the responsibility for the crisis lies not in the intended beneficiaries of the CRA, but to the CRA itself and to the lax standards that it later encouraged across the entire mortgage market, both prime and sub-prime.)

Beginning in 1992
:  Fannie and Freddie were encouraged to purchase “affordable” mortgages from banks – i.e., mortgages that followed “flexible lending standards” to promote the goals of the CRA.

•    Pressure from Congress and presidents Clinton and Bush helped promote the “subprime” market.  (Note:  You could underwrite subprime paper even before deregulation of 1999.)

•    Congress and the Administration pressure Fannie & Freddie to accept a growing percentage of their portfolios in subprime mortgages and also MBSs, of which by 1992 they held over $1 trillion.

•    Home ownership rises from around 64% in 1994 to 69% in 2005.

From 1998 to 2006
:  There’s a great housing boom in the US.  Prices rise from just under $60K to over $90K (in 1983 dollars), owing in large part to “flexible standards” and the Fed’s interest-rate policy.

•    The “Federal Funds Rate,” which the Fed targets by using open-market operations, plunged from around 6% in January 2001 to 1% in January 2004.

•    While this was largely in response to the recession and 9/11, it also reinforced Congress and the President’s goal of expanding home ownership and fueling the ongoing housing boom.

2006:  In the third quarter of that year, defaults and “foreclosures started” began their sudden climb for prime (from around 0.16% of loans made to 0.43% in Q4 2007) and subprime mortgages (from around 1.5% to 3.7%) AT THE SAME TIME.  Thus, contrary to conventional wisdom, subprime defaults did not precipitate the prime-market defaults.

•    Stan Liebowitz shows that it was in the market for adjustable-rate loans, particularly in low-income areas, that foreclosures were the most dramatic.  These are the kind of loans that speculators prefer because of their low initial rates (with low or no money down owing to the “flexible standards” which were becoming the practice across the industry) and because speculators expect to re-sell (or “flip”) the houses before the rates were set to increase.

•    In percentage terms, the increase in foreclosure rates was significantly higher for prime adjustable loans (69%) than for subprime adjustable loans (39%).

2008: Investment banks and other financial institutions that, after years of encouragment from the government and GSEs, hold a significant part of their assets in MBS with defaulting loans — such as Bear Stearns, Lehman, AIG, Fannie and Freddie — see their asset values plummet and go belly up. Panic races across the rest of the Wall Street, the Dow Jones crashes again and again. In the midst of the panic, the government nationalizes a significant and ever growing percentage of the financial market.

So here’s the short version:  (1) Government legislates and the Fed helps to implement flexible standards in the mortgage industry in conformity with the CRA.  (2) Throughout the 1990s and early 2000s, government pressures Fannie and Freddie to purchase an increasing proportion of MBSs and subprime loans (based on flexible standards), while at the same time (perhaps unintentionally) loosening traditional lending standards across the board.  (3) From 2001 to 2004 the Fed deliberately drives interest rates down (as much as 5 percentage points).  (4) This all fuels in a speculative housing boom beginning in 1998, financial innovations on Wall Street based on MBSs and other derivatives in the early 2000s, and a housing bust in 2006.  (5) This in turn precipitates an historic financial collapse and equally historic bail-out in September 2008.

Greed and speculation are obviously an integral part of this story.  (They are as constant as gravity in ANY politico-economic system.)  Given the scope and depth of involvement in it by government institutions and policies, however, blaming our current woes on “the free market” is nonsense.

***

I drew on many sources in putting this timeline together, but the following were my principal ones:

Stan Liebowitz, “Anatomy of a train wreck.” [pdf]

Roger Congleton, “Notes on the financial crisis and the bail out.” [pdf]

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

Reason.org’s Staley Not in Favor of Property Rights if…

That is, he argues that private property should be subject to government planning restrictions if a developer building densely on its property creates a traffic burden on government roads.

Wooten points out that any solution to Atlanta’s traffic congestion has to focus on roads, not transit or land use. In a more interesting twist, he takes local policy makers to task for approving higher density zoning without making the commitment to improving the road network to support it.

Hmmm… Interesting point of view from a so called free-market organization that claims to support individual property rights over government planning. I think I’ll remove them from the blogroll. click, click, done

Add Staley to the list of Free-Market Impostors.

Urban[ism] Legend: Greedy Developers

This post is part of an ongoing series featured on Market Urbanism called Urbanism Legends. The Urbanism Legends series is intended to expose many of the myths about development and Urban Economics. (it’s a play on the term: “Urban Legends” in case you didn’t catch that)

We’ve all heard it said by some NIMBY activist: “This developer doesn’t care about the people of the neighborhood, he just wants to maximize his own profit.” Are developers the devil?

No doubt, developers usually are self interested, and seek profit. However, just like in any business, profit seekers must try to satisfy the desires of its customers better than its competitors. The successful developer must direct capital towards creating value in the real estate market for potential customers. So, perhaps it seems particularly greedy that a developer who is creating value in a community, cares less about the current inhabitants than newcomers.

But, as Henry Hazlitt wrote in the classic, Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics:

the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

here’s a link to the quote in an online version of the book

Most Urbanism Legends, like most economic myths, rely on looking at policies from the perspective of one group without looking at the effects on other groups and society as a whole. This Urbanism Legend is no different. Looking deeper at the issue, the developer represents the needs of the community in a less visible, yet equally important way. However, it is the needs of those who desire to be in the community who the developer is most interested in advancing, obviously because those people are the only ones from whom the developer expects to earn profit. Thus, through his self interest, the developer is an advocate for those who intend to move to the neighborhood where he is developing.

In nearly all cases, the developer represents “The Forgotten Man”, or the less visible members of a community effected by zoning policies. If a developer is prevented from developing as many units as the market dictates, we do not see the individuals who have to look elsewhere for housing or pay more for housing in their desired location. Yet, we plainly see the existing neighbors who complain that a developer is neglecting their needs. NIMBY activism is a perfect example of lobbying for popular policies that benefit some seen person or persons, at the expense of the unseen persons.

Looked at from the perspective of “seen and unseen” the developer is the voice of the unseen future members of the community, while it is the existing neighbors who make themselves readily visible. The NIMBY seeks to abuse public policy to enhance his own property values at the expense of potential newcomers. (for more on “the seen and unseen”, check out Bastiat’s must-read 1848 essay, That Which Is Seen and That Which Is Not Seen also online here)

According to The American Heritage Dictionary of The English Language, greed is “An excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth”

By this definition, who is greedy? The developer who seeks to earn a profit by satisfying the needs of its customers who are willing to pay market prices for the developer’s product? Or is it the NIMBY, who seeks to halt the progress of people who desire to live in his community, in order to improve his own property value?


To receive future Urbanism Legends posts, subscribe to the Market Urbanism feed by email or RSS reader here. If you come across an interesting Urbanism Legend, let me know by email or in the comments and I’ll make a post debunking the myth. Of course, I’ll give you credit for the tip and any contributions to the post you make…