Monthly Archives: June 2009

Homeowners and the Great Recession

Writing at Forbes.com, Joel Kotkin weighs in on the claim that homeownership caused the Great Recession:

Increasingly, conventional wisdom places the fundamental blame for the worldwide downturn on people’s desire–particularly in places like the U.K., the U.S. and Spain–to own their own home. Acceptance of the long-term serfdom of renting, the logic increasingly goes, could help restore order and the rightful balance of nature.

Once considered sacrosanct by conservatives and social democrats alike, homeownership is increasingly seen as a form of economic derangement. The critics of the small owner include economists like Paul Krugman and Ed Glaeser, who identify the over-hot pursuit of homes as one critical cause for the recession. Others suggest it would be perhaps nobler to put money into something more consequential, like stocks.

Much of Kotkin’s piece is devoted to the implications for the future:

Rather than a source of economic weakness, this renewed quest for homeownership could underpin a sustainable recovery. As prices fall to reasonable levels, more people will qualify for reasonable loans. First, the empty houses and somewhat later, the condominiums now on the market will find buyers, in most places in a matter of a few years.

This shift will create huge opportunities for a diverse set of geographies. For urban areas like New York or Los Angeles, there will be a unique–perhaps once in a generation–chance to induce middle-class people to settle down in big-city homes or condominiums. If they become homeowners, they will be more likely to stay than move elsewhere to the suburbs or other regions when the time comes to buy a home.

Other, more affordable, less regulated and often more economically dynamic places like Texas and the Great Plains may realize even greater gains. Over time, we will likely see a recovery in some now-suffering parts of the Sunbelt. The renewal of home demand could also help revitalize many of our hardest-hit sectors, including construction and manufacturing.

Additionally, Economic Recovery Digest points to new research about homeowners who can afford to pay mortgages but choose not to; the research suggests that a quarter of defaults could be “strategic.”

Experiments in Democracy

A Wall Street Journal editorial discusses the severity of the budget crises in three states: California, New Jersey, and New York.  While all states are suffering decreased revenues this fiscal year, the problems in these states have been especially severe, resulting in possible downgrades for California’s bonds which are already the lowest-rated in the country.

The Journal states:

A decade ago all three states were among America’s most prosperous. California was the unrivaled technology center of the globe. New York was its financial capital. New Jersey is the third wealthiest state in the nation after Connecticut and Massachusetts. All three are now suffering from devastating budget deficits as the bills for years of tax-and-spend governance come due.

During booms in the business cycle, high tax rates accompanied by an increased level of government services are palatable to taxpayers, but as these three cases exhibit, high-tax policies can quickly become unsustainable as incomes fall.

Eileen’s last post explains that state and municipal policy makers including Rudolph Giuliani are currently discussing reforms toward greater fiscal responsibility in order to promote prosperity in their localities, but these reforms are going to be difficult to enact for states that are already deeply indebted.

A great asset of the American federal system is that policy variation across the states allows citizens and law makers to observe how various fiscal policies function in the real world.  As described by the authors of the newly published 2009 edition of Rich States, Poor States, constituents do in fact “vote with their feet” by moving to states with policies that fit their desires.  This year’s index demonstrates that states in the South and West are generally gaining domestic population from the Northeast where taxes and government involvement in the economy are generally higher.

Unfortunately, the same experimentation at the federal level carries much greater costs.  Until now, federal aid has allowed for irresponsible fiscal policies to continue at the state level, but this policy may be coming to an end.  If the federal debt and deficit approach the unsustainable levels that states such as California, New Jersey, and New York have reached, no entity will be able to bail it out.  Additionally, economic policies at the federal level do not provide the same sort of natural experiment within the country and carry a higher risk of severe negative consequences.

The article continues:

At least Americans have the ability to flee these ill-governed states for places that still welcome wealth creators. The debate in Washington now is whether to spread this antigrowth model across the entire country.

While government systems can never incorporate the feedback mechanisms of the market, the federalist system allows for a sort of competition between states and localities in which competition allows successful programs to thrive and spread. However, this system only works when unsuccessful local policies are not subsidized by the federal government and when authority is sufficiently devolved to allow states to differentiate their policies from one another’s.

Rudolph Giuliani to Albany: Constitutional Convention to Fix State Government

Former New York City mayor Rudolph Giuliani makes the case in an op-ed in today’s New York Times for a state constitutional convention to address the state’s economic ills. New York is just behind New Jersey with the second highest state and local tax burden in the nation. And like other ailing states (California and New Jersey), New York is dealing with the recession by hiking taxes.

A constitutional convention would consider the rules and incentives under which the state and its elected officials operate. Giuliani makes seven specific recommendations including reforming the budget process, term limits, and a supermajority vote for tax increases.

The specific proposals he offers are not necessarily silver bullets. For instance, ensuring the budget adheres to generally accepted accounting principles is an excellent idea. A supermajority vote for tax increases may or may not be effective, depending on how it is linked to other rules — such as spending limits.

A strong tax and expenditure limit, like the Taxpayer’s Bill of Rights (TABOR) in Colorado, requires that voters approve any spending beyond what population growth and inflation allow.

Giuliani’s proposal is a good one because it gets to heart of the matter: the rules under which elected officials create fiscal policy. New York’s fiscal institutions need review and reform. It is something other states would do well to also consider.

Top Ten Funded Stimulus Road Projects

The Business Insider has an interesting slideshow of the ten most expensive stimulus road projects to have received funding thus far, based on data assembled by ProPublica.

Of the ten, five are in California, two are in Florida, one is in New Jersey, one is in Alabama, and one is in Connecticut.

The most expensive project is the expansion of the Caldecott Tunnel on California’s State Route 24 between Alameda and Contra Costa counties. According to Caltrans, this improvement has been in the works for some time now, having received environmental approval in 2007, that is, long before the stimulus.

What makes this historically interesting is that construction on the orignal tunnel commenced in 1929 — but was taken over by the Public Works Administration and completed in 1937. So for the second time, the Caldecott Tunnel seems to have had fortunate timing when it comes to getting federal funding for an already-decided state project.

Roberta Brandes Gratz on Planning by Bulldozer

Roberta Brandes Gratz, one of the most interesting and innovative thinkers on urban space and planning, weighs in on current discussions about bulldozing cities (this blog discussed it here) at Citiwire. She likens plans to bulldoze large swaths of cities to the urban renewal projects of the last century.

One is hard pressed to find a city or even a neighborhood that was ever regenerated through demolition of vacant buildings. Didn’t we learn of the hollow results from the discredited post-World War II urban renewal policies that destroyed — and for decades left bereft — vast tracks of troubled residential structures?

Granted some appealing urban gardens are now sprouting in these cities, where piles of debris might have accumulated. Clearly this is better than rubble-strewn lots.

But vast clearance? The fact is the presence of vacant buildings is nothing new in any of these cities; the condition in today’s recession and industrial collapse is just worse. No citywide benefits ever materialized from mass demolition. And the big-bang projects that have sometimes risen where neighborhoods once stood– stadiums, arenas, convention centers, malls and the like — have not only failed in their promise and cost dearly but provided no fundamental basis for citywide resilience in good times or bad.

Her book The Living City: How America’s Cities Are Being Revitalized by Thinking Small in a Big Way is a classic and a must-read for anyone interested in how cities can be transformed by small, locally-based solutions. I was fortunate enough to meet her last year and discuss her work in the context of post-Katrina rebuilding in New Orleans with some of the founders of the New Orleans Institute for Resillience and Innovation.

Overplanning in Dubai

In an  LA Times article, architecture critic Christopher Hawkin writes about his trip to study Dubai:

Like many first-time visitors, I expected to find in Dubai a messy, vital hybrid of architectural and urban strategies, reflecting the city’s history as a regional crossroads and trading center. I could hardly have been more wrong. Dubai is not some Middle Eastern Venice, a polyglot city where the combination of construction workers from Pakistan, bankers from London and Hong Kong and tourists from around the world creates a mash-up of contemporary urbanism.

[. . .]

One major reason that the city has been divided up this way is that the emirate’s ruling family, led by Sheik Mohammed bin Rashid al Maktoum, controls all the major real estate companies operating here. In Dubai, the urban planners and the developers are essentially one and the same. Market ambition and civic ambition are similarly intertwined: Sheik Mohammed has often been called Dubai’s chief executive. Instead of building a monumental city hall or war memorial, Dubai builds shopping centers and office towers at a monumental scale.

In the heart of most cities, the biggest piece of land that a single developer is typically able to control is one square block. (In a dense, layered city, of course, the average parcel is far smaller.) In Dubai, whole districts of the city, many covering dozens of square blocks and hundreds of acres, have been given over to single developments. Seeing architectural diversity within any project as a threat to the bottom line, their creators usually hire a single firm to design them around a recognizable theme: the golf community, the office park, the vaguely souk-like waterfront combination of retail outlets and condominiums.

Currently, the relationship between builders and policy makers in Dubai has led to a strange pattern of development and has resulted a compartmentalized city rather than a conglomeration of neighborhoods. If the city does not recover its position as a tourist destination, it will be difficult for it to diversify its economy because current land use is not suitable for typical residential or business uses.

The unnatural development that a lack of competition has created in Dubai shares similarities with ideas promoted by garden city planners of the early 20th century. Garden city planners believed an organized, planned utopia would be preferable to the apparent chaos of cities that grow organically. Although the idea of a highly stylized and planned city may theoretically seem  this sort of development does not lead to livable cities.

If Dubai seeks to be merely a tourist attraction rather than a vibrant city, this glitzy but impractical development model may succeed provided that global economic prosperity returns quickly.  However, such an undiversified economy means that the city would remain in a position to be particularly hard hit by downturns in the business cycle, as Las Vegas is in the United States.

In order to develop cities that function as more than amusement parks, competition between developers at the street level is necessary to facilitate the diverse needs of residents, rather than exclusively the desires of wealthy tourists.  As a British businessman in Dubai explained in The Sunday Times:

Dubai has brilliantly exploited the boom years to build itself on to the map and into people’s minds. But Plan A is over now. The model only works in the good times. We need Plan B and we need it fast.

More on Dubai’s economy from the Economist, and on the city’s future prospects from Tyler Cowen (who has written on Dubai over 100 times).

“If you have a decent job, do what you’re supposed to do with your money, save your pennies, and pay off your bills, you can have the world by the tail in Flint.”

Recently, Bob Nelson discussed plans to bulldoze sections of Flint, Michigan to shrink the city to make up for declining population. San Franciscan Gordon Young discusses in Slate why he’s giving up the Paris of the West to buy a house in Flint:

As the veteran of a brutal San Francisco home-buying odyssey, there’s no denying the appeal of a place where desperate Realtors sometimes offer up houses by the dozen. But this is more than a quest for cheap housing. I have an almost unhealthy attachment to Flint. I want to do something—anything—to help my hometown. Maybe a “summer place” in what has been ranked one of America’s most depressing cities can pump a little life into the local economy. And I fear that after 15 years in San Francisco—sometimes described as 49 square miles surrounded on all sides by reality—I’m losing touch with my roots, drifting uncomfortably far from the factory town my grandparents moved to at the turn of the 20th century.

Read the whole thing here. Young blogs at flintexpats.com.

New Paper on Optional Federal Chartering

David Marlett has a new working paper discussing how an optional federal charter (OFC) for insurers would impact community resilience to natural disasters. Here’s the abstract:

The ability of communities to recover from disasters depends on a well-functioning property insurance market.  However, many states insurance markets are substantially distorted or are hobbled by excessive regulation.

As a solution, there has been proposed an Optional Federal Charter (OFC) system, under which insurers would be able to opt into a federal regulatory system, leaving behind the system of patchwork state regulations.

The merits of moving toward federal regulation have been debated for many years to try and alleviate some of the problems of current regulatory systems. The most common model in recent years is the Optional Federal Charter (OFC). This approach would provide insurers the option of obtaining either a state or a federal charter.

This paper discusses the benefits and problems with both the state-based and federal-based regulatory systems and suggests that, if policy makers choose to proceed with an Optional Federal Charter system, they should focus attention on:

1.       Minimizing political risk,
2.       Allowing competitive rating and minimizing rate suppression,
3.       Minimizing the immediate impact on policy holders, and
4.       Maintaining the antitrust exemption.

Download the paper here.

Addendum: Fixed the block quote which was not formatting properly.

Incentives for Mixed-Use Developments

Followers of the New Urbanism movement in city planning believe policies should be undertaken to encourage people to move into city centers and discourage sprawl. A New York Times article reports:

Urban-style development may be the brightest spot in a generally gloomy market. A recent survey of developers and investors by the Urban Land Institute for its annual Emerging Trends in Real Estate report found that urban redevelopment had the best prospects among all types of housing, while urban mixed-use properties and town centers scored high among niche property types. “These are the places that will be creating and holding value,” Ms. [Shelley] Poticha [the president of a transit-oriented nonprofit] said. She said proximity to public transit could raise property values significantly.

[. . .]

That often requires collaboration between local governments and private developers. Local governments might invest in transit, parks and infrastructure, revise zoning laws and offer financial incentives in return for a developer taking the risk of building in an unproven area.

If in fact consumer preferences are changing, shifting demand toward higher density, mixed-use housing and away from suburban single-family homes, of course it makes sense for developers to cater to these desires.  Some urban planning scholars see benefits in these types of residences such as increased quality of life or a more ecologically sound lifestyle. Home buyers likely see these same benefits, which may explain why some people are wanting to leave the suburbs for areas that they see as having superior amenities.

When consumers’ tastes in housing change, developers do not need incentives from any level of government to create housing products that satisfy their customers; in fact, they will have to build houses that meet changing demand conditions in order to stay in business.

Relaxing zoning code in order to allow for more mixed-use development in some cities may allow builders to better provide housing of the sort people want and may make cities that allow for mixed-use development more desirable places to live. However, proposed government incentives for specific types of developments, whether enacted at the local, state, or federal level, will move the market equilibrium away from optimal variety and quantity of housing which is demanded, making the politically-supported new developments cheaper relative to existing housing stock than they otherwise would be.

Particularly now, as many analysts think that the current housing stock is still in excess of what consumers want to buy at prevailing prices, it seems bad policy to create incentives that will allow builders to profit off of new housing in a way unsupported by market demand. The fallout of the mortgage market should have made it abundantly clear to everyone, especially urban planners, that incentivizing home building is not without risk.

Does the Schelling Tipping Point Model Fail?

William Easterly, an NYU economist best known for his work in international development, has a new NBER working paper suggesting that the Schelling tipping point model of neighborhood racial segregation doesn’t work out strongly as an empirical matter. Here’s the abstract:

The Schelling model of a “tipping point” in racial segregation, in which whites flee a neighborhood once a threshold of nonwhites is reached, is a canonical model of strategic interdependence. The idea of “tipping” explaining segregation is widely accepted in the academic literature and popular media. I use census tract data for metropolitan areas of the US from 1970 to 2000 to test the predictions of the Schelling model and find that this particular model of strategic interaction largely fails the tests. There is more “white flight” out of neighborhoods with a high initial share of whites than out of more racially mixed neighborhoods.