Tag Archives: City Journal

New York’s Population Challenge

Last week at City Journal, Aaron Renn explored the New York region’s loss of domestic residents since 2000. He demonstrates that one of the world’s economic powerhouses is falling victim to the trend of domestic outmigration that New York state is seeing. Between 2000 and 2010, the New YOrk region lost 2 million domestic residents and they took with them billions of dollars of income. In Freedom in the 50 States, Will Ruger and Jason Sorens rank New York as the country’s least-free state based on its regulatory and tax regimes. They point to its tax burden — the highest in the nation —  and indebtedness as a factors contributing to the state losing 9-percent of its domestic population on net since 2000. Renn also posits that high tax rates are a leading cause for residents leaving New York City, many of them moving to Sun Belt states.

While the New York City region is only maintaining a positive population growth rate through births and international immigration, it’s far from the case that no one is willing to suffer its high tax rates in exchange for the city’s economic dynamism and cultural amenities. Rather the city’s exorbitant rental rates demonstrate that millions of people are willing to pay a premium to live in the region in spite of city and state policies that hamper economic development.  The vacancy rate for apartments is below 2-percent, well under many estimates for the natural vacancy rate. While lower taxes at the state and municipal levels in the New York region would reduce the flow of domestic outmigration at the margin, they would also increase competition for the city’s coveted apartments.

Are New York City’s amenities so desirable that its policymakers don’t need to worry about losing more residents to other states than they’re gaining? Its own not-so-distant history indicates that even the Big Apple is susceptible to the ravages of population loss. From 1950 to 1980, the city’s population fell from 7.9 million to 7 million, with most of that loss occurring in the 1970s. This time period corresponded with sharp increases in crime and the city’s famous default. These are predictable consequences of urban population decline, particularly in indebted cities where a decrease in tax base equates with inability to meet obligations to creditors .

While pursuing policy reforms designed to boost the state’s competitive standing to attract businesses and residents is a key piece of ensuring the city does not fall prey to population exodus, perhaps most importantly, city policymakers should examine their land use restrictions that limit would-be residents from moving to the city. Over the past decade, New York’s housing stock has grown only 5.3% in the face of the highest rental rates in the country for much of this time period. Historic preservation, density restrictions, and an onerous review process prevent the city’s housing stock from growing to meet demand.

Renn points out that most of New York’s domestic inmigration comes from midwestern cities and college towns across the country. Presumably many of these new residents are early in their careers and are on the margin of being able to afford New York rents. If New York housing were more attainable, more American young people would select the city as the starting place for their careers and it would attract more of the foreign immigrants essential to maintaining the city’s diversity and innovation. Ed Glaeser explains that those states that are successfully attracting more residents, like Texas and Georgia, are also those in which developers are able to build more housing with fewer restrictions. By allowing more housing in New York City and the surrounding areas, policymakers would both protect their tax base and help to maintain the city as a center of innovation and economic growth. In their effort to retain citizens — and particularly high-income retirees — New York City and New York state policymakers will need to revisit their punishing tax schemes. But at least as importantly they should focus on allowing those residents who would like to move to the city for economic and cultural opportunities to be able to afford to do so.

 

 

 

 

Pension Reforms from California Progressive Leaders

California’s pension tsunami is a few years from decimating the cities. In 2015 it is estimated one-third of Los Angeles’ budget could go to pay for employee retirement costs. Steven Greenhut reports at City Journal these facts have touched off calls for reform not just among fiscal conservatives but among several prominent progressive leaders in the state.

San Francisco Public Defender Jeff Adachi is a Democrat and the sponsor of “Proposition B” or the Sustainable City Employee Benefits Reform Act which will appear on the November ballot. If passed, the measure requires uniformed police and firefighters to dedicate 10 percent of their income to their retirement.(City employees would have to increase their contributions to 9 percent).

While unions and their political backers are likely to challenge any alteration to the status quo, a shift in thinking may be taking place, as Greenhut reports. Governor Schwarzenegger’s pension adviser, David Crane, points out the price for ignoring pension reform is less public funding for progressive programs. That tradeoff is real and significant. In the next five years the cost for San Francisco’s employee benefits are slated to rise from $413 million to $1 billion. Charles Lane writing at The Washington Post puts it another way: “Nothing threatens the political consensus of progressive government more than the widespread impression –and reality– that public employees have captured government.”

In other words, profligate fiscal policy doesn’t just affect taxpayers and weaken economies. Unsustainable spending also harms beneficiairies by undermining expectations and trust — a recipe for dysfunctional government.

Bailouts and Municipal Bonds

City Journal‘s Steven Malanga writes at RealClearPolitics about the possibility of a municipal bond bailout on the horizon. The canary in the coalmine is the SEC’s cease-and-desist order to New Jersey for misleading investors by omitting key information in their bond offerings between 2001-2007. Specifically, the SEC charges that New Jersey misrepresented the state’s pension liabilities. The state indicated it was taking actions to ensure the solvency of its pension funds when in fact pension deferrals were frequently undertaken.

What’s interesting is that the day after this announcement, New Jersey easily sold an offering of short-term notes to banks. The state didn’t have to pay a premium to attract investors. Why aren’t investors more cautious? And why wasn’t New Jersey fined?

As Malanga noted earlier this week in the Wall Street Journal, for years states have been hiding the true size of their fiscal problems behind a range of fiscal manipulations (for a catalog of those, see my latest paper on Fiscal Evasion). Yet the signal sent by the SEC is that there is no penalty or risk for bad behavior. The question Malanga asks: do politicians and muni bond holders simply expect that in the event a state can’t pay its bondholders a federal bailout will pick up the tab?

Things That Should Make Us Very Nervous

Nicole Gelinas at City Journal asks an excellent question, “Is it not daft to lend New York and California one more dime?” In the past two years tax revenues have plummeted. Overall state and local governments face an operating gap equal to 15 percent of their budgets.

Credit ratings agencies such as Moody’s do not expect municipal governments to default, because they will do anything to avoid it, they have the power to tax (i.e. they will find the money), and states can’t declare bankruptcy. Of course it is also expected that Washington D.C. will bail out an insolvent state.

But, those state and municipal bailouts need to be added to the most frightening tab of all.

In the next year, our economy will enter a ‘debt super cycle’. the United States’ $13 trillion in federal debt will overtake GDP in 2012. By that time several states will need to contribute increasingly large amounts to pay pension obligations with Illionis leading the way to insolvency sometime in the next few years.

We are, as my colleague Veronique de Rugy puts it, on the verge of a financial disaster. Simply, this level of indebtedness is unsustainable. The next question is how will it end?

The Community Development Block Grant in Perpetuity

Steven Malanga writes at City Journal of the defenseless persistence of the Community Development Block Grant. Created by the merger of a slew of Johnson Administration local aid grants, CDBG has been doling out grants to municipal governments since 1974.

CDBG’s primary constituencies include the U.S. Conference of Mayors and community groups.The program has been criticized from many angles. HUD itself has pointed to deficiencies in the funding formula which have resulted in the grant being disproportionately targeted to college towns. CDBG has been the subject of numerous fraud investigations by the IG’s office. And more fundamentally, the program has not shown it can meet its statutory purpose of revitalizing communities, the subject of a study I authored in 2007.

Regardless, CDBG is funded every year at about $4.7 billion. It’s not alot of money relative to the size of the federal budget, but as Mr. Malanga notes, that isn’t the point. CDBG is a vehicle for waste and congressional patronage.

And as far as I know it is also the only block grant with a folk song:

The Doughty Hill Band – The CDBG Song

Edward Pinto on the Community Reinvestment Act

The debate about the role of the Community Reinvestment Act in the current mortgage morass — and its effects on neighborhoods — continues with this article from Edward Pinto in City Journal. Pinto writes:

Whatever the precise magnitude of the CRA’s role, there is no question that as the government pursued affordable-housing goals—with the CRA providing approximately half of Fannie’s and Freddie’s affordable-housing purchases—trillions of dollars in high-risk lending flooded the real-estate market, with disastrous consequences. Over the last 20 years, the percentage of conventional home-purchase mortgages made with the borrower putting 5 percent or less down more than tripled, from 8 percent in 1990 to 29 percent in 2007. Adding to the default risk: of these loans with 5 percent or less down, the average down payment declined from 5 percent to 3 percent of the loan’s value.

As for Fannie and Freddie, most of the loans with 5 percent or less down that they had acquired by 2005 had down payments of 3 percent or even no down payment at all. From 1992 to 2007, the two entities acquired over $3.1 trillion in low-down-payment or credit-impaired loans and private securities backed by credit-impaired loans—and these are performing horribly: the delinquency rate on Fannie’s and Freddie’s remaining $1.1 trillion in such high-risk loans is 15.5 percent as of this past June 30, about 6.5 times the rate on the entities’ traditionally underwritten loans. All this risky lending, of course, drove the nation’s homeownership rate up and inflated a housing-price bubble.

Last year, Tyler Cowen disagreed. Here is Randy Kroszner’s take. Russ Roberts wrote about it in the Wall Street Journal last year.

DC’s School Voucher Experiment

The Wall Street Journal reports on the battle to keep the DC school vouchers program in operation. Without federal approval, the DC School Opportunity Program will end in 2010. The programs provides 1,500 children with $7,500 per year towards private tuition.

Parents praise the program for improved outcomes and the ability to obtain a better education for their children, “It’s not a competition between public schools, charter and private,” said [parent of two Patricia William]. “Not all schools work the same for all children and we, as parents, should have the right to chose the school that works for them.”

But many in Congress argue the program siphons money away from public schools. The Obama administration plans to phase out the program once the current enrollees graduate.

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Want to Help the Earth? Move Back to Metropolis

Ed Glaeser writes in City Journal on his latest study, which suggests that cities emit less carbon than suburbs. (Full NBER paper with Matthew Kahn can be found here.) The top five cities (by emissions) are in California.

This sounds counterintuitive at first blush. But, Glaeser suggests, people who live in the suburbs drive more and consume more housing. The policy implication is make cities more affordable by loosening building restrictions:

If climate change is the major environmental challenge that we face, the state should actively encourage new construction, rather than push it toward other areas. True, increasing development in California might increase per-household carbon emissions within the state if the new development, following the current model, took place on the extreme edges of urban areas. A better path would be to ease restrictions in the urban cores of San Francisco, San Jose, Los Angeles, and San Diego. More building there would reduce average commute lengths and improve per-capita emissions. Higher densities could also justify more investment in new, low-emissions energy plants.

Similarly, limiting the height or growth of New York City skyscrapers incurs environmental costs. Building more apartments in Gotham will not only make the city more affordable; it will also reduce global warming.

Here’s Glaeser’s write-up at the New York Times Economix blog. Here’s Tyler Cowen on a previous, related study.

Local Government Credit Crunch Compliments of the Federal Budget

According to Nicole Gelinas of City Journal, the size of federal spending is about to consume debt markets, crowding out municipal debt. In the third quarter of 2008, federal government debt increased 39 percent , “the largest quarterly growth rate recorded” according to the Federal Reserve.

This, in effect, shoves non-federal bonds off the table by oversaturating the market.

Gelinas also posits that if the stimulus stifles recovery, localities will face default – really bad news, because municipal debt doesn’t have a federal guarantee. If municipalities seek one, they might not get it. The federal government is deeply overcommitted.

The federal stimulus meant to bail out Main Street is moving more like a budgetary virus, robbing cities of their ability to maneuver and chart the best fiscal course during rough times.