Tag Archives: NYC

Local land-use restrictions harm everyone

In a recent NBER working paper, authors Enrico Moretti and Chang-Tai Hsieh analyze how the growth of cities determines the growth of nations. They use data on 220 MSAs from 1964 – 2009 to estimate the contribution of each city to US national GDP growth. They compare what they call the accounting estimate to the model-driven estimate. The accounting estimate is the simple way of attributing city nominal GDP growth to national GDP growth in that it doesn’t account for whether the increase in city GDP is due to higher nominal wages or increased output caused by an increase in local employment. The model-driven estimate that they compare it to distinguishes between these two factors.

Before I go any further it is important to explain the theory behind the author’s empirical findings. Suppose there is a productivity shock to City A such that workers in City A are more productive than they were previously. This productivity shock could be the result of a new method of production or a newly invented piece of equipment (capital) that helps workers make more stuff with a given amount of labor. This productivity shock will increase the local demand for labor which will increase the wage.

Now one of two things can happen and the diagram below depicts the two scenarios. The supply and demand lines are those for workers, with the wage on the Y-axis and the amount of workers on the X-axis. Since more workers lead to more output I also labeled labor as L = αY, where α is some fraction less than 1 to signify that each additional unit of labor doesn’t lead to a one unit increase in output, but rather some fraction of 1 unit (capital is needed too).

moretti, land use pic

City A can have a highly elastic supply of housing, meaning that it is easy to expand the number of housing units in that city and thus it is relatively easy for people to move there. This would mean that the supply of labor is like S-elastic in the diagram. Thus the number of workers that are able to migrate to City A after labor demand increases (D1 to D2) is large, local employment increases (Le > L*), and total output (GDP) increases. Wages only increase a little bit (We > W*). In this situation the productivity shock would have a relatively large effect on national GDP since it resulted in a large increase in local output as workers moved from relatively low-productivity cities to the relatively high-productivity City A.

Alternatively, the supply of housing in City A could be very inelastic; this would be like S-inelastic. If that is the case, then the productivity shock would still increase the wage in City A (Wi > W*), but it will be more difficult for new workers to move in since new housing cannot be built to shelter them. In this case wages increase but since total local employment stays fairly constant due to the restriction on available housing the increase in output is not as large (Li > L* but < Le). If City A output stays relatively constant and instead the productivity shock is expressed in higher nominal wages, then the resulting growth in City A nominal GDP will not have as large of an effect on national output growth.

As an example, Moretti and Hsieh calculate that the growth of New York City’s GDP was 12% of national GDP growth from 1964-2009. But when accounting for the change in wages, New York’s contribution to national output growth was only 5%: Most of New York’s GDP growth was manifested in higher nominal wages. This is not surprising as it is well known that New York has strict housing regulations that make it difficult to build new housing units (the recent extension of NYC rent-control laws won’t help). This makes it difficult for people to relocate from relatively low-productivity places to a high-productivity New York.

In three of the most intensely land-regulated cities: New York, San Francisco, and San Jose, the accounting contribution to national GDP growth was 19.3%. But these cities actual contribution to national output as estimated by the authors was only 6.1%. Contrast that with the Rust Belt cities (e.g. Detroit, Pittsburgh, Cleveland, etc.) which contributed -28.5% according to the accounting method but +6.1% according to the author’s model.

The authors conclude that less onerous land-use restrictions in high-productivity cities New York, Washington D.C., Boston, San Francisco, San Jose, and the rest of Silicon Valley could increase the nation’s output growth rate by making it easier for workers to migrate from low to high-productivity areas. In an extreme migration scenario where 52% of American workers in 2009 lived in a different city than they actually did, the author’s calculate that GDP per worker would have been $8,775 higher in 2009, or $6,345 per person. In a more realistic scenario (only 20% of workers lived in a different city) it would have been $3,055 more per person: That is a substantial increase.

While I agree with the author’s conclusion that less land-use restrictions would result in a more productive allocation of labor and thus more stuff for all of us, the author’s policy prescriptions at the end of the paper leave much to be desired.  They propose that the federal government constrain the ability of municipalities to set land-use restrictions since these restrictions impose negative externalities on the rest of the country if the form of lowering national output growth. They also support the use of government funded high-speed rail to link  low-productivity labor markets to high-productivity labor markets e.g. the current high-speed rail construction project taking place in California could help workers get form low productivity areas like Stockton, Fresno, and Modesto, to high productivity areas in Silicon Valley.

Land-use restrictions are a problem in many areas, but not a problem that warrants arbitrary federal involvement. If federal involvement simply meant the Supreme Court ruling that land-use regulations (or at least most of them) are unconstitutional then I think that would be beneficial; a broad removal of land-use restrictions would go a long way towards reinstituting the institution of private property. Unfortunately, I don’t think that is what Moretti and Hsieh had in mind.

Arbitrary federal involvement in striking down local land-use regulations would further infringe on federalism and create opportunities for political cronyism. Whatever federal bureaucracy was put in charge of monitoring land-use restrictions would have little local knowledge of the situation. The Environmental Protection Agency (EPA) already monitors some local land use and faulty information along with an expensive appeals process creates problems for residents simply trying to use their own property. Creating a whole federal bureaucracy tasked with picking and choosing which land-use restrictions are acceptable and which aren’t would no doubt lead to more of these types of situations as well as increase the opportunities for regulatory activism. Also, federal land-use regulators may target certain areas that have governors or mayors who don’t agree with them on other issues.

As for more public transportation spending, I think the record speaks for itself – see here, here, and here.

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.

 

 

 

 

Will The EPA’s Environmental Justice Agenda Backfire?

In May, the Environmental Protection Agency (EPA) proposed new guidelines for incorporating “environmental justice” into its rulemaking procedures. Environmental justice is the idea that all people, regardless of income or race, should be treated equally with respect to environmental laws, regulations and policies. Sounds pretty good, right? Unfortunately, it’s not quite as simple as waving a magic wand and making low income and minority communities cleaner and safer. Instead, EPA’s new guidelines may have unintended effects that harm the very people they are supposed to protect. Perversely, the poor may end up paying for a cleaner environment they won’t get to enjoy, while wealthier people enjoy it instead.

In the new guidelines, the EPA talks at length about how lower income and heavily minority areas are often correlated with environmental problems and a whole host of health risks. It may be that the poor are less politically organized than wealthier people and interest groups. Perhaps for this reason there are companies that purposefully pollute in poor and minority neighborhoods because the companies know they can get away with it. That seems plausible.

But there may be other reasons that poor people tend to live in more polluted areas. For example, the poor may move to polluted areas because those areas are less expensive to live in. I myself am a case in point.

When I was in my younger twenties, I tried to make a go at being a musician in New York City. I spent most of my time practicing with my band, so I generally worked odd jobs at off hours, living month to month and paycheck to paycheck. That way I could focus most of my time on music. When I first moved to New York, I lived in the Lower East Side of Manhattan. Then I moved to Harlem because it was cheaper. Finally, to save even more money, I moved to Greenpoint, a neighborhood in northern Brooklyn.

Most people don’t know this, but Greenpoint sits over one of the largest oil spills in North American history. In fact, there was a sign down the road from my house that signaled the end of my street was a “dumping station” where there was a physical pipe coming out of the ground dumping waste into a river, Newtown Creek. You could literally smell the oil in the air.

So why would I live like this? I paid $480 a month for a gigantic room with huge bay windows in a 3-bedroom apartment that was $1,300 a month in total, dirt cheap by NYC standards. My two roommates, also musicians, paid even less in rent than I did. We knew it wasn’t the best neighborhood; we weren’t stupid. We just thought the tradeoff was worth it.

So what does the EPA think will happen if it cleans up a neighborhood like Greenpoint? Would starving artists like myself and my old roommates benefit as we are finally freed from the exploitation of evil oil companies? Maybe, maybe not. The reasoning should be obvious to anyone who has ever lived in New York City.

Greenpoint is prime real estate situated extremely close to Manhattan. When the neighborhood gets cleaned up, real estate prices will rise as wealthier people, who previously wouldn’t tolerate the pollution, move in. Rents will go up as well. Those who own land will be better off, and some of them may currently be poor. But most low income people rent and don’t own property. Those people will have to move out as the area gets more expensive, or if they stay they will face a higher cost of living. Perhaps if they move, they will choose another polluted area to live in. Almost certainly, they will have a much longer commute if they work in Manhattan like I did.

The point of this story isn’t to say we should never clean up polluted areas. We should. But the EPA shouldn’t claim it is helping low income and minority populations when it is far from clear that they are the primary groups that will benefit from EPA rules. Regulations claiming to help the poor can be highly misleading if analysts don’t make an attempt to forecast (and analyze retroactively) adjustments in human behavior that result from regulatory changes.

There’s even more to the story. While the benefits to low income groups as a result of regulations justified on the basis of “environmental justice” can be highly uncertain, the costs are all too real. Costs of regulations are often spread evenly across everyone in society, much like the costs of regressive sales taxes are spread evenly across everyone who purchases a taxed product, and this includes the poor. We could end up in a perverse situation where the poor are actually paying to gentrify their own neighborhoods.

This is far from the only problem with the EPA’s new environmental justice guidelines, but it may be the most perverse. If the EPA really wants to help the poor, the agency should pay closer attention to changes in prices and human behavior that will result from its actions. The EPA should also seek feedback from, and provide detailed information on expected benefits and costs to, impacted communities before moving forward with a regulation. Otherwise, the EPA could be wasting a whole bunch of time with little to show for its efforts.

Tax Holidays in the Dog Days of August

In what has become a common practice in about a dozen and a half states, August is the month for the sales tax holiday. Whether the goal is to encourage consumer spending or ostensibly offer tax relief to families, the three-day holiday waives sales tax on certain purchases – typically school supplies and clothing. Here’s a chart listing the states and the once-a-year exemptions they offer.

What exactly do sales tax holidays accomplish? Some claims:

  • They save consumers money.
  • They increase consumer spending on both tax-free and taxed items. On net, the result is more revenue in what the National Retail Federation calls a “win/win/win” for consumers, retailers and governments.
  • A weekend tax break keeps spending in the local economy. According to Bloomberg BNA Ohio and Michigan first experimented with a tax holiday on cars in 1980. New York picked up the weekend tax holiday in 1997 to entice borough residents to keep their clothes shopping dollars in NYC rather than cross the border to New Jersey’s malls.
  • It is a way for politicians to make good on tax relief without making permanent changes to the code.
The Tax Foundation claims that tax holidays only shift consumer spending and any savings in tax may be offset by higher retail prices. In addition, the “gimmick-y” exemption leads to arbitrary decisions (e.g. backpacks are exempt but briefcases are not – see Virginia). Basically, the one-time break is a way for politicians to crow about tax relief while avoiding more substantive reforms to the code such as broadening the base and lowering the rate of tax.
A 2009 econometric study, The Fiscal Impact of Sales Tax Holidays, by Adam Cole of the University of Michigan finds that sales tax holidays induce “timing behavior” in consumers. There is a reduction in sales and use tax collections by 4.18 percent in the month of the tax holiday. Half of this reduction is attributed to consumers timing their purchases to coincide with the tax-free weekend. Though there is no evidence that this leads to a large substitution of purchases during the rest of the calendar year.
Cole raises two interesting issues for researchers to consider. Do tax holidays produce cross-jurisidictional shopping effects? Secondly, because of their short duration, do tax holidays allow retailers to evade taxes by attributing earlier sales to the holiday weekend?

Marwell and McGranahan (2010) provide another set of questions to consider for those who over-sell the benefits of back-to-school bargains for family budgets. In their working paper, “The Effect of Sales Tax Holidays on Household Consumption Patterns“, the authors ask: Who’s shopping and what are they buying? Their preliminary findings suggest it is primarily upper income households and they are mainly purchasing clothes.

On a purely anecdotal note, I calculate that if our family went shopping during Virginia’s August 3-5 tax holiday we would have saved about $9.00 on backpacks and school shoes. To avoid the back-t0-school crowds we purchased those items at Tysons Corner the weekend before. If that’s the premium for efficient mall shopping, we paid it gladly.

 

NYC Taxi Reform Doesn’t Go Far Enough

Next week, New York Governor Cuomo is likely to sign a bill that will marginally increase competition in the NYC cab market. The new rule will allow passengers to hail some livery cars in outer boroughs and add 2,000 additional medallions for yellow cabs with wheelchair access.

Via Flickr user Ian Caldwell

The auction of these medallions  is projected to raise $1 billion. This figure might seem outlandish, but last month two medallions sold at auction for over $1 million. That’s right, it costs $1 million for the right to drive a cab in NYC, not accounting for any of the costs associated with owning and operating the vehicle.

The price tag of these medallions that are sold to the highest bidder demonstrates that in a free market, many more drivers would enter the cab industry. Artificially constraining the supply hurts both consumers and those who are not able to drive a cab because they are unable to purchase a medallion.

Unsurprisingly, the Metropolitan Taxicab Board of Trade remains strongly opposed to this bill. The increase in the supply of medallions will lower the value of the medallions that cab drivers and larger medallion companies already own. Their lobbying efforts reflect their desire to profit through the political system.

While this increase in the number of medallions available for yellow cabs and allowing some livery cars to be hailed represents a small improvement for New Yorkers, the reform does not go nearly far enough. For real reform, Mayor Bloomberg should look to Indianapolis.

Before Stephen Goldsmith was elected as the city’s mayor in 1991, the number of cabs permitted in Indianapolis was limited to 392. Goldsmith created a Regulatory Study Council whose first project was to reform taxi regulations. The RSC recommended eliminating regulatory barriers to entry and allowing cab drivers and companies to determine their own prices. In a case study of regulatory reform in Indianapolis, Adrian Moore writes:

The main resistance came from existing taxi companies, and initially much of the city and county council sided with them in the name of the “public interest.” However, the support for reform by seniors, the inner city poor, minorities, the Urban League, and the disabled soon brought many of them over to the RSC’s side. The RSC expected little support from Democrats on the council, but the strong support for deregulation from that party’s traditional constituents turned the tide.

Some price controls remain in the Indianapolis taxi market, but the city has seen an increase in supply, a decrease in fares, and an improvement in service. Indianapolis and New York City are of course very different, but the laws of supply, demand, and rent-seeking are the same everywhere. By phasing out the medallion system, New York City would benefit consumers and allow many more people to make a living driving cabs. Medallion owners who have invested in some cases over $1 million in the current system would need to be compensated in some way, but not by continuing to profit at the public’s expense.

New Jersey Network (NJN) to be operated by NYC public broadcaster

New Jersey Network, known to New Jerseyans as NJN is now NJTV and is to operated by WNET the New York public broadcasting station. Governor Christie made the announcement today saying, “no one elected me to be programmer in chief.”

The sale saves the state about $11 million a year. The state of New Jersey will retain the TV license and will sell nine public radio licenses to Philadelphia (WHYY) and New York City (WNYC and WQXR).

New Jerseyans essentially have two out-of-state markets for their news: New York City and Philadelphia, a void NJN was to fill when it began in 1968.  According to reports the new non-profit will be required to dedicate 20 hours per week to New Jersey programming and will be made up of a board of New Jersey residents.

The legislature has 15 days to veto, otherwise the deal goes into effect on July 1.

 

TEL Event and TEL Podcast

If you couldn’t make it to GMU last week for the Tax and Expenditure panel, you are in luck: the tech team at Mercatus was good enough to capture it for posterity:

I thank our two guests: Assemblyman Micah Kellner of the NY-65th district and Nick Kasprak of the Tax Foundation.

Nick has created a very handy on-line tool. It does what my paper on state spending restraint did: it traces out what states would (theoreticall) have spent had they adopted TELs in certain time periods. Unlike my paper, however, Nick’s tool is interactive, it examines all states, and it allows users to see the different impact of different types of TELs. Check it out.

I learned a number of things from Assemblyman Kellner. Perhaps the most-interesting thing I learned: if you live in the 65th district of NY and if your family earns $250k or more, the state considers you poor enough to qualify for affordable housing rent control but rich enough to pay the “millionaire’s” tax. The assemblyman notes that in pricey NYC, a lot of people who live modest lifestyles actually fall into this category.

I presented the results of my  paper on tax and expenditure limits.

Also this week, the Tax Foundation’s Richard Morrison interviewed me about TELs in their weekly podcast.

NYC’s Metropolitan Transit Authority: The Customer Is Always Last

Toy MTA TrainNew York’s Metropolitan Transit Authority is broke. Back in May, Governor Paterson approved $2.1 billion in tax hikes to plug the authority’s $383 million hole, including, as the Manhattan Institute’s Nicole Gelinas notes, an ill-advised payroll tax in the middle of a deep recession. Predictably, revenues fell short. On top of this, the Governor agreed to $91 million in pay increases for top MTA officials. The MTA’s hole is now $400 million.

As if to hammer home that the MTA exists to serve its employees rather than its customers, a judge ruled this week that the state must pay the Transit Workers Union an 11 percent pay increase over the next few years.

The result: MTA will cut off service on the W and Z lines, reduce service on the G and M lines, and shrink 49 bus routes. Riders are guaranteed longer wait times, and cars will be packed. An MTA board member calls it “a failure of government.”

For some policy ideas, the MTA might review its history. Initially, NYC’s buses and and train services were private. Between 1932 and 1953, the city and the state acquired New York City’s transit systems. And since that time it has experienced frequent financial crises. In spite of years of subsidies, transit prices continue to rise. As Wendell Cox writes, New York transit remains immune to competitive pressure and instead relies on the deep pockets of taxpayers. By contrast, the Tokyo and Hong Kong transit systems get most of their revenues from rider fares.

While privatizing is a near-impossibility, Cox notes that competitive contracting might go a long way to lowering MTA’s runaway spending. The Transport for London bus system took this route and reduced costs per mile by 40 percent.