Target the planning laws not the one per cent

 

At FT.com Robin Harding (@RobinBHarding) has a very smart essay on the true cause of high real estate prices. This is a wide-spread disease, with familar standout cases such as London and San Francisco. Excerpt (emphasis mine):

About 40 per cent of the stated wealth of the UK – more than £3tn – does not exist. It is a terrible illusion. For the US the figure is about 12.5 per cent of total wealth, or $10tn, and growing fast.

The “assets” in question are what planning or zoning restrictions have added to house prices. They are the ransom that renters and recent buyers must pay to existing homeowners – whose homes the rules protect – for use of an artificially limited stock of housing. So severe have those restrictions become that the value of the ransom runs into the trillions.

Wealth of this kind is far more destructive than the alleged sins of the top 1 per cent. It is wealth created not by improving our living standards but by making them worse; by building too few houses in London and San Francisco, not too many. It is not earned by skill or effort. It is taken directly from the pockets of some – the young, especially those who were born poor – and transferred to others via political regulations on building. This is not wealth, this is plunder.

[...snip...]

You might think the rise in house prices reflects a natural scarcity of land. Britain is a small island; San Francisco sits on a narrow peninsula. However, the best available studies suggest that the vast majority of this rise in urban house and land prices reflects not natural scarcity but planning restrictions.

A clever 2005 study by American economists Edward Glaeser and Joseph Gyourko compares the price of an extra square foot of land attached to a house (a slightly bigger back yard, perhaps) with the average price of a square foot of land under a house in the same city. If the problem is a natural shortage of land, the two prices should both be high because it is profitable to build on the back yards until the two prices converge.

That is not what happens, however. In the cities of coastal California, the average price of urban land is 10 times the price of land in a back yard because zoning laws make it impossible to turn one into the other. In Los Angeles, the price of the extra square foot on the garden was $2.60 while the average price of urban land was $30.44. In San Francisco, the back yard land was worth $7.84 per square foot, versus $63.72 on average for the same lot.

The ratio of these two figures – as much as 10 to 1 – suggests only 10 per cent of the value of land in expensive cities is due to its natural scarcity. The rest is planning restrictions.

Paul Cheshire and Christian Hilber at the London School of Economics applied the same trick to British and European offices in 2006, with terrifying results. For the well-heeled West End of London, the cost of planning restrictions was eight times the cost of actually building an office. In Birmingham, it was 2.5 times the cost of building the office. This was not because land in the West Midlands is desperately scarce – just land you are allowed to build on is scarce.

We have many examples of localities that have avoided the housing-tax (Austin, Houston, Dallas). However, I don’t know of any cases where the populace has chosen to tear down the restrictions on building. There are powerful incentives for the present property owners to prefer that prices keep climbing.

Politician are not keen to educate the populace about the full cost of their preference for building restrictions. E.g., the total economic loss caused by preventing workers from moving from relatively low to relatively high productivity areas. We know that a Haitian taxi driver’s productivity improves by roughly 10x if she can move to New York. Same job, but her productivity is automatically so much higher because the value of her service is proportionately higher. The same applies to a software developer moving from Oklahoma to San Francisco.

My Haitian taxi driver case illustrates that building restrictions have costs similar to immigration barriers. Progressives are more likely to recognize the need for immigration reform, whilst vigorously “protecting” their Manhattan or Palo Alto neighborhoods. The terrible costs of these “protections” weigh most heavily on the poorer demographics. Robin closes with this:

These rules have added billions and billions of dollars to the price of housing, money that must be paid to those who already own houses by those who do not. If we want to make society fairer and more equal, just let people build.

Public Choice: rational ignorance, pork and rent-seeking

[The] Idea that when people go to the polls they are knowledgeable is ludicrous.

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That is just one of the illuminations from Don Boudreaux, chair of the department of economics at George Mason, in the recent Econtalk discussion  “Don Boudreaux on Public Choice”. One of the firm results of Public Choice Theory is often expressed in the shorthand “rational ignorance”. This result is a consequence of two facts — that information is not free, while the deciding impact of an individual’s vote is nearly zero. So the payoff from investing in the study and critical thinking required to place an informed vote is effectively zero, while the cost is relatively high. I.e., just to study a single issue (say energy policy) requires many hours of time that alternatively could have been invested in family time, or in better job qualifications, or …

What’s the point? The problem is concentrated benefits, diffuse costs. A smaller government is less likely to do harm than a bigger government. It is impossible for voters to know what the federal government is up to. In practice they do not know the impact nor effectiveness of what competing politicians are proposing. A smaller government presents less opportunity for politicians to divert taxpayer’s earnings to pay off supporters (pork). A smaller government presents less opportunity for rent-seeking by interests that influence government to provide them special benefits.

For background I recommend the short summary of Public Choice at the Concise Encyclopedia of Economics. Here is a descriptive excerpt:

(…) In modeling the behavior of individuals as driven by the goal of utility maximization—economics jargon for a personal sense of well-being—economists do not deny that people care about their families, friends, and community. But public choice, like the economic model of rational behavior on which it rests, assumes that people are guided chiefly by their own self-interests and, more important, that the motivations of people in the political process are no different from those of people in the steak, housing, or car market. They are the same human beings, after all. As such, voters “vote their pocketbooks,” supporting candidates and ballot propositions they think will make them personally better off; bureaucrats strive to advance their own careers; and politicians seek election or reelection to office. Public choice, in other words, simply transfers the rational actor model of economic theory to the realm of politics.

Don’t forget that the primary motivation of politicians is to stay in office, to get re-elected. Forget “public good”, that is just romance. Public Choice is “politics without the romance” (James Buchanan).

The Lessons of Public Choice

One key conclusion of public choice is that changing the identities of the people who hold public office will not produce major changes in policy outcomes. Electing better people will not, by itself, lead to much better government. Adopting the assumption that all individuals, be they voters, politicians, or bureaucrats, are motivated more by self-interest than by public interest evokes a Madisonian perspective on the problems of democratic governance. Like that founding father of the American constitutional republic, public choice recognizes that men are not angels and focuses on the importance of the institutional rules under which people pursue their own objectives. “In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself” (Federalist, no. 51).

Institutional problems demand institutional solutions. If, for example, democratic governments institutionally are incapable of balancing the public budget, a constitutional rule that limits increases in spending and taxes to no more than the private sector’s rate of growth will be more effective in curbing profligacy than “throwing the rascals out.” Given the problems endemic to majority-rule voting, public choice also suggests that care must be exercised in establishing the domains of private and collective choice; that it is not necessarily desirable to use the same voting rule for all collective decisions; and that the public’s interest can be best protected if exit options are preserved by making collective choices at the lowest feasible level of political authority.

For more resources on informed voting, I highly recommend Bryan Caplan’s 2007 book Myth of the Rational Voter.

Should we force drunks to drive? Compulsory Voting: For and Against

Choice

I’ve not yet read the June-release of Compulsory Voting: For and Against, but it comes well-recommended. Here are two blurbs by George Mason colleagues of the authors:

“The frustrating thing about arguments over citizenship in democracies is that everyone is right, meaning that everyone is also wrong. There are powerful arguments in favor of asking citizens to act on a moral obligation to become informed, so as to move toward an ideal world. In that view, argued ably here by Jason Brennan, anyone who fails to become informed should voluntarily abstain. Lisa Hill argues that Brennan has it backwards: ‘good’ elections are not the result of an informed citizenry. Rather, a broadly accepted electoral process, legitimated by universal participation, is what creates an informed citizenry. Who is right? An extraordinary and very fair-minded treatment of significant issues in democracy around the world.”
Michael Munger, Duke University

“Should the government force citizens to vote? Brennan and Hill’s Compulsory Voting crisply presents the strongest case in favor as well as the strongest case against mandatory participation in the electoral process. Although the two authors defend opposite conclusions, both show that philosophy is better with careful social science – and that social science is better with careful philosophy. A book full of ideas, clarity, and candor.”
Bryan D. Caplan, George Mason University

Incidentally, prof. Bryan Caplan is the author of one of our favorite Public Choice books The Myth of the Rational Voter.

For more background try my post Public Choice: rational ignorance, pork and rent-seeking.

The BN-800 reactor startup is big news

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The BN-800 is the big brother to Russia’s BN-600 fast breeder reactor which has been supplying power to the electrical grid since 1981. This is a sodium-cooled, pool-type reactor (like the EBR-2). I think it is a big deal because successful deployment will allow Russia to close the fuel cycle, while accelerating China’s deployment of fast breeders.

Wikipedia: Designed to generate electrical power of 880 MW in total, the plant is the final step to the commercial plutonium cycle breeder. It is planned to start producing electricity in October, 2014. 

…China’s first commercial-scale, 800 MWe, fast neutron reactor, to be situated near Sanming city in Fujian province will be a based upon the BN-800. In 2009 an agreement was signed that would entail the Russian BN-800 reactor design to be sold to the PRC once it is completed, this would be the first time commercial-scale fast neutron reactors have ever been exported.

Could Russian success with the BN-800 support GE-Hitachi’s marketing of PRISM – their commercial design of the infamously-terminated IFR project? We don’t know how successful the BN-800 will prove to be.

China will be getting access to more cost and technical data than any other outsiders. So if China proceeds with their agreement to build to the BN-800 design that will be encouraging.

How will we know if the ACA is working?

I don’t know the answer to these five concise questions formulated by Tyler Cowen. Do you?

I have read a good deal on this topic and I am not very satisfied with most of it, from either side.  Too often citing and then refuting weaker claims from the other side is conflated with showing that one’s own view is right.  Here are a few issues we ought to consider and indeed focus on:

1. Five to ten years from now, how much do we think employment will have gone down as a result of ACA?  (That is from the employer mandate, high implicit marginal tax rates because of the subsidies, and also from a lesser need to stay employed to have health insurance.)  By the way, you can’t in other contexts believe strongly in rigidities and then confidently point to a small employment response within a one year time frame and claim to know these labor market effects are small ones.

1b. How will the effort to introduce greater equality of health care consumption fare if wage and income inequality continue to rise?  Will this attempt at consumption near-equalization require massively distorting incentives?

2. Given your answer to #1, and given how much employment itself boosts health, will ACA even have improved overall health in America?  Whatoutcome indicators might show this?

3. Given that prices in the individual insurance market already seem to have gone up 14-28 percent, and may go up more once political scrutiny of insurance companies lessens, what is the overall individual welfare calculation from this policy change?  I mean using actual economic policy analysis, of the CBA sort, not just noting that more people have health insurance.

4. Given supply side constraints, how much did ACA increase the consumption of health services in the United States?  (I take the near-universal bafflement over the first quarter gdp revision a sign of how poorly we understand what is going on.)  And how good or bad a thing is the ongoing but accelerated shift to narrow provider networks?

5. How much of the apparent slowdown of health care cost inflation is a) permanent, b) not just due to the slow economy, and c) due to ACA?  Or how about d) the result of trends which have been operating slowly for the last 10-20 years?

I have lifted Tyler’s complete post to serve as a checklist for monitoring the results. It will take a while – especially solid outcomes data. It isn’t at all obvious how the outcomes can be measured.

Chemical-Free Products: The Complete List

Derek Lowe

Here’s a comprehensive review of chemical-free consumer products, courtesy of Nature Chemistry. I’m flattered to have been listed as a potential referee for this manuscript, which truly does provide the most complete list possible of chemical-free cleaners, cosmetics, and every other class of commercially available product. Along similar lines, I can also recommend (…snip…)

Source: by research chemist Derek Lowe. Derek is a remarkable insider source on preclinical drug discovery.  

Will nine billion people exhaust our materials resources?

Concrete in china

On Bill Gates’ recommendation we just bought the Kindle edition of Vaclav Smil’s recent book: Making the Modern World: Materials and Dematerialization. In his book review Bill closes with these thoughts: 

What does all this tell us about the future?

First, the good news: Thanks to technical advances, we can make major industrial products like steel and cement more efficiently than ever. On average, making a ton of steel today takes a third as much energy as it did in 1950, and produces 10 percent less carbon.

On the other hand—getting back to relative dematerialization—there’s no end in sight to the rising demand for more materials. Even though the richest countries are leveling off, many other countries are catching up. Smil points out that if the poorest 80 percent of the planet reaches a living standard that’s just a third of what people in rich countries enjoy, the world should expect to continue using more materials for generations to come.

So if consumption won’t level off anytime soon, are we doomed to run out of the stuff that makes modern life possible? As usual, Smil refuses to provide pat predictions. He does say we shouldn’t lose sleep worrying about running out in the next 50 years. Beyond that, there are a lot of variables, but we might need to limit the use of some materials or do a better job with recycling. Smil nods to several innovations that could help avoid future shortages, such as new materials that could cut our need for cement by 65 percent.

I agree with Smil that humans have an amazing capacity for finding ways around scarcity by using materials more efficiently, recycling them, or finding substitutes. The big concern isn’t so much whether we will run out of anything—it’s the impact that extracting and using these materials is having on the planet. For example, the cement industry now accounts for about 5 percent of all carbon-dioxide emissions. That’s one reason I think that developing affordable energy that produces zero carbon is one of the most important things we can do to lift people out of poverty.

Is it not obvious that abundant, affordable carbon-free energy is essential to produce the materials demanded by once-poor peoples — from concrete to steel to nitrogen fertilizer?

Bill’s TED 2010 talk Innovating to zero! remains one of the very best arguments for investing much more in energy R&D — particularly in advanced nuclear power, such as the Gates-funded Terrapower traveling wave reactor.

At TED2010, Bill Gates unveils his vision for the world’s energy future, describing the need for “miracles” to avoid planetary catastrophe and explaining why he’s backing a dramatically different type of nuclear reactor. The necessary goal? Zero carbon emissions globally by 2050.

Lastly, don’t miss the 2 minute video interview with prof. Smil on Making the Modern World.