Sunday, February 16, 2020

Supply and demand in local economics

Act 1: If housing is too expensive, allow the supply curve to operate.

In a surprising bit of excellent economics,  Conor Dougherty  writes "Build Build Build Build..."in Sunday's New York Times.

The story starts with the usual way of doing business (meaning, not doing business) in California:
A developer had proposed putting 315 apartments on a choice parcel along Deer Hill Road — close to a Bay Area Rapid Transit station, and smack in the view of a bunch of high-dollar properties. ... Zoning rules allowed it, but neighbors seemed to feel that if their opposition was vehement enough, it could keep the Terraces unbuilt....
Mr. Falk could see where this was going. There would be years of hearings and design reviews and historical assessments and environmental reports. Voters would protest, the council would deny the project, the developer would sue. ...
Spoiler: Where did this all end up?
Today, after eight years of struggle, his career with the city is over, the Deer Hill Road site is still just a mass of dirt and shrubs, and Mr. Falk has become an outspoken proponent of taking local control away from cities like the one he used to lead.
Mr. Dougherty comes to a most un-Times like view of the problem.
America has a housing crisis. ...One need only look out an airplane window to see that this has nothing to do with a lack of space. It’s the concentration of opportunity and the rising cost of being near it.... There is, simply put, a dire shortage of housing in places where people and companies want to live — and reactionary local politics that fight every effort to add more homes.
Nearly all of the biggest challenges in America are, at some level, a housing problem. Rising home costs are a major driver of segregation, inequality, and racial and generational wealth gaps. You can’t talk about education or the shrinking middle class without talking about how much it costs to live near good schools and high-paying jobs. Transportation accounts for about a third of the nation’s carbon dioxide emissions, so there’s no serious plan for climate change that doesn’t begin with a conversation about how to alter the urban landscape so that people can live closer to work.

We tend to look to laws, edicts, regulations and other top-down solutions to problems. Mr. Dougherty notices we are a democracy, and one that at a local level is quite responsive to the desires of people who show up at town meetings. If this is to change, the attitude of the people in the room has to change.
the real solution will have to be sociological. People have to realize that homelessness is connected to housing prices. They have to accept it’s hypocritical to say that you don’t like density but are worried about climate change. They have to internalize the lesson that if they want their children to have a stable financial future, they have to make space. They are going to have to change.
Along the way, we meet Sonja Trauss, heroine of the YIMBY (yes in my back yard) movement who  "thought the Deer Hill Road project was too small."
Ms. Trauss...made her public debut a couple of years earlier, at a planning meeting at San Francisco City Hall. When it was time for public comment, she stepped to the microphone and addressed the commissioners, speaking in favor of a housing development. She returned to praise another one. And another. And another.
In backing every single project in the development pipeline that day, Ms. Trauss laid out a platform that would make her a celebrity of Bay Area politics: how expensive new housing today would become affordable old housing tomorrow, how San Francisco was blowing its chance to harness the energy of an economic boom to mass-build homes that generations of residents could enjoy. She didn’t care if a proposal was for apartments or condos or how much money its future residents had. It was a universal platform of more. Ms. Trauss was for anything and everything, so long as it was built tall and fast and had people living in it. 
My italics. Ponder how astonishing it is that anyone living in San Francisco or writing in the New York Times could say something like this.

Sonja also understands that ideas have to change.
her goal wasn’t to enact any particular housing policy, but to alter social mores such that neighbors who fought development ceased being regarded as stewards of good taste and instead came to be viewed as selfish hoarders.
Selfish, and intensely hypocritical. My Palo Alto neighbors fight development here, forcing all the people who build our houses, wait on our tables, and staff the businesses who pay our taxes, to drive 50 miles from Gilroy or Tracy. They are also parodies of bleeding heart inequality and climate warriors. 

Ms Trauss and Mr. Dougherty understand not only the mechanics of supply curves, vintage economics of real estate, the responsiveness of local governments to their constituents, but they get deep theorems about political economy: 
Ms. Trauss... argued that the entire notion of public comment on new construction was inherently flawed, because the beneficiaries — the people who would eventually live in the buildings — couldn’t argue their side.
“An ordinary political process like a sales tax — both sides have an opportunity to show up and say whether they’re for or against it,” she said. “But when you have a new project like this, where are the 700-plus people who would initially move in, much less the tens of thousands of people who would live in it over the lifetime of the project? Those people don’t know who they are yet. Some of them are not even born.”
This is a deep issue for land control regulation. "Affordable housing" whether directly by government  or by forcing developers to provide it (i.e. an implicit tax on new housing) is directed to long-time residents who are already here. The crying need is for housing for people who want to move here, to take the great jobs this area has to offer. That is what reduces inequality, enhances opportunity, and reduces carbon. The Bay Area has enacted quite a few museums of poverty to allow long-time residents with little or no income to stay, and to stay that way. 

Mr. Falk took a step that allowed the 300 unit plan to proceed, which he paid for with his job. He didn't dare read aloud the last half of his resignation letter. 
“All cities — even small ones — have a responsibility to address the most significant challenges of our time: climate change, income inequality, and housing affordability,” Mr. Falk had written. “I believe that adding multifamily housing at the BART station is the best way for Lafayette to do its part, and it has therefore become increasingly difficult for me to support, advocate for, or implement policies that would thwart transit density. My conscience won’t allow it.”
Lafayette in general has not yet had the change of ideas.

That California is a one-party state may actually help. If this were partisan, it would be easy to tar pro-development forces as evil Republicans who want to line to pockets of real estate developers. Instead, note how this argument hits all the progressive goals -- inequality, climate, affordability, homelessness, and nobody is talking about economic growth.  Well, it does help both. If an argument can be made inside a party, perhaps common sense has a better chance to emerge. Sensible climate policy disappeared from public debate when climate became a partisan cleavage issue.

Some of my libertarian friends have pushed back, saying that local communities have a right to build walls and drawbridges if they like. But if they want views, they can buy the property and keep it pristine.


Act 2: Uber congestion.

On Saturday, Eliot Brown at Wall Street Journal covered Uber and Traffic 
Five years ago, Travis Kalanick was so confident that Uber ...rides would prompt people to leave their cars at home that he told a tech conference: “If every car in San Francisco was Ubered there would be no traffic.”
Today, a mounting collection of studies shows the opposite: Far from easing traffic, Uber and its main rival Lyft..are adding to congestion in numerous U.S. downtowns.
...Multiple studies show that Uber and Lyft have pulled people away from buses, subways and walking, and that the apps add to the overall amount of driving in the U.S.
Surprise, surprise, if a method of transportation becomes cheaper and better, people use more of it. They substitute out of owner driven cars, yes. But Ubering substitutes away from a parked car, not a driven car!  People  also out of public transit, walking, bicycling and so forth. And they take more trips.

As usual, cities are full of complex regulatory schemes to allocate an underpriced resource -- caps and special fees on Uber and Lyft, for example.
Officials in San Francisco, Chicago and New York have cited congestion as the main rationale for new fees they recently enacted on Lyft and Uber rides in each of the cities.
As usual, the point of regulation here as it is in real estate, is to privilege access to free resources to status quo users -- to existing homeowners who like free views, to drivers of their own cars, to taxicab companies, to money-losing public transit. And a mess results.
Uber and Lyft now emphasize the ways they steer riders toward alternatives to their ride-hail cars, such as by incorporating public-transit options into their apps. 
Hmm. Clutter up the apps with more things people don't want? That's not likely to work.
They have both launched shared scooters and bikes.. 
With their own set of problems

The answer is hiding in plain sight, though not celebrated in this article:
[Uber and Lyft] and have lobbied heavily for congestion pricing in cities including New York, so that all cars on the road—not just theirs—share the penalties for added traffic.
Uber is “determined to continue our work to improve access to shared and active transportation modes, while also doubling down in our efforts to advocate for road pricing,” a spokesman said.
Aha! If the streets are congested with cars, charge all cars for using the streets. Real time electronic tolling is now easy to do. How the car is owed and operated is irrelevant. Every car causes the same congestion.  

How much should the toll cost?
drivers in major cities cruise for fares without passengers an estimated 40% of the time.
The biggest factor by far is the large amount of time Uber and Lyft drivers spend without any passengers, hunting for fares. A December report by the California Air Resources Board found ride-hailing cars are driving with no passengers 39% of the time; New York City estimates such cruising at 41%. 
Well, it surely should cost more to drive than to park. That Uber drivers are cruising around on free city streets, that move at speeds indistinguishable from parking, while awaiting rides is an obvious misuse of a free resource.

It's a win - win. Either we get unclogged streets, or we get a windfall of revenue for bankrupt cities. Or both.


  1. There are no atheists in foxholes and there are no Libertarians when neighborhood property zoning is under review.

  2. NIMBY is the reason the housing crisis will not be solved. We just saw the defeat of SB50 hearaled as a victory for local control against big government. Meanwhile places like Lafayette can afford to have police chase out the homeless.

  3. Two additional thoughts on this:

    1) The same economics (old capital resisting competition from new capital) apply, with the politics almost perfectly reversed, in the debate over immigration (old labor vs new labor). It would be another point of hypocrisy, if only either side understood economics.

    2) Where's the Coase Theorem here? Local politics, with council people sweating through the tirades at town hall meetings, seems like possibly an intimate enough setting for negotiated Pareto improvement?

    1. Item (2) above is right on point. What are the direct incentives for current property owners to support high density property development, even if the impact upon traffic, views, etc. is only moderately negative? Why is it obviously impractical/inefficient to package local property rights with votes to determine common objectives, handling of externalities, etc.? We do this all the time in many situations, lacking a robustly superior alternative.

      There are interesting economic problems here, including a game in which an action (high-density development) alters the number of votes allocated to each type of player. But nothing is said.

      I don't see obvious irrationality or inefficiency here...just people with different preferences from John and Conor.

  4. Once again, if cities are full for any reason, move to a new city. Apparently, the situation is such as to get people to not move to their favorite city, but rather, move elsewhere, or stay put.

    This is not a problem that competition can't solve.

  5. Question, from Act I: Who are these “libertarians” who believe in *community rights*?

  6. "Some of my libertarian friends have pushed back, saying that local communities have a right to build walls and drawbridges if they like."
    I should not be astonished that a "libertarian" would believe that a "local community" is an "individual" in the sense of property rights. ("No true Scotsman Libertarian" would be such a collectivist!)
    * The individuals who own the land and want to build high density on their property have a property right; the "local community" is just a political faction of neighbors trying to take away the owner's property value - by force of law (i.e. corruption?).

    * Regarding Uber/Lyft fees, pricing the roads is appropriate, but the most obvious problem is the current rent enjoyed by taxi franchise owners, which are an incentive for car owners to both drive and park.
    On-demand rides are better, but marginal costs are paid in cash and owning has sunk costs embedded and no longer considered (other than insurance payments and loan-interest on the fancy vehicle in your driveway).

  7. Interesting observation about blaming Uber, but not non-Uber cars, for congestion: if we don't charge Uber for using the roads, then the rest of us won't be able to keep using them for free!

    Btw, aren't gas taxes an (admittedly imperfect) form of road pricing. The more miles one drives the more gas one buys. Admittedly imperfect because: (1) high-mileage and electric cars pay less tax per mile driven and (2) no distinction between driving during high congestion vs low congestion periods. The point, though, is that Uber drivers pay gas tax just like non-Uber drivers do.

  8. Interesting. My North Georgia town of Suwanee seems to understand supply meeting demand. Average population growth rate is 3.93% over the last 9 years. Standard deviation is 6.23%. Over 600 new apartment units have been approved and built in that time. Rents are between $1000 and $1500 monthly for 54% of the current stock. Between $1500 and $2000 for 42% and $2000 and up for the remaining 4%. To address congestion, Georgia has dedicated a pay lane on the interstates for those willing to use them. During peak hours, the fares are much higher than low travel hours. When first instituted people complained. Now those pay lanes are full.

  9. Dear John,

    A friend of mine just plunked down all of his savings, his wife's savings, and assistance from his parents to purchase a starter home in Palo Alto - a 3 bedroom 2 bath, nearly 2.5 million dollar property. At this point, he like many many of my friends and their families have sunk their wealth into this one asset and now have a powerful incentive to block the supply of housing. I am horrified at the net result, but I understand the argument on their side.

    How might you address this issue or should it be...buyer beware?

    1. I have a friend who just sunk all his money into Tesla. Should the government prop up that price to bail him out? There are crazy homeless people on the streets who need our help. Just how much should we bail out people with $2.5 million bets when people with these kinds of needs are around. Residential real estate is less risky than you think, as you get to live there. If prices go down, the house you want to buy gets cheaper just as the house you want to sell falls in value, and you can cut down your property tax too! But yes, such people vote and are a big part of the problem, and local governments can prop up house prices more effectively than Tesla share prices. BTW, if your friend found a house one can live in in Palo Alto for only 2.5 million, he got an amazing deal! That's lot value for teardowns around here.

    2. Dear John,

      I agree with your points overall. Minor quibbles:

      Zillow seems to show houses around that price range for the size of his house.

      Second I don't know how much sky high housing prices contribute to homelessness. In one of your blog posts on the Seattle housing crisis, it suggested that very few of the homeless are workers priced out of the housing market and forced into the streets

    3. Finding a house that isn't a teardown for $2 million in palo alto is tough. Prices are lower further from stanford/downtown, though, and it can be done. From what I can tell of studies I have read on it, whether houses cost $1 million or $2 million has next to nothing to do with homelessness, as you suggest. This is a decidedly upper middle class phenomenon. Most homelessness is linked with mental illness and drug abuse. Flame suit on. I allowed the quoted articles to state it, as they get the right answer even with a slightly wrong motivation!

  10. Congestion pricing of all vehicles is technologically feasible now, so why not? One reason might be that it's just another source of additional revenue to governments that will spend it unwisely. Perhaps if it were paired with cuts in sales taxes or income taxes it would be more popular.

  11. John, I'm surprised no one seems to link the housing crisis to a transportation crisis. Why do the houses have to be near the jobs? If someone invented safe teleportation, Manhattan house prices would collapse because people could commute from rural Iowa to Midtown in an instant. Less extreme: if there were high speed bullet trains allowing people 300 miles away to get to work in half an hour, this too should ease house prices near job centers.


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