Brownean motion

There is one big rule in local public finance. Do not use local income taxes to fund city governments. Ed Glaeser helps explain why:

In addition, some cities, like New York and Philadelphia, also have income or wage taxes that generate significant revenues. Typically smaller jurisdictions are not granted the authority to  levy these taxes, and many would not want to anyway, given the fears of repelling businesses and wealthier individuals. Indeed, Haughwout et al. (2004) estimate that the elasticity of earnings in cities with respect to the tax rate is so high that income tax rates quickly become counter-productive for producing revenue. 

...But the property tax also has several key virtues for a locality. First, property is considerably less mobile than income or other forms of wealth. Even the tiniest community, like a business improvement district, can levy a charge based on the amount of real property in the community. That property will not just get up and walk away, while an attempt to have a neighborhood level income tax would surely lead to considerable out-migration by the wealthy. 

...Income taxes, of course, can be far more redistributive than sales taxes and that is one of the reasons for their attraction to many cities. The problem with local income taxes, of course, is that they potentially repel wealthier individuals. That provides one reason why many forms of local redistributive services are actually funded by higher levels of government. 

Bottom line: income taxes are a reasonable way of funding redistribution from rich to poor. Rich people prefer not having to pay them. So, run your big income redistribution programmes at the national level, funded by income taxes, and leave local government to provide local public goods, funded by land or property taxes.

Glaeser and Shleifer also showed that Detroit's Coleman Young and Boston's James Michael Curley's use of high local income taxes encouraged their richer opponents to move outside of their cities' limits, beggaring their cities but helping to ensure their continued re-election.

Here's Auckland mayor Len Brown [ht @MarkHubbard33]:

Making all Aucklanders pay a council income tax may help elderly people in affluent areas who can't afford their rates, mayor Len Brown says.
The current system is "inherently unfair" on people living on fixed incomes and paying high rates because of the value of their properties in areas like Devonport-Takapuna, Brown says.
Introducing an income-related tax for local council services that everyone pays is an option, he says.
Only property owners pay rates but the council is spending money on infrastructure and services for everyone, Brown says.
He believes the only way to mitigate the rates burden as property prices rise is to rethink how local government is funded.
Brown won't express a view on what alternative might work saying he is "quite open minded".
Options could include funding through income tax, GST, user pays charges, or bed taxes from hotel.

A few things worth noting:

1. Everyone in Auckland pays property taxes, though only homeowners and business owners make direct payments to councils. Renters bear some of the burden through their rental payments. Shoppers bear some of the burden through their purchases from local taxed establishments. 
2. An income tax is only feasible if Auckland Council is now large enough that commuting in to Auckland from outside of its rating zone is infeasible, or if the amenities it provides to rich folks are just super-awesome and don't do much for commuters. Otherwise, the richest folks keep their residence just outside of town and maybe have a small commuter apartment in town.
3. Property taxes are a way of taxing wealth rather than income. They're then a nice complement to existing national taxes on income and consumption. The elderly person on a fixed income, sitting on a million-dollar Davenport property, is really really rich, even if she has little income. Getting rid of the only wealth tax we have in favour of more taxes on income does even more to screw up the system. The existing system already has big transfers from less wealthy people on high current income to very wealthy people on low current income: superannuation payments going from young mortgage-holders to old homeowners. Brown is proposing to make this even worse. 
4. Further, a reverse mortgage can solve the problem for many wealthy but low income elderly. 
5. For those for whom the annuity wouldn't be enough, well, is it really worse to have a few wealthy but low-income elderly move to a smaller house or apartment than to wreck your local council's ratings base with an income tax? And you know that Councils can, in some cases, put in a limited property tax abatement scheme for those on lower incomes, right? 

User charges for some Council services can make sense. If Gerry Brownlee hadn't somehow banned Auckland from putting in congestion charging, that would have been a good one for Auckland. But local income taxes are a pretty bad idea.

Glaeser on Christchurch

Ed Glaeser's Condliffe Memorial Lecture is now up at the University's "What If?" site. I've embedded it below.

 

I tell my students of the Pantheon of the Econ-Gods. Ed Glaeser is one of our Elder Gods - fueled not by the apples of the Hesperides but rather by Diet Coke.

Ed had a ridiculously busy day prior to his talk at Canterbury. He started with a tour of downtown with CERA, chipped in for a documentary somebody was making, lunched with a bunch of architects, provided a seminar for the Department, gave an interview for a freelancer for The Listener at the Staff Club, then the Condliffe. Then off for breakfast with Roger Sutton in the morning.

There are a lot of fans of Glaeser's approach to urbanism around the country. Let's hope it's done some good!

More Glaeser

Eric posted yesterday on Ed Glaeser's upcoming Condliffe Lecture at the University of Canterbury. Some of you have if the talk will be videoed, given that you are not based on Christchurch. Absent any technical hitches, the talk will be posted on YouTube as part of the University's What If series of public lectures, a week or so after the talk.

But if you are based on Wellington, you can go one better. Why not register now for the annual conference of the New Zealand Assocation of Economists, which is taking place at the Amora Hotel in Wellington next week--Wednesday July 3 - Friday July 5. Ed is giving a keynote address at 4:00 on Wednesday. Other keynote speakers are Maurice Obstfeld of Berkeley, John Riley of UCLA, Mardi Dungey of U. Tasmania, and John Quiggin of U. Queensland (best known in the blogsphere as one of the authors at Crooked Timber).

Quite apart from the keynote addresses, the conference will also feature TVHE's Matt Nolan, who is presenting a paper and also participating in a panel discussion on the Open Banking Resolution, along with  Ian Woolford from the Reserve Bank and Bank critic, David Tripe; and I will be presenting my work on Do Catches win Matches. Groping to Bethlehem's and Association Vice President, Bill Kaye-Blake, is not giving a paper this year, but he will be at the conference.

The full conference web site including the link to registration and the programme is here. I hope to see as many of you there as possible.

Glaeser Glaeser Glaeser Glaeser Glaeser GLAESER Glaeser!

Mark your calendars: Ed Glaeser delivers the Economics Department's Condliffe Memorial Lecture on Wednesday, 10 July.

Ed Glaeser is the world's best urban economist (says me). His book, The Triumph of the City, is the culmination of decades of serious work on urban issues. Do register for his talk and attend.

Event Details

Presenter: Professor Edward Glaeser, Harvard University

• What if humanity stopped urbanising?
• What is the role of cities in promoting economic growth?
• What are the lessons for the Christchurch rebuild from cities around the world?

Cities are often seen as the source of social problems such as poverty and crime, while we retain romantic notions of idyllic rural life. The truth is very different. In this lecture, Professor Edward Glaeser, the world’s leading expert in the economics of cities, will discuss why cities are crucial to economic development, why proximity has become ever more valuable as the cost of connecting across long distances has fallen and why, contrary to popular myths, dense urban areas are the true friends of the environment, not suburbia.

I'm really rather looking forward to this. Glaeser is one of the Elder Gods in the Pantheon of the EconGods.

Previously:

• A review of The Triumph of the City
• Agglomeration: Saviour of New York, Bane of New Zealand
• Agglomeration revisited
• Skyscrapers, building codes, density, and making cities work
• Glaeser on the advantages of going to University
• Our department's fine Condliffe lectures: Hausman, Grossman, Blaug, Slemrod, Varian, Plott, Weitzman, Cochrane, Glaeser.

Another for the "As always, Ed Glaeser is right" file...

Ed Glaeser highlights one of the main advantages real universities have over online alternatives: it's where you're most likely to find your best possible spousal match.

However, my own finely tuned algebraic simulations of an optimal spousal-search model find that while college provides an ideal time to accumulate a large stock of good friends (prospective spouses), it is typically suboptimal to wed at age 21 because of preference uncertainty and the benefits of continuing to meet alternatives.

In my own life, which has always been based on a rigorous application of optimization methods, the equations dictated that I meet my future wife in line at a Princeton dining hall at age 17, but that we should not date for another 15 years and not wed until after our 15th reunion.

Patton’s phrase that “you will never again have this concentration of men who are worthy of you” has been interpreted as unpleasant elitism. Her critics are certainly right that neither Princeton nor Harvard has any particular monopoly on virtue or intellect. Another interpretation is that what she said could have applied to any tightly knit campus of full-time students.

The college experience is profoundly different from what comes before and after in life. It is when 19-year-olds have chance encounters in different settings that make it easy to befriend and evaluate others. And they have enough free time to follow relationships where they may lead. Few of us will ever again walk into a dining hall filled with 100 interesting members of the opposite sex of roughly the same age.

He worries about potential perceived elitism of Patton's phrasing, but he shouldn't be. So long as people roughly sort into the right colleges, then the statement is true regardless of whether you're at the world's top university or somewhere rather farther down the pecking order. The best partner you're likely ever to be able to afford, given your particular bundle of characteristics, is likely someone at your university.

This might not hold true at universities where a good proportion of students would do far better by instead enrolling at a trade school, but then again, if you're there, then "making bad choices" is part of your bundle of characteristics as well as part of the bundle of characteristics of your affordable partners. It might also fail to hold if you are enrolled in a graduate programme with a severe gender imbalance and you're not inclined to mix with students from other disciplines; in that case, dating and eventually marrying the friend of a classmate could be optimal.

The Triumph of the City

My review of Ed Glaeser's excellent Triumph of the City is in today's Christchurch Press, but not online. Here it is.

Fixing the City

Anybody wanting to throw the book at Christchurch Council should consider the hardback edition of Professor Edward Glaeser's "Triumph of the City". It has two distinct advantages. First, at a bit over 300 pages, it'll be hefty enough to make for a satisfying throwing experience - neither too heavy to lob, nor so light as to be brushed off. Second, Christchurch's city planners really ought to read it; throwing this particular book at them might improve outcomes.

For the last fifteen years, Professor Glaeser has been figuring out what makes cities work. The Triumph of the City is more than just the culmination of that work; it's a passionate defence of the city as the best mechanism for human flourishing. When we live together in well-functioning cities, we are more productive, healthier, and, perhaps surprisingly, more environmentally friendly.

Cities are our engines of creativity and innovation. Chance interactions among smart, productive people in complementary lines of work that can happen in dense urban environments occasionally create "miracles of human creativity." And, as cities get larger, the process accelerates.

Bigger cities make it easier for entrepreneurs to strike it out on their own; failing in a bigger city gives you more opportunities to transition back to the salaried workforce, so innovators can be more comfortable in taking risks. Bigger cities also make it easier to find new niches in the intersections of different industries. Businesses are willing to locate in big cities, where costs are higher, precisely because cities facilitate productivity.

Glaeser also forces us to take a broader perspective when thinking about local "green city" regulations. Cities are already very green - and especially so where Councils have placed fewer constraints on building up. He points to smart growth regulations in California that have done a great job of preserving local green spaces and increasing property prices, but have helped push people away from California and towards Las Vegas, where the sweltering environment means more electricity use and where more people live in automobile-intensive suburbs. As Glaeser puts it, "we must recognize that if we try to make one neighbourhood greener by stopping new building, we can easily make the world browner, by pushing new development to someplace far less environmentally friendly."

Where cities have myriad paths to success, city failure usually involves bad planning. Sometimes, bad policy comes when Councils grasp at straws in the face of events outside of their control, like Detroit's push for grand infrastructure projects as response to auto industry deline; their white elephant monorail only drained city resources as it rolled above empty streets. But failure can come too for growing cities when regulatory measures slowly strangle entrepreneurial activity and make it too expensive for families to choose to live there. When something bad happens, these cities are not well placed to adjust.

We can take a few lessons for Christchurch, and for New Zealand, from Glaeser's work. If Council continues making it too hard for developers either to build up or to build out, section prices will remain too high and we will continue giving our graduates strong reason to seek higher salaries abroad. For all of Council's protestations against urban sprawl, it has released surprisingly little land for dense development within the city. We were more than a little surprised when we moved here eight years ago that we could not rent an apartment by the beach at New Brighton; zoning had made it illegal to build them. Council's having strangled land supply before the earthquake made it impossible for developers to respond after the earthquake. Building fancy stadiums or light rail systems will be far less important for recovery than fixing infrastructure and getting land use policy right. Other cities would do well to fix their policies before their earthquakes come to visit.

More broadly, while early pundits reckoned that the internet would bring the death of distance, the evidence now suggests that information technology is increasing distance's relative cost: it's making New York better faster than it's helping Auckland. Cities have long exhibited what economists call "agglomeration effects" - the city is greater than the sum of its separate parts were those parts scattered across the country; fast broadband seems to be accentuating these agglomeration effects. We are more likely to phone and email people who live and work near us; US patent data shows innovators are more likely to draw on other patented work that happened to be created near them. While we can all email potential colleagues in New York, we're not likely to find serendipitous meetings with them on FourSquare. If we want our cities to be more than support centres for the dairy industry in the longer term, we need to let them grow.

Building codes

Anybody wishing to sensibly comment on the Christchurch draft rebuilding plan really ought to have a look at Ed Glaeser's piece on skyscrapers, building codes, density, and making cities work. A few highlights:

The relationship between housing supply and affordability isn’t just a matter of economic theory. A great deal of evidence links the supply of space with the cost of real estate. Simply put, the places that are expensive don’t build a lot, and the places that build a lot aren’t expensive. Perhaps a new 40-story building won’t itself house any quirky, less profitable firms, but by providing new space, the building will ease pressure on the rest of the city. Price increases in gentrifying older areas will be muted because of new construction. Growth, not height restrictions and a fixed building stock, keeps space affordable and ensures that poorer people and less profitable firms can stay and help a thriving city remain successful and diverse. Height restrictions do increase light, and preservation does protect history, but we shouldn’t pretend that these benefits come without a cost.

...

The cost of restricting development is that protected areas have become more expensive and more exclusive. In 2000, people who lived in historic districts in Manhattan were on average almost 74 percent wealthier than people who lived outside such areas. Almost three-quarters of the adults living in historic districts had college degrees, as opposed to 54 percent outside them. People living in historic districts were 20 percent more likely to be white. The well-heeled historic-district denizens who persuade the landmarks commission to prohibit taller structures have become the urban equivalent of those restrictive suburbanites who want to mandate five-acre lot sizes to keep out the riffraff. It’s not that poorer people could ever afford 980 Madison Avenue, but restricting new supply anywhere makes it more difficult for the city to accommodate demand, and that pushes up prices everywhere.

...

Most people who fight to stop a new development think of themselves as heroes, not villains. After all, a plan to put up a new building on Madison Avenue clearly bugs a lot of people, and preventing one building isn’t going to make much difference to the city as a whole. The problem is that all those independent decisions to prohibit construction add up. Zoning rules, air rights, height restrictions, and landmarks boards together form a web of regulation that has made building more and more difficult. The increasing wave of regulations was, until the Bloomberg administration, making New York shorter. In a sample of condominium buildings, I found that more than 80 percent of Manhattan’s residential buildings built in the 1970s had more than 20 stories. But less than 40 percent of the buildings put up in the 1990s were that tall. The elevator and the steel-framed skyscraper made it possible to get vast amounts of living space onto tiny amounts of land, but New York’s building rules were limiting that potential.

What do I take from this? Density is a great thing - agglomeration effects are real. But when you force it by artificially restricting land supply, you push up land prices everywhere else. Height restrictions in the CBD push up land prices elsewhere in town. Further, while agglomeration effects are real, the only potential market failure justifying coercion is coordination. Otherwise, the agglomeration effects are largely internalized  by the firms in the dense area. Nobody has to force Wall Street firms to be located on Wall Street; that the choose to be there instead of other places shows that they value those density-related amenities.

But coordination doesn't require coercion! The folks putting together the EPIC technology park got together and themselves decided that they all wanted to share a venue before sorting out with Council where it could be located. At most, Council could put up a few public amenities that would act as Schelling points for a few types of development.

As for transport strategies relying on rail to ease congestion, why not go for the low-hanging fruit first? Congestion charging!

The most cost-effective means of opening up overcrowded city streets would be to follow Singapore and charge more for their use. If you give something away free, people will use too much of it. Mumbai’s roads are just too valuable to be clogged up by ox carts at rush hour, and the easiest way to get flexible drivers off the road is to charge them for their use of public space. Congestion charges aren’t just for rich cities; they are appropriate anywhere traffic comes to a standstill. After all, Singapore was not wealthy in 1975, when it started charging drivers for using downtown streets. Like Singapore, Mumbai could just require people to buy paper day licenses to drive downtown, and require them to show those licenses in their windows. Politics, however, and not technology, would make this strategy difficult.

The draft city plan has a $400 million rail line connecting downtown to the University campus. It's unclear that there's sufficient demand to justify such investment, but there might be on the City's creation of a proposed  new international precinct downtown where international students would be invited to live. Those students currently live within walking distance of campus in a vibrant international hub at Church Corner and Riccarton where I can find great Chinese, Vietnamese and Korean food; Korean butchers and grocers; a Japanese bakery; and, all kinds of other diverse amenities (Korean and Chinese churches, etc). To the extent that the city is successful in moving all the students downtown (from where they'd need public transport to get to University, and so would need the $400 million dollar (more than $3k per household) rail line (or a far far cheaper designated busway), it would be by destroying an existing international hub.

Let's work through some numbers on rail. Suppose that the $400 million is financed through a 25 year bond issue paying 8%. For an annuity paying 8% to have a present value of $400 million over 25 years (in other words, for folks to be willing to give the City $400 million today in exchange for bonds), the annual payment has to be $37.47 million. The building costs alone for the rail line are then $103k per day for the next 25 years. And, suppose further that we're willing to subsidize each rail rider by $10 per ride. We'd then need 10,000 people riding the train every day just to cover the capital cost where we're willing to pay $10 per person per ride. By way of comparison, RedBus, which services most of Christchurch, carries 5.8 million passengers per year - an average then of just under 16,000 passengers per day. If a single rail line from downtown to the University carried as much traffic as the entire RedBus network, the effective per-passenger capital cost subsidy would be $6.50. If the train were running on a cost recovery basis, it would need to charge $6.50 per trip plus running and maintenance costs. If it covered only running and maintenance costs, the government would be kicking in $6.50 per trip. If it carried as much traffic as the entire RedBus network.

But I almost certainly have those numbers wrong. There's no way anybody would be advocating the rail line if those numbers were correct. So please don't quote me on them as I'm certainly wrong. Please run them yourself - there are any number of online calculators for the present value of an annuity. Plug $37.47 in as the annual payment with an interest rate of 8% and a 25 year term. 8% is Treasury's recommended discount rate on infrastructure projects. If you can convince people to buy the bonds for a 4% return, the annual payment is instead $25.6 million, the daily costs $70,100 and we would need only 7000 daily riders to have a $10 per passenger subsidy. At the end of 25 years, the City would hold an asset free and clear, but we'd also need to account for maintenance and upkeep over the period. Please draw your own conclusions about likely ridership, what would be an appropriate per-passenger subsidy, and whether rail then would be a good idea. I'm just putting up some of the parameters. I'm sure I have something wrong here and that rail is the best possible thing in this the best of all possible worlds.

The draft Christchurch City plan would increase the density of a smaller downtown, but only to a maximum building height of six or seven stories. The process for going from six to seven or more stories requires proving your building meets a tougher building code. Fair enough, you might think: tall buildings impose earthquake externalities on neighbours and so ought to have stronger foundations. But that's not what's in the plan; instead, you get to go taller if you have enough gardens on your roof and solar panels. Glaeser writes:

First, cities should replace the lengthy and uncertain permitting processes now in place with a simple system of fees. If tall buildings create costs by blocking out light or views, then form a reasonable estimate of those costs and charge the builder appropriately. The money from those fees could then be given to the people who are suffering, such as the neighbors who lose light from a new construction project.

I don’t mean to suggest that such a system would be easy to design. There is plenty of room for debate about the costs associated with buildings of different heights. People would certainly disagree about the size of the neighboring areas that should receive compensation. But reasonable rules could be developed that would then be universally applied; for instance, every new building in New York would pay some amount per square foot in compensation costs, in exchange for a speedy permit. Some share of the money could go to the city treasury, and the rest would go to people within a block of the new edifice. 

A simple tax system would be far more transparent and targeted than the current regulatory maze. Today, many builders negotiate our system by hiring expensive lawyers and lobbyists and buying political influence. It would be far better for them to just write a check to the rest of us. Allowing more building doesn’t have to be a windfall for developers; sensible, straightforward regulations can make new development good for the neighborhood and the city.

Glaeser also writes sensibly on heritage preservation, arguing that heritage committees should face a capped maximum number of buildings that could be deemed to be of protected status. Otherwise, such committees will always over-reach, over-designate, and spread resources too thinly. We saw more than a bit of this in pre-quake Christchurch: too many designated buildings so too few had substantial earthquake protection; in some cases, heritage designation prevented or hindered adequate earthquake-strengthening instead of drawing public funds to assist in preservation. In an alternative world where only the best couple dozen buildings were designated of historic importance, public funds could have been devoted to ensuring their earthquake-readiness.

The Christchurch plan simultaneously demands medium-intensity downtown development while stifling any substantial development outside of downtown (to encourage downtown redevelopment). Worse, businesses that have cobbled together alternative arrangements in the suburbs may face zoning scrutiny in the next couple years intended to force them back downtown. Glaeser writes "If cities can't build up, then they will build out. If building in a city is frozen, then growth will happen somewhere else." Developers will be prevented from substantially building up downtown while being prevented from building out within city limits. I worry growth may well then just leave Christchurch. Yeah, some folks claim they'd never be willing to work or live in a tall building again, but aren't developers are the ones best placed for assessing public demand? Did people abandon skyscrapers in San Francisco?

A couple final notes:

• The businesses that worked damned hard to re-establish themselves outside of downtown will be punished for having done so under rules effectively forcing them to move back downtown.
• It would be mighty nice if Council could see fit to allow smaller subdivided lots and ease up the green belt restrictions around town so that the thousands of folks whose land has been deemed unremediable can afford to build on sections in Christchurch rather than leave town. Yeah, this will reduce demand for the downtown urban apartments where the planners want people to live eventually. But the folks in Kaipoi (and elsewhere) need houses within the next year and there's no chance of downtown housing options being available anytime soon.

* This post was written entirely on my own time on a Sunday. While I have never represented that anything on this blog reflects any views of the University, I particularly specify here that nothing in this post reflects anything that I would write in my capacity as an employee of the University of Canterbury. For purposes of this post, I am only an interested resident of Christchurch. Every one of the numbers presented is almost certainly incorrect and readers are encouraged to form their own assessments.

Agglomeration revisited

Ed Glaeser, earlier noted here, has more on agglomeration effects and growth. Glaesar recently edited a volume on agglomeration economics which I've yet to pick up; fortunately, he's now blogging some of it for the New York Times.

Contra the usual story, the internet isn't a substitute for physical location, it's a complement.

If cities serve, as I believe, primarily, to connect people and enable them to learn from one another, than an increasingly information-intensive economy will only make urban density more valuable.
...
Other essays in the volume focus on the changing nature of agglomeration economies. Jed Kolko writes about services, which now dominate most United States urban areas.

Mr. Kolko highlights a fundamental difference between manufacturing and services. For manufacturing firms it doesn’t much matter if suppliers or customers are in the same ZIP code or the same state. Goods are cheap to move. But services seem tied to suppliers and customers that are in the same ZIP code. Since face-to-face contact is so much a part of service provision, they are drawn to the extreme densities of cities.

In the penultimate essay in the book, Giacomo Ponzetto and I ask, “Did the Death of Distance Hurt Detroit and Help New York?”

Improvements in transportation and communication costs made it cost-effective to manufacture in low-cost areas, which led to the decline of older industrial cities like Detroit. But those same changes also increased the returns to innovation, and the free flow of ideas in cities make them natural hubs of innovation. Since the death of distance increased the scope for new innovation, idea-intensive innovating cities were helped by the same forces that hurt goods-producing cities.

Humanity is a social species and our greatest gift is our ability to learn from one another. Cities thrive by enabling that learning, and they have become only more important as knowledge has become more valuable. Understanding what makes cities work is more important than ever.

If this is right, then New Zealand is set for long term decline. Some folks argue that New Zealand's poor performance relative to Australia comes down to the Aussies having taken a different path to reform than the Kiwis. I'd worry more about agglomeration effects. Melbourne alone has roughly as many people as New Zealand. While population differences are a level effect across the countries, increased returns to agglomeration with technological change interacted with population ought be a growth effect.

If Glaeser's argument holds, then even the best policy in the world couldn't help us catch Australia, barring Australia doing anything monumentally stupid. That's not an argument for not trying, but rather for being realistic in expectations and for not damning reforms should they fail to help us catch Australia. It probably also points to dairy and agricultural production becoming more rather than less important relative to the tech sector. My confidence intervals around any of this are too wide for useful prediction, but I put a fair bit of weight on Glaeser having things basically right.