Monthly Archives: November 2016

California’s Housing Shortage

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Mckinsey folks estimate it at 2 million. Pointer from Alex Tabarrok.

The market clears, of course, but at a price point that is very high relative to income.

Presumably, this is a supply problem. You do not cure a supply problem with mortgage subsidies or rent controls.

They have several suggestions for how to fix it. First,

In California cities with populations of more than 100,000 people, we conservatively estimate that there is capacity to build 103,000 to 225,000 housing units on vacant land that has already cleared the multifamily zoning hurdle (Exhibit 8). One-third of this opportunity is in Los Angeles County. This estimate applies only to vacant and already-zoned urban land capacity and does not account for whether it is economically feasible to build housing onthis land.

Los Angeles County is a big place, and the vacant parcels seem to be all over the map. That leads me to worry about transportation issues. And it leads to their second recommendation.

We estimate that by increasing housing density around high-frequency public transit stations, California could build 1.2 million to 3 million units within a half-mile radius of transit. . . in our “high case,” 34 percent, or one million units, would be in the Bay Area; 8 percent, or 245,000 units, in the Sacramento area; and 30 percent, or 903,000 units, in the Los Angeles area.

An interesting paragraph about the disincentive to approve new housing appears in a footnote:

One reason for this is the small share of property tax that is allocated to the city from a residential development. The city must provide municipal services for the development, yet a large share of the development’s property taxes flows to non-city entities such as the county, the school district, and special-purpose districts such as fire and water districts. In addition, affordable units built by non-profit organizations are exempt from property tax, since such units qualify for the “welfare exemption” outlined in the state constitution. For a given parcel, local governments would often rather approve developments that generate more revenue, such as retail projects, than housing. This “land-use fiscalization” is commonly cited as a barrier to residential development in California.

On the permitting process in general, there is this:

California stakeholders could study other systems to get a fact-based view of “what good looks like”—for example, a robust, participatory, and transparent land-use process where outcomes are measured in days or weeks, rather than years or decades.

The report strikes me as very good.

Along similar lines, see Richard Epstein.

Another piece, recommended by Steve Teles, is David Schleicher’s City Unplanning.

Each time a community board approves a new development, the city could provide a time-limited property tax rebate to residents in the board’s district equal to a percentage of the “tax increment” created by the development (the tax increment is the increase in tax revenues caused by increasing property values18). The payments would head off local opposition to new development

Books of the Year, 2016

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1. Sebastian Mallaby, The Man Who Knew. A very readable biography of Alan Greenspan. It corrects many misconceptions. It offers useful lessons on the history of economic policy, on the role of economists in Washington, and above all on the effect of politicians on economists. I have a review essay forthcoming.

2. Thomas Leonard, Illiberal Reformers. A highly original and devastating account of how American economics was “born bad,” so to speak. The founders and early stars of the American Economic Association were filled with hubris and racism, quite the opposite of Adam Smith and the English liberals. Here is my review essay.

3. Yuval Levin, The Fractured Republic. There is at least implicit in Levin’s book the claim that libertarianism has unwittingly served the cause of statism by helping the left in its project of undermining intermediating institutions such as the family and organized religion. I wrote a review essay and, in addition, I decided to read and review Robert Nisbet’s 1953 work, The Quest for Community, which is a major influence on Levin.

4. Erwin Dekker, The Viennese Students of Civilization. This book offers some novel and provocative analysis of early 20th century Austrian economics. It is marred by Dekker’s lack of facility with the English language, a problem which Cambridge University Press does not seem to have bothered to address. Here is my review essay.

5. Joel Mokyr, A Culture of Growth. Mokyr takes the view that leading Enlightment thinkers helped to pave the way for industrialization by putting forth notions of progress aided by the combination of science and commercial innovation. It is marred by Mokyr’s heavily academic writing style, with citations and asides constantly interrupting the flow. I can barely imagine even specialists plowing through the entire book, much less general readers. My review essay is forthcoming.

In addition, I would like to mention two other books. One is my own Specialization and Trade, which I was happy with and has actually grown on me since it appeared this summer. The other is Martin Gurri’s The Revolt of the Public, which appeared in 2014 but only came to my attention this year. As I argued in my review essay, Gurri is one of the few analysts who can legitimately claim to have anticipated something like the Trump phenomenon.

What Now for Conservative Cosmopolitans?

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The LA Times hosts a symposium. Max Boot writes,

I want Trump to succeed as a conservative president for the good of the country. But I remain skeptical about whether this is possible for someone as unmoored and erratic as he is.

In the meantime, I can no longer support a party that doesn’t know what it stands for — and that in fact may stand for positions that I find repugnant. After a lifetime of being a Republican, I have re-registered as an independent.

I am not registered as an independent, because in Montgomery County, Maryland that would mean being disenfranchised. I am registered as a Democrat, so I can vote in the primaries, where votes have a (distant) chance of mattering.

Jonah Goldberg writes,

The Republican Party, which in many ways is at the historic height of its power, really isn’t having a crisis — but the conservative movement is. The differences between a white-nationalist, protectionist populism and the traditional conservative reverence for classical liberalism and limited government are too great to paper over indefinitely.

Suppose that you are cosmopolitan conservative. What are your choices?

a) Suddenly discover the virtues of mercantilism and strict immigration controls, sort of like a liberal economist who suddenly discovers the virtues of raising the minimum wage.

b) Try not to worry about what might become of the Republican brand, and meanwhile enjoy whatever conservative legislation gets signed and whatever sensible deregulation takes place.

c) (Continue to) distance yourself from Mr. Trump, and hope for a more cosmopolitan conservatism to make a comeback.

For me, (a) is too dishonest. Meanwhile, (c) sounds much less plausible after a Trump victory than a Trump defeat. You wind up in the same wilderness as libertarians. That leaves (b) as the only realistic alternative. Although if the cosmopolitans over-play their hand, the anti-cosmopolitans may feel like victims of a bait-and-switch.

Pete Boettke on Expertise

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He writes,

The problem with experts isn’t that individuals can have superior judgement to others, or that one can earn authority through judicious study and successful action. The problem is an institutional one, and institutional problems demand institutional solutions. In the case of the Levy/Peart and Koppl stories, the problem results from monopoly expertise that produce systemic incentives and social epistemology which is distortionary from the perspective of correct policy response.

Read the whole post. Pointer from Don Boudreaux.

The Minnesota Plan for Big Banks

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Neel Kashkari explains,

Today, banks can enjoy their explicit or implicit status as being TBTF potentially indefinitely. In contrast, the Minneapolis Plan puts a hard deadline on Treasury: Certify banks as no longer TBTF within five years, or else that bank will see dramatic increases in capital requirements. We believe the threat of these massive increases in capital will provide strong incentives for the largest banks to restructure themselves so that they are no longer systemically important.

Pointer from Mark Thoma. TBTF is, of course, too big to fail.

I endorse this approach. However, instead of the threat consisting of dramatic increases in capital requirements, I think that the threat ought to be to have the Treasury break up the banks. In effect, the government would be saying, “Either you break yourselves up, or we do the break-up for you.” I am confident that every large bank would come up with a divestment plan.

Keep in mind that the top financial institutions all grew through mergers and acquisitions. It is not as if any of them just naturally grew larger because of some unique ability to serve customers. As a result of these agglomerations, the largest institutions are too complex to be managed effectively. My guess is that breaking them into “smaller” units (I put smaller in quotes, because even after divestment these institutions would still be gigantic on a world historical scale) would not result in a large loss in total market value. It might very well result in an increase.

I should emphasize that smaller institutions are not necessarily less risky financially. But when they do fail, there are many feasible alternatives to bailouts. When a financial giant is about to fall, no Treasury Secretary can sleep at night unless there is a bailout.

Trust and Banks

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Erika Vause writes,

No institution more clearly relies on trust than the bank. That is precisely what makes banks a lightning rod for suspicion. From the time modern banking emerged, it has been the subject of intense misgivings. Many of these suspicions are with us still.

This issue gets much more attention in Specialization and Trade than it does in standard economic textbooks, but reading Vause’s essay makes me think that there is even more involved. The role of materialism is one example. That is people, including most economists, want to see value reduced to tangible properties of things, such as capital and labor input. A prerequisite for understanding finance is a willingness to acknowledge the large intangible components of value, including the components that consist of trust and financial intermediation.

Mortgage Loan Limits, Housing Demand, and Supply

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Tobias Peter writes,

In the mortgage business, the drumbeat for the government to support more leverage is a constant, occurring in both a buyer’s and a seller’s markets. But it is the latter that has potential for dangerous buildup of risk. The latest fad is raising the conforming loan limit, which, since 2006 has been set at $417,000 in most areas, but allows for a higher limit in certain high-cost counties.

Of course, one reason that there are high-cost counties is because there are higher loan limits. Remember that the general pattern of government policy is to stimulate demand and restrict supply. Where this combination of policies is most blatant, in cities like New York and San Francisco, you see prices soar. More mortgage credit, which is supposed to make housing “affordable,” has the opposite effect.

For high-cost counties, one idea might be for the Federal government to try to encourage cities to break the logjam by offering a subsidy for every new housing unit that is fully approved in terms of permits within the next six months. I am not saying that I have that concept fully worked out, and of course it is not a first-best libertarian idea.

In any case Keeping the loan limits fixed, and getting rid of the alternative for “high-cost counties,” would be steps in the right direction.

Peter Turchin on Surplus Elites

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Bloomberg view decided that this was a good time to recycle this column, first published in 2013.

Past waves of political instability, such as the civil wars of the late Roman Republic, the French Wars of Religion and the American Civil War, had many interlinking causes and circumstances unique to their age. But a common thread in the eras we studied was elite overproduction. The other two important elements were stagnating and declining living standards of the general population and increasing indebtedness of the state.

He argues that the surplus of law school graduates indicates elite overproduction. The other elements seem to be here as well. On the stagnation issue, Tyler Cowen cites research into cohorts that sounds more convincing than the usual analysis of means and medians.

Recall that I wrote about Turchin a couple of months ago.

Disperse the Federal Government

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I have a random suggestion for the new Administration: disperse the Federal government. The idea is to move agencies that do not really need to be in Washington to depressed areas of the country. This would improve the labor market in those areas.

We could move HUD to Detroit. We could move the Department of Energy to West Virginia. We could move the Department of Education to rural Mississippi.

I know that some of you do not think we need these agencies at all. But dispersing them might accomplish some of what you want. Many of the employees would be unwilling to relocate.

Jason Collins on Joseph Henrich

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Self-recommending. One excerpt:

Contrast cultural evolution with genetic natural selection. In the latter, high fidelity information is transmitted from parent to offspring in particulate form. Cultural transmission (whatever the cultural unit is) is lower-fidelity and can be in multiple directions. For genetic natural selection, selection is at the level of the gene, but the future of a gene and its vessels are typically tightly coupled within a generation. Not so with culture. As a result we shouldn’t expect to see the types of results we see in population/quantitative genetics in the cultural sphere. But can cultural evolution get even close?

Suppose that we define culture as socially communicated thought patterns and behavioral tendencies. Then cultural evolution would be the process by which the “fittest” thought patterns and behavioral tendencies survive. One can imagine that such a process could be extremely messy. There are non-linear interactions among thought patterns and behavioral tendencies. We would expect the evolutionary process to make a lot of mistakes, and indeed a little reflection would tell you that we have seen a lot of mistakes.