Wednesday, August 13, 2014

Urban Affordability: How "Progressive" governance Kneecaps middle class families

"Dishonest scales are an abomination to the Lord,
But a just weight is His delight."
Proverbs 11:1

3 fantastic articles on how big government at the local level ALWAYS begets higher cost of living and fewer jobs at lower pay.

First up is City Journal on the cautionary tale that is NYC:
Throughout his speech, de Blasio said little about what he thought was causing the city to get so unaffordable for so many. If he’d been honest with himself, though, he would have to see the very government that he leads—and the expansion of which he enthusiastically supports—as a major contributor to the economic difficulties of the city’s non-wealthy, especially middle-class families. From its arcane regulatory regime to the nosebleed taxes and fees it imposes on firms and individuals—usually amplifying similar measures radiating out from the state government in Albany—New York City government drives up the cost of living and working in the city dramatically, making it harder for ordinary New Yorkers to get ahead. Unfortunately, the mayor’s policy agenda—demanding that businesses grant employees paid sick leave and compelling real-estate developers “to build affordable homes for everyday people,” among other steps—will only make the problem worse.

[Author's Note: Emphasis added]


A recent New York Times story, summing up research on urban income differences, noted that income inequality “is closely tied with the availability of affordable housing.” Places where housing becomes very expensive, the report observed, tend to hemorrhage middle-class residents and instead become communities made up primarily of the rich, who can afford stratospheric housing prices, and the poor, who can get government housing subsidies. And New York, according to information from real-estate website Trulia that the Times cited, has the highest housing prices, relative to incomes, of any American city except San Francisco. In New York, the typical middle-class family can afford only about a quarter of available homes, the data suggest.


Yet de Blasio neglected to mention a far more significant reason that housing is so pricey in New York: it’s incredibly expensive to build in the city. Perhaps the most comprehensive examination of New York construction costs is a 2005 study by three policy experts from the New York City School of Law, released under the auspices of New York University’s Furman Center for Real Estate and Urban Policy and the Robert F. Wagner Graduate School of Public Service. The report found that the price tag for building a 15-story, multiunit apartment building in New York had become the highest of any city in America (San Francisco was second).


Needless to say, the expense pushes up rental rates in the city’s unregulated apartments. A 2010 study by the Association for Neighborhood and Housing Development estimated that covering the cost of financing, building, and operating a new apartment building in New York City, including taxes, required a minimum rent for its units of $2,100 per month. To live comfortably with such rent, a family would need an income of at least $86,000. Further, developers become understandably unwilling to construct apartment buildings where they can’t be assured of such rent premiums. The high construction costs result not only in inflated rents in new buildings, therefore, but in an overall shortage of housing, which drives up the price of already-constructed unregulated units.

And it’s New York’s tentacular state and local government that helps make it so wildly expensive to build. The NYU study found a host of government policies that drive construction prices higher. For starters, city agencies responsible for overseeing and regulating building were often openly hostile to new construction, the study discovered. “The Buildings Department is still one of the major drivers of the high cost of housing in New York City, rather than an agency dedicated to reducing expense and facilitating development,” the report observed. Even experienced builders, the study found, now typically employed well-paid “expediters” to move their projects through the city’s foot-dragging approval process, adding an average cost of about $200,000 per building.

Taxes and fees tied specifically to development—many of them rare in other cities—are another factor in Gotham’s sky-high building costs. For example, New York levies a transfer tax on land when a developer buys a plot, and then a mortgage-recording tax when a builder borrows to finance his project. And the builder faces significant sales taxes on construction materials, too. For a hypothetical New York apartment building, going up on a plot of land bought for, say, $5 million, real-estate, mortgage, and sales taxes would add $1.6 million to the development price tag.

New York’s local and state elected officials also write laws and codes that curry favor with various special interests with a financial stake in development, raising prices higher still. Litigation-friendly New York State makes it easy to sue builders and developers, for instance, which benefits construction-worker unions and trial lawyers, two powerful Albany lobbies, but makes insurance on the construction of an apartment building as much as 8 percent to 10 percent of total costs—twice the national average. The Scaffold Law may be the most striking example of this kind of legislation. Unique in the country, it mandates that a developer or contractor is completely liable if an employee gets injured on a job site, even if worker negligence played a role. Even workers found to be drunk on the job have won big judgments.

Another costly government barrier to building is the city’s excessive fondness for historic preservation. Initiated in the mid-1960s as a way of protecting truly exceptional structures—a fallout from the unfortunate demolition of the original Penn Station—the city’s landmarking process has morphed over time into a way for local activists and progressive politicians to stymie development of any new construction in neighborhoods often all but devoid of historic value. Nowadays, notes Harvard economist and City Journal contributing editor Edward Glaeser, nearly 16 percent of buildable land in Manhattan resides in historic-preservation districts, and about half of it is largely off-limits to development. (See “Preservation Follies,” Spring 2010.) In a city desperately needing housing construction, the preservation districts lost an average of 46 units of housing per tract during the 1990s, according to Glaeser’s research. Not surprisingly, the cost of housing in these districts has risen substantially faster than in other areas of the city.

The authors of the NYU study calculate that easing or eliminating the impediments that they identified could reduce housing construction expenses by 19 percent to 25 percent—a massive savings. Further, they add, these figures “likely underestimate the full impact of the recommendations because they do not take into account the supply effects of the proposals to make additional land available for residential use.” If enacted, the changes could cause rents to fall by as much as 26 percent, the authors projected.


“My name is Matiur,” a landlord who owns a rent-regulated building with six apartments in Queens testified to the rent board last year. “I moved to the United States from Bangladesh 36 years ago and have owned my building since 1997. Unfortunately, low rents [including one apartment that rents for just $280 a month] make it impossible for me to maintain my building.” Landlords worry about the city’s rising taxes on multiunit residences—increases that outpace rents. Since 2003, property-tax collections in the city have soared from $9.9 billion to $19.8 billion, thanks to rising assessments and a major tax increase engineered by the Bloomberg administration. As landlord Michael Vinocur said at a rent hearing last year, “My taxes are 80 percent higher now than five years ago, and my rent revenues have gone up less than 20 percent.”


New York puts additional pressure on residents and businesses through its extraordinarily high taxes, which ripple throughout the economy and raise prices for everyone, “everyday people” included.


New York imposes other strains on non-wealthy residents in the form of additional heavy business taxes and fees and intrusive business regulations. These measures curb job growth—above all, in middle-income occupations—and make it tough for new firms in the city to survive, let alone flourish and provide their owners with an entrepreneurial route to the middle class. The IBO study found that New York levies business taxes at nearly double the average found in other big cities—$1.06 per $100 in taxable income, compared with 55 cents per $100.


Companies remain willing to keep their highest-paid executives in New York because those workers thrive in a global business capital, and low-income jobs for unskilled workers follow because the city still needs service workers—those employed by restaurants, retailers, and hotels—to provide basic amenities. But companies derive little payoff from keeping middle-income jobs in pricey New York when technology allows them to situate these positions in less expensive locales....Average pay in Manhattan for a financial-services job is now $246,000 annually; in New Jersey, the securities industry is more of an upper-middle-income business, with average pay at $97,600 annually.

It’s also incredibly cumbersome to start a business in New York City. A recent study by the finance site ranked New York a discouraging 126th out of America’s 150 largest cities in the ease of launching a firm. A recent World Bank report noted that a would-be entrepreneur needs to obtain six permits, on average, to start a new venture in the United States (compared with just one in business-friendly New Zealand). But according to NYC Business Express, he’d need ten—six local and four from the state—to open, say, a simple office-supply business in the city. A study by the Kauffman Foundation and gave New York City a D for welcoming entrepreneurs.

All these impositions and requirements snuff out growth and opportunity. The NYC Jobs Blueprint study released by the Partnership for New York City last September estimated that it costs 50 percent more to build a business in Gotham than in the U.S. in general. One consequence, the study pointed out, is that New York businesses aren’t “scaling up”—that is, they’re not growing larger at an encouraging rate. Between 2003 and 2010, New York City saw no rise in the number of firms with 50 or more employees. Another worrisome sign: the city experienced a net loss during that time span of so-called tradable companies—firms in industries with the capacity to do business outside the five boroughs, and hence possessing the largest growth potential. “Because companies in a high-growth mode need all available resources to invest in people, New York is less attractive as a job expansion location than lower cost alternatives,” the study observed.


Putting still another strain on ordinary citizens, New York’s government pushes up the prices at establishments that do business directly with consumers, such as retailers and restaurants. For decades, the city’s politicians have tended to meddle in these industries for their own political aims, often keeping out disfavored firms and squelching competition....A 2009 study by the Bloomberg administration estimated that New York needed 100 more supermarkets to serve its residents adequately and was losing $1 billion in sales a year as shoppers left the city to buy food.

New York’s political class has similarly thwarted the efforts of America’s largest retailer, Wal-Mart, to open a branch in the city. Elected officials, many backed by labor organizations, have justified denying permits to the firm by charging that it exploits working people and ruins neighborhood prosperity. “Wal-Mart has blazed a path of economic and social destruction in towns throughout the U.S,” then-congressman Anthony Weiner told the New York Times in 2005. New Yorkers, however, think far more highly of the retailer. In 2012, the company says, basing its finding on credit-card receipts, city residents spent a staggering $215 million at its New York metropolitan area stores outside the city. And surveys show that New Yorkers overwhelmingly want the stores, with their low prices and broad selection.

The higher prices that inevitably result from these restrictions on commerce are a substantial burden to ordinary New Yorkers, who can’t regularly leave to shop in the suburbs.


All these factors—the expensive housing, fat tax bills, and high prices—have a direct and powerful effect on people’s daily lives. In a 2008 City Journal article, Glaeser calculated that, after including the costs of housing, taxes, and transportation, the average Houston family wound up with 50 percent more income to spend than the average New York family. The difference in real dollars: about $32,000 in spendable money for the typical Houston family, compared with just $21,000 for the New York family. (See “Houston, New York Has a Problem,” Summer 2008.) In a similar study of median incomes adjusted for cost of living in 50 metro areas, City Journal contributing editor Joel Kotkin and the Praxis Strategy Group’s Mark Schill determined that Houston workers enjoyed the nation’s highest effective pay: the annual average Houston salary of $67,279 was worth $75,256 when adjusted for the city’s lower-than-average cost of living. By contrast, in New York, the average annual salary of a worker, $77,640 on an unadjusted basis, shrank to $50,169 when corrected for the city’s high costs—above all, housing and taxes (see Figure 4). That left New York a poor 41st among metro areas in average annual effective pay.
 Next we have Max Borders:
Some people think cool cities are just expensive. And advocates of smart growth think the cool draws people and the growth has to be “managed.” Those who live there are happy to tolerate the planners for all sorts of reasons, but signaling one’s ideological bona fides is surely high among them. There is also the (generally unstated) desire to curb the growth—that is, to keep out the newbies before they ruin everything. Your favorite dive bar could become a chain restaurant, god forbid. And many well-heeled urbanites will go without cars and cram themselves into all manner of tiny dwellings to indulge environmental self-congratulation.

Smart growth thus becomes a catch-all: a cluster concept for socially engineering your way to bourgeois bohemia and treating everything in town as the property of an enlightened elite (which every self-respecting progressive goes along with lest she be considered unenlightened, or worse, not a member of said elite).

If they’re being honest with themselves, however, denizens of such places have to admit there is not only a growing gap between rich and poor in these towns, but a disappearing middle class. Much of this gap in San Francisco, for example, comes from the fact that some of the largest companies in the world are headquartered there, even among folks who self-identify as progressives. That’s a lot of rich people.


U cities

I shamelessly borrow the term “U city” from entrepreneur Gary Hoover, who is used to doing business in developing countries where a lot of the major cities are U cities. Here’s the idea: When you have a strong middle class, the population—when mapped on a curve—looks more or less like an inverted U (X is the number of people, Y is the level of income.) But the inverted U can get flipped to a regular U when, for example, the middle class starts to leave, the rich come and stay, and the poor are trapped by incentives. U cities predominate in the third world, primarily due to rampant cronyism—which limits possibilities for a middle class to emerge. In the United States cronyism is a factor, too. But so also are urban planning and growth management policies.

Smart growth

To understand how wealth disparities worsen in cities like these, we have to look at clusters of policies that go under the name "smart growth." They aren’t the only policies that create U cities, but these three areas drive the U city pattern, so they’re a good place to start the conversation:

  • strict zoning regulations and building codes 
  • rent control and low-income housing subsidies 
  • rail investments preferred over roads

These three points alone suffice to set any city on the path to being a U city. (Austin, where I live, is trending that way.)

[A]dd in strict zoning regulations and building codes. In a relatively free housing market, the cost of creating new housing supply is generally far lower. So, for example, city planners don’t have to approve a townhome or building for mixed use, declare it residential only, or whatever—if it can be built at all. Not so in areas with byzantine building codes and zoning. In these areas the stock of housing is limited and restricted to certain areas of the city. Of course, this makes housing far more expensive. Now, that’s okay for wealthier people. Indeed, they’re content with paying more. Once they’re there, they really like the idea that not so many more people are moving into the area. If you’re a middle-class earner, this makes life considerably more difficult as housing is far less affordable.


By now the progressive town fathers have likely picked up on the fact that this is happening. So they expand or maintain policies like rent control and subsidized housing for the poor. Poor people who’ve been there for a while cling to their rent-controlled or subsidized housing—as is reasonable to do given the incentives (but which sadly represents another “poverty trap” for the poor.) Of course, basic economics tells us that rent control exacerbates the problems of a limited housing supply, as developers have far fewer incentives to build properties and tenants have great incentives to stay put. The rental market is therefore less dynamic and the price controls distort the housing market even more—further limiting the availability of affordable housing. Non-rental properties may get built. But as we say, their supply is artificially limited, too, so these are reserved for tech execs.


For conscientious social signalers in progressive cities, the only thing that’s going to pull them out of their Priuses is rail transit. The trouble is, light rail is really, really (really) expensive. In fact, on average, rail transit is four times more expensive than driving per passenger mile, according to Cato transportation analyst Randall O’Toole.

Not only is light rail profoundly wasteful in cost-efficiency terms, it means resources that could have gone to increasing road capacity or building bus networks are lost (not that buses benefit town cronies). People who idealize walkable cities are simply kidding themselves, as most people drive their cars anyway and grumble about the awful commuting times—which new rail line thruways end up making worse.

Now, let’s not forget that rail is an expensive proposition. To give you an example of just how expensive it is, consider that the average U.S. light rail rider only pays in his/her fare about 10 percent of the total cost of the ride. Boosters rarely bring up costs, and cost overruns always plague such projects once voters take the bait. The people who do use rail don’t see or feel the budgetary nightmares their (in most cases, mostly empty) train cars create.

That’s because a lot of the costs get shifted onto people who will never see or take light rail in their lives—people who live in cities without rail, or people who live in rural areas. So much of the tax burden for these rolling pyramids falls disproportionately on the poor and middle class. After all, funding for such projects—even if they benefit rich, urban progressives—comes from sales and property taxes (which are not progressive taxes).


Now what about inverted-U cities? We could call these “fried-egg” cities, but that’s not terribly sexy. I prefer “galaxy cities” for obvious reasons. The idea behind galaxy cities is that, all things equal, you’ll not only get a fat bell of a middle class on the graph, but you’ll also get a galactic distribution of housing options if you look from above. Some call this sprawl, because more affordable housing extends outward from a denser core, phasing out at the periphery after the suburbs and exurbs. Not-so-obvious reasons for the galaxy metaphor include dynamics that have been unpacked in the work of the Santa Fe Institute (SFI), a group that studies all sorts of phenomena in complex systems.


Future cities

Galaxy cities of the future will be far smarter than any city that adopts smart growth, as galaxy cities will do the following:

Eliminate unreasonable zoning restrictions and costly building codes. Some believe that cities without zoning laws and building codes will have collapsing structures and factories moving in next to residential housing. It would take us too far afield to explain why free prices and a robust system of common law would help settle conflicts that might arise from the absence of zoning and municipal codes. Suffice it to say that with prices undistorted, property rights well established, and municipal courts using tort principles to settle disputes, cities will continue to find equilibria that will make galaxy cities far more hospitable to people across the income spectrum (especially the middle class). And if, god forbid, poor or middle-class people have to live in the same zone as a warehouse, at least they’ll be able to afford it.

Get rid of rent control and, instead, voucherize housing for the poor. Assuming full privatization of housing is not politically viable, then cities should simply get rid of government housing projects and rent control. Instead, the municipal government can offer housing vouchers for the poor based on an income scale specific to that city’s cost of living.

Think of any given citizen as needing to go to any given point in the city. Instead of going from point A to point G—with only points B, C, D, E, F in between—galaxy cities will build travel networks that assume people want to get from point A to point n (read: “any point among millions”) as quickly, efficiently, and safely as possible. To accommodate galaxy-city travelers, they will create distributed networks and vascular systems. And until there are flying cars, these systems will be built around cars. There are a number of great ways to build car-centric systems:
  • Remove regulations against ride-sharing technologies, such as Uber and Lyft; 
  • Prepare for the coming age of driverless cars (We have the technology!); 
  • Convert as many intersections as possible to traffic circles; 
  • Optimize traffic lights using computer modeling; 
  • Use congestion pricing and hot lanes, where possible; 
  • Liberalize and privatize all bus and van services; 
  • End municipal transport and taxi cartels; 
  • Let resources follow cars rather than hoping cars (or people) follow resources; 
  • Respect the urban ecosystem as it is rather than as you would hope for it to be.
The extent to which planning for transportation is a market-based phenomenon is the extent to which cities will become more convenient, cost-effective, and dynamic for everyone.
 Finally, Ross Kecseg of Empower Texans details the situation closer to home:
Texas still has the second highest, per person local debt in the United States. And although it appears that the growth over the last twelve months has slowed when compared to past years, the long-term trajectory is alarming.

So which local governments are borrowing on your behalf?

Cities and school districts are the largest taxing, borrowing and spending entities, making up two-thirds of the overall debt burden.


Although necessary in some cases, debt financing is an extremely expensive way to pay for government services. Although Texans have received $200 billion in tangible assets for local government entities, they will pay an additional $128 billion in interest expense alone; a tangible cost without a tangible benefit.

In other words, taxpayers will pay $328 billion for only $200 billion in actual benefits.
 Each of the articles is worth reading in full; see here, and here, and here.

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