The November Metropolis magazine has a one page piece on a new square in Portland.
http://www.metropolismag.com/story/20101117/portland-trailblazers
As part of a long-term project to build parks in the city, this converted city block is different from previous versions containing the usual grass and trees. The newest addition to the project is a paved public square that includes elements promoting social interaction and even a full service cafe. The cafe was thought too commercial by some, but the square has been attracting roughly 500 visitors per day. The question is, can this type of public space be exported to the suburban context to promote social energy?
On the downside, Portland is much denser than most suburbs so there are fewer people within walking distance. That means the trick is finding a way to attract a self-sustaining level of social activity when people have to arrive via car. It is this reason that I think suburban pocket parks are destined for failure. There just are not enough people within walking distance to populate a small park to the extent that social energy becomes self-sustaining (people attract people).
I think the answer is to incorporate such a public square into an area that people are already visiting for other reasons. Most inner-ring suburbs have strip centers in decline. We already know that electronics, clothing, sports equipment, and a lot of other retail work best out of the big-box typology. Old strip malls malls have to find a way to remain relevant at a smaller scale. Since this smaller scale generally means fewer cars per square foot of space, unused parking lot space can be home to public square like the one in Portland. The synergy created between the public space and the repurposed strip center tenants might be just what older suburbs need to generate much needed social energy.
Sunday, November 21, 2010
Monday, June 14, 2010
The Single Tax Idea, 130 Years Later
In 1880, Henry George proposed that all taxes be replaced by a single tax on the unimproved value of land. While his tax idea never caught on, the economic benefits of a tax policy based on the idea have found a new life and are being advocated by Walter Rybeck at the consulting firm Just Economics (www.justeconomicsllc.com).
The rationale behind George's single tax idea is that virtually all taxes on economic activity create a disincentive to economic production. The lost productive value caused by a tax is called a deadweight loss by economists. The only taxes that do not create such a loss are taxes on resources where supply is perfectly inelastic. Perfectly inelastic supply means that whatever the cost of using the resource, the quantity of it used remains the same. One of the few resources with a perfectly inelastic supply is land. Certainly, if the tax on land exceeds its rental value, then it will be abandoned, but so long as the tax stays below that threshold, it will be used productively. Because overall government expenditure was so modist in 1880 when George proposed the idea, it would have been possible to replace all other taxes with a single land tax on the value of unimproved land (hense the "single tax" moniker). Today, a single land tax would not be enough to fully fund all government.
For local governments however, the idea holds some promise. Today, property tax policy genrally taxes both the unimproved land value and the value of improvements at the same rate. While the tax on the land itself does nothing to affect its use, taxing improvements creates a disincentive to improve land. What Rybeck advocates is shifting the tax burden towards the unimproved land value and away from the value of improvements (see Retooling Property Taxes ). Say in a city 2/3 of the total value of property is in the improvements while only 1/3 is the unimproved land value. Say the tax rate is originally X. Cutting the rate to 1/2X on the improved value and raising it to 2X on the land value, total property tax revenue is the same, but the economic incentives to use land are dramatically different. The cost of leaving land unimproved rises and the cost of improving it (via lower taxes) falls. Such a move is a win-win situation for cities as less land is left vacant and there is an incentive to use land more intensively.
The only caution is that such a policy will certanly lower the value of unimproved land. If the tax gets so high that the value of unimproved land falls too low, then it becomes hard to detemine how it should be used and the likelihood of abandonment rises. But a shift similar to my example above would not come close to creating these adverse effects.
The rationale behind George's single tax idea is that virtually all taxes on economic activity create a disincentive to economic production. The lost productive value caused by a tax is called a deadweight loss by economists. The only taxes that do not create such a loss are taxes on resources where supply is perfectly inelastic. Perfectly inelastic supply means that whatever the cost of using the resource, the quantity of it used remains the same. One of the few resources with a perfectly inelastic supply is land. Certainly, if the tax on land exceeds its rental value, then it will be abandoned, but so long as the tax stays below that threshold, it will be used productively. Because overall government expenditure was so modist in 1880 when George proposed the idea, it would have been possible to replace all other taxes with a single land tax on the value of unimproved land (hense the "single tax" moniker). Today, a single land tax would not be enough to fully fund all government.
For local governments however, the idea holds some promise. Today, property tax policy genrally taxes both the unimproved land value and the value of improvements at the same rate. While the tax on the land itself does nothing to affect its use, taxing improvements creates a disincentive to improve land. What Rybeck advocates is shifting the tax burden towards the unimproved land value and away from the value of improvements (see Retooling Property Taxes ). Say in a city 2/3 of the total value of property is in the improvements while only 1/3 is the unimproved land value. Say the tax rate is originally X. Cutting the rate to 1/2X on the improved value and raising it to 2X on the land value, total property tax revenue is the same, but the economic incentives to use land are dramatically different. The cost of leaving land unimproved rises and the cost of improving it (via lower taxes) falls. Such a move is a win-win situation for cities as less land is left vacant and there is an incentive to use land more intensively.
The only caution is that such a policy will certanly lower the value of unimproved land. If the tax gets so high that the value of unimproved land falls too low, then it becomes hard to detemine how it should be used and the likelihood of abandonment rises. But a shift similar to my example above would not come close to creating these adverse effects.
Saturday, June 12, 2010
Value Capture
I attended a seminar a few weeks back entitled “The New Economics of Place.” As I believe placemaking is one of the most important aspects of redevelopment projects, I was really looking forward to a discussion of which investments would offer the most placemaking bang for the buck. Instead, the topic was how to justify government subsidization of redevelopment projects. While I happen to think this is a worthy goal, I am also fearful that there is a lot of room to massage data to make bad projects look good.
The new buzz word was “value capture.” In reality, value capture is a new term closely related to the long term economic concept of a positive externality. Positive externality is the economist’s term for the benefit from some action that accrues to someone not involved in the action itself. If my house looks shabby because of peeling paint, my repainting the house benefits my neighbors. Because I do not fully take into account these benefits that are external to me, I repaint my house less often then I should. Playing objectionable loud music in my back yard creates a negative externality. Economists are forever trying to figure out how appropriately subsidize actions that generate positive externalities and tax actions that generate the opposite.
For a public works project, say a new bridge across a river that will save 1,000s of people each several hours per week in driving, there is clearly a benefit to those other than the government agencies that paid for the bridge. In fact, land on both sides of the river near the bridge will increase in value. With the idea of value capture, the government agency could rightly tax these landowners by the amount of the increased land value to pay for the bridge. This value capture allows the bridge to be funded. To the extent the increase in land value exceeds the cost of the bridge, building the bridge was a good idea.
To digress a bit, an even better solution would be to make the bridge a toll bridge. If the toll money pays for the bridge and property values still rise, then it is clear the bridge was a sound economic decision.
Where the speaker was really going with this was that he thought that increased land value could and should be used to justify the expense of redevelopment projects. I actually think this is completely appropriate in certain cases. The difficulty is measuring the benefits. For example, he spoke of a project his firm had put together for a town of 50,000 on the Ohio River, many miles from the nearest town. The plan called for a reconnection of the downtown to the river and about 200 new condo/apartment units. He said the increased value of the new development and the surrounding land justified the millions of dollars of expense. But the devil is in the details. For the apartments, so long as the rents collected pay off the cost of construction, they are a good deal. But the millions of dollars spent to recreate the waterfront would certainly not be covered by the rent of the apartments or the retail and commercial space. Somehow, it needs to be argued that the increase in land value to the whole city paid for the waterfront redevelopment. But this is tricky. In a growing metro area, it could be argued that the waterfront would bring even more new in-migration from the rest of the state and/or country. However, in a declining river city in Kentucky, any new land value near the new development will likely be offset by declining land values elsewhere in the city. Higher rents in the redeveloped area mean lower rents elsewhere. I could be persuaded otherwise if the city’s population either stabilized or was reversed by the redevelopment, but it would take a substantial change in the population to increase overall land values by several million.
At the end of the day, value capture is a valid enough term that is way too easy to overplay.
There was another odd value capture story that came up after the talk. After the talk, the speaker mentioned that although fares from Dallas’ light rail system cover less than 25% of the operating costs (and zero of the substantial initial capital costs), that it was still a good deal via the value capture idea. I mentioned that a UNT geography student had looked at property values along the light rail lines both a year before the system was announced and a year after it opened for business. He found that the gains near the stations were virtually completely offset by losses along the lines but further away from the stations. He effectively showed that the $8 billion spent has generated zero benefit. The speaker countered that the only way to figure out the true value is to undertake such a study decades from now. In my opinion, land markets are very effective as assessing potential and they were telling us that the light rail offers little of that.
One attendee mentioned that the I-highway system was built not for suburban commuters but for intercity movement of goods. While I didn’t say anything, what I wanted to say was “wow, what a wonderful outcome that the benefit to the government’s highway system was much, much, much higher than anyone anticipated!” Talk about value capture! The I-highway system has caused the value of agricultural land near large cities to be worth ten times as much as residential land. Like I said, value capture is a really great concept, we just have to learn how to use it.
The new buzz word was “value capture.” In reality, value capture is a new term closely related to the long term economic concept of a positive externality. Positive externality is the economist’s term for the benefit from some action that accrues to someone not involved in the action itself. If my house looks shabby because of peeling paint, my repainting the house benefits my neighbors. Because I do not fully take into account these benefits that are external to me, I repaint my house less often then I should. Playing objectionable loud music in my back yard creates a negative externality. Economists are forever trying to figure out how appropriately subsidize actions that generate positive externalities and tax actions that generate the opposite.
For a public works project, say a new bridge across a river that will save 1,000s of people each several hours per week in driving, there is clearly a benefit to those other than the government agencies that paid for the bridge. In fact, land on both sides of the river near the bridge will increase in value. With the idea of value capture, the government agency could rightly tax these landowners by the amount of the increased land value to pay for the bridge. This value capture allows the bridge to be funded. To the extent the increase in land value exceeds the cost of the bridge, building the bridge was a good idea.
To digress a bit, an even better solution would be to make the bridge a toll bridge. If the toll money pays for the bridge and property values still rise, then it is clear the bridge was a sound economic decision.
Where the speaker was really going with this was that he thought that increased land value could and should be used to justify the expense of redevelopment projects. I actually think this is completely appropriate in certain cases. The difficulty is measuring the benefits. For example, he spoke of a project his firm had put together for a town of 50,000 on the Ohio River, many miles from the nearest town. The plan called for a reconnection of the downtown to the river and about 200 new condo/apartment units. He said the increased value of the new development and the surrounding land justified the millions of dollars of expense. But the devil is in the details. For the apartments, so long as the rents collected pay off the cost of construction, they are a good deal. But the millions of dollars spent to recreate the waterfront would certainly not be covered by the rent of the apartments or the retail and commercial space. Somehow, it needs to be argued that the increase in land value to the whole city paid for the waterfront redevelopment. But this is tricky. In a growing metro area, it could be argued that the waterfront would bring even more new in-migration from the rest of the state and/or country. However, in a declining river city in Kentucky, any new land value near the new development will likely be offset by declining land values elsewhere in the city. Higher rents in the redeveloped area mean lower rents elsewhere. I could be persuaded otherwise if the city’s population either stabilized or was reversed by the redevelopment, but it would take a substantial change in the population to increase overall land values by several million.
At the end of the day, value capture is a valid enough term that is way too easy to overplay.
There was another odd value capture story that came up after the talk. After the talk, the speaker mentioned that although fares from Dallas’ light rail system cover less than 25% of the operating costs (and zero of the substantial initial capital costs), that it was still a good deal via the value capture idea. I mentioned that a UNT geography student had looked at property values along the light rail lines both a year before the system was announced and a year after it opened for business. He found that the gains near the stations were virtually completely offset by losses along the lines but further away from the stations. He effectively showed that the $8 billion spent has generated zero benefit. The speaker countered that the only way to figure out the true value is to undertake such a study decades from now. In my opinion, land markets are very effective as assessing potential and they were telling us that the light rail offers little of that.
One attendee mentioned that the I-highway system was built not for suburban commuters but for intercity movement of goods. While I didn’t say anything, what I wanted to say was “wow, what a wonderful outcome that the benefit to the government’s highway system was much, much, much higher than anyone anticipated!” Talk about value capture! The I-highway system has caused the value of agricultural land near large cities to be worth ten times as much as residential land. Like I said, value capture is a really great concept, we just have to learn how to use it.
Sunday, March 21, 2010
New Orleans, Down for the Count?
According to the official estimates, New Orleans will have a population of 442,064 on April 1, 2010 (census day). However, Janna Knight and Mark VanLandingham at the Tulane University School of Public Health think it will be lower, much lower. Looking at death certificates and age specific death rates, they work backwards to figure that the census will probably count between 300,000 and 350,000 in New Orleans on April 1. Of course, the city government has been asking people to invite friends and relatives to visit for the April Fool holiday and then count them, but barring that, the count should be about 20%-35% below the pre-Katrina level -- but who knows how successful the fraud strategy will be.
So what does this mean? First, it now seems unlikely that a substantial number of families or individuals that have relocated are likely to come back now. All the money used to bring people home has been distributed and the insurance money has now all been paid out. However, while many have settled away from the city, many may be located in the surrounding suburbs. It will certainly be interesting to see how the population of the New Orleans metro area has changed over the last 5 years.
So what does this mean? First, it now seems unlikely that a substantial number of families or individuals that have relocated are likely to come back now. All the money used to bring people home has been distributed and the insurance money has now all been paid out. However, while many have settled away from the city, many may be located in the surrounding suburbs. It will certainly be interesting to see how the population of the New Orleans metro area has changed over the last 5 years.
Why haven't people come back to the city? Well, for a lot of folks, the allure of New Orleans was not gumbo or jazz, but cheap housing. Housing in New Orleans was, in many places, renting for rates that are not sufficient to fund new construction. Moving elsewhere is simply a better deal.
But this leaves the city with a very big problem. I spent a couple of hours driving around the Lower Ninth Ward this past week and I can report that east of the industrial canal where the flooding was so bad, maybe 15% of the houses are occupied. In some areas it is about 30% while in others less than 5%. If the return migration is over, then someone has to figure out how to deal with hundreds of acres of land now occupied with a rural density level. It looks like the streets and services are all still there so turning the remaining area into a park will be expensive... as will be an agricultural use. Could the lots be bought and then sold to a large scale housing developer who could get the cost of construction way down by building 1,000 units? Anyway this goes, it won't be easy... but it will be big.
Monday, March 8, 2010
New Culprit in Sprawl: Free Parking
I have spent some time talking to professors in a planning department at a large university. What surprises me most is how openly hostile many of the faculty are to economics. To an economist, sprawl is the result of economic factors. Primarily, economists believe that sprawl is the result of sprawl-type development having a combination of profitability and desirability that beats out all other options. A big part of what created this winning combination during the 20th century involves the effect of the automobile on transportation costs. Not buying this argument, one planning professor tried to tell me that sprawl was the result of greed, corruption and stupidity.
After reading Donald Shoup’s excellent book, The High Cost of Free Parking, I think I have found a way to bring economists and planners together. That is, the stupidity of parking requirements has significantly lowered the cost of driving, making sprawl much more economically viable.
We all may love free parking, but parking spaces are not free, they take up valuable real estate that could be used for other purposes. At the same time, planning departments all across the United States force developers to provide enough parking so that, 99% of the time, there will be a free space available for the next car that wants one. Shoup not only demonstrates that parking standards are largely based on little more than educated guesses, but by measuring the value of spaces, shows that the excess parking capacity we have created across the U.S. is extremely wasteful. With an estimated 4 parking spaces for every car in the U.S., it is clear that the cost of parking spaces exceeds the value of the cars in the U.S. Beyond that though, Shoup also effectively explains how free parking, through its effect on the cost of a driving trip, subsidizes driving and exacerbates sprawl.
In a nutshell, partly because a parking space that could cost $5,000-$50,000 to provide is free to the user, people choose to drive alone rather than choose a substitute – car pooling, mass transit, demand for higher-density, mixed-use living, etc. When everyone makes this choice, there is more congestion on the roads and we build more road capacity. This keeps the time cost of driving low and increases the demand for parking. So we force more spaces to be provided at every type of land use.
Planners (and economists) have long argued that free streets essentially subsidize driving, but we have missed the fact that free parking has the same effect. But free parking is in some ways more problematic as excess parking lots necessarily reduce density of land use, which forces developers to spread out more. Sprawl is built into the system. According to Shoup, developers always want to provide less parking than city planners force them to create. Because spaces are so expensive to provide, this drives up the cost of production and creates higher prices for whatever is being created on that piece of land. Everything from restaurant meals, to groceries, to insurance policies, to dry cleaning, to city services, cost more to produce because empty parking spaces must be paid for.
So free parking can be partly blamed for low-density development, excess road capacity, higher prices for goods, high demand for automobiles and gasoline (and therefore pollution and climate change), low demand for mixed-use development and low demand for mass transit.
Turning this around is going to take time, but the fixes are easy. 1) end all parking supply requirements and 2) install parking meters. By doing this, if a parking space won’t pay for itself, then its provision is a waste of resources and it will be replaced with a higher valued land use. High tech parking meters do not require carrying a bunch of quarters around and never result in a picket for overstaying your allotted time by 3 minutes. Beyond that, the revenue generated may allow cities to lower property taxes.
If the solution is so easy, why is implementation so hard? Because Americans seem to think that free parking is equivalent to the “pursuit of happiness” and is therefore promised them by the Constitution. It is time for better ideas to carry the day.
After reading Donald Shoup’s excellent book, The High Cost of Free Parking, I think I have found a way to bring economists and planners together. That is, the stupidity of parking requirements has significantly lowered the cost of driving, making sprawl much more economically viable.
We all may love free parking, but parking spaces are not free, they take up valuable real estate that could be used for other purposes. At the same time, planning departments all across the United States force developers to provide enough parking so that, 99% of the time, there will be a free space available for the next car that wants one. Shoup not only demonstrates that parking standards are largely based on little more than educated guesses, but by measuring the value of spaces, shows that the excess parking capacity we have created across the U.S. is extremely wasteful. With an estimated 4 parking spaces for every car in the U.S., it is clear that the cost of parking spaces exceeds the value of the cars in the U.S. Beyond that though, Shoup also effectively explains how free parking, through its effect on the cost of a driving trip, subsidizes driving and exacerbates sprawl.
In a nutshell, partly because a parking space that could cost $5,000-$50,000 to provide is free to the user, people choose to drive alone rather than choose a substitute – car pooling, mass transit, demand for higher-density, mixed-use living, etc. When everyone makes this choice, there is more congestion on the roads and we build more road capacity. This keeps the time cost of driving low and increases the demand for parking. So we force more spaces to be provided at every type of land use.
Planners (and economists) have long argued that free streets essentially subsidize driving, but we have missed the fact that free parking has the same effect. But free parking is in some ways more problematic as excess parking lots necessarily reduce density of land use, which forces developers to spread out more. Sprawl is built into the system. According to Shoup, developers always want to provide less parking than city planners force them to create. Because spaces are so expensive to provide, this drives up the cost of production and creates higher prices for whatever is being created on that piece of land. Everything from restaurant meals, to groceries, to insurance policies, to dry cleaning, to city services, cost more to produce because empty parking spaces must be paid for.
So free parking can be partly blamed for low-density development, excess road capacity, higher prices for goods, high demand for automobiles and gasoline (and therefore pollution and climate change), low demand for mixed-use development and low demand for mass transit.
Turning this around is going to take time, but the fixes are easy. 1) end all parking supply requirements and 2) install parking meters. By doing this, if a parking space won’t pay for itself, then its provision is a waste of resources and it will be replaced with a higher valued land use. High tech parking meters do not require carrying a bunch of quarters around and never result in a picket for overstaying your allotted time by 3 minutes. Beyond that, the revenue generated may allow cities to lower property taxes.
If the solution is so easy, why is implementation so hard? Because Americans seem to think that free parking is equivalent to the “pursuit of happiness” and is therefore promised them by the Constitution. It is time for better ideas to carry the day.
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