Has New York City become too nice of a place to live? In this piece, Emily Badger embraces a Goldilocks point of view. If New York City real estate is porridge, then the "porridge is too hot". Ms. Badger bemoans that New York City renters are being priced out of their city. This view suggests that she believes that renters have a property right to live there at "their old rent level". But is that true? Does she propose that NYC increase the number of rent controlled apartments so that incumbents won't be priced out? This would be a takings from those who own these buildings.
Who holds an equity stake in a rising city? Is it the land owners in the city or the incumbents who lived in the city? For those of you with a taste for Karl Marx, I hope you see the analogy to whether capital or labor benefits from dynamics shocks.
For those of you who didn't sleep through your economics classes, this is classic example of "economic incidence". When there is "new news" (whether it is good ---- Wall Street is booming or bad ---- the murder rate increases to an all time high), the owners of assets such as land are the ones who either gain or lose based on the content of the news. Since land is in scarce supply in Manhattan, rising international demand to live in NYC raises local prices.
What is to be done? As shown in my PNAS China Bullet Train paper, faster trains would partially address her concern. Downtown Philadelphia could become a NYC suburb if the train between the cities moves even faster.
Another way to address her concern is to allow for more high rise buildings in NYC and to allow for micro apartments to reduce the square feet in apartments. As Ed Glaeser has argued, NYC has designated too many buildings to merit historical preservation status and this has slowed down the increase in housing supply.
Ms. Badger appears to want to build a wall around NYC to keep the outsiders out as they bring their wads of cash and bid up prices so that the 99% are priced out. This raises a fundamental issue; how should scarce assets be allocated across different people? If you reject the pricing mechanism as the means for allocating such resources, what alternative approach do you embrace? Do you root for a new fair dictator to emerge and redistribute ill gotten gains to the people? That experiment has been tried before!
While economists teach generations of students that one's wage equals one's marginal value product and that capital gains represent the returns for patiently investing rather than consuming early, more and more people appear to believe that the 1% stole their money from some honey pot and that due to general equilibrium effects that the consumption behavior of this 1% are pricing out other people. To regain trust from society, perhaps each member of the 1% should post a Youtube video explaining how they earned their money and how they have contributed to society.
The "Law of One Price"? Evidence from Cross-Area Housing Opportunities
This webpage offers a quick refresher course on the role that amenities and local labor market opportunities play in explaining real estate prices across different areas of the United States. Why aren't the owners in Berkeley selling their small $400,000 homes and moving to Maine to live in that enormous $400,000 house?
The Competitive Coastal Housing Insurance Market Nudges Climate Change Adaptation Forward
While behavioral economists dismiss "rational expectations, there are some important economic actors with a strong incentive to discover accurate assessments of the probabilities of future events. The insurance industry is investing in forecasting because it has the right incentives to do so. As Grossman and Stiglitz and Hayek taught us long ago, risk prices convey information about our best guess of future probabilities of events. Read the first paragraph of this paper.
Two Thoughts About Cities
The NY Times has a long piece about China's Communist Party (CCP) forcing its farmers to urbanize. This will be an interesting test of the Roy Model (i.e comparative advantage and sectoral choice). The article suggests that the CCP is assuming that urbanization always raises one's wages and happiness. Such an assumption ignores population preference and talent diversity (this may be a consistent theme with communists). In the real world, people differ with respect to their endowments of brains and muscle and in what is their "conception of the good life". If rural people are free to choose whether they want to urbanize, then a standard comparative advantage model would predict that those with a high brain to muscle ratio of will urbanize (because cities offer a higher wage per unit of brains than rural areas and rural areas offer a higher wage per unit of muscle than urban areas).
So, this is a long winded way of saying that China's increased incentives for rural people to urbanize is likely to lead to the fact that the marginal new migrant will have a lower brain/muscle ratio than the early migrants. This suggests that the urbanization returns to the new cohort of rural people who now are "forced" to urbanized will be lower than for earlier cohorts. This group will also find real estate prices to be very high. So imagine that you are forced to leave your rural social network to move to an urban area to work where you don't have the skills to qualify for good jobs and rents for housing are extremely high. This is a recipe for very low quality of life and future trouble.
The CCP appears to believe that all farmers are identical in terms of skills and ambition. The CCP is about to learn a lesson about marginal versus average!
Switching topics; the Los Angeles Times has a very interesting front page article about new urbanism. More new homes have "micro lots" so they stand side by side. Does this look like the LA you think of?
While this housing isn't for everyone, it is more "affordable" because the absence of a backyard means that the home sits on little land. This is an example of how we adapt our urban form as our needs change. Why Los Angeles has so much green grass when nobody spends time in their own private outdoor space remains a mystery to me.
So, this is a long winded way of saying that China's increased incentives for rural people to urbanize is likely to lead to the fact that the marginal new migrant will have a lower brain/muscle ratio than the early migrants. This suggests that the urbanization returns to the new cohort of rural people who now are "forced" to urbanized will be lower than for earlier cohorts. This group will also find real estate prices to be very high. So imagine that you are forced to leave your rural social network to move to an urban area to work where you don't have the skills to qualify for good jobs and rents for housing are extremely high. This is a recipe for very low quality of life and future trouble.
The CCP appears to believe that all farmers are identical in terms of skills and ambition. The CCP is about to learn a lesson about marginal versus average!
Switching topics; the Los Angeles Times has a very interesting front page article about new urbanism. More new homes have "micro lots" so they stand side by side. Does this look like the LA you think of?
While this housing isn't for everyone, it is more "affordable" because the absence of a backyard means that the home sits on little land. This is an example of how we adapt our urban form as our needs change. Why Los Angeles has so much green grass when nobody spends time in their own private outdoor space remains a mystery to me.
Four Thoughts About the China PNAS "Coal Kills" Study
MIT's Michael Greenstone and co-authors have published an important paper in PNAS documenting that "coal kills". This finding is based on a natural experiment from China where cheap winter heating was made available in certain geographic areas. This creates a natural treatment group and control group. This well done study is also politically shrewd. As natural gas has grown cheaper, any research documenting the social cost of coal will be welcomed by the "green cities" coalition and those who want sharp cuts in global greenhouse gas emissions.
Comment #1: What is the elasticity of demand for winter heating in China?
Comment #2: What was the efficiency of the coal boilers used by the Chinese heat providers located in the North of the Huai River? If they had very efficient boilers then they would have needed less coal to make the heat and thus less TSP would have been released.
Comments #1 and #2 suggest that if either the boilers had been efficient or the elasticity of demand was low then there would have been no differential TSP at the border. A "natural experiment" existed because these conditions were not satisfied.
Comment #3: Coal burning bundles many nasty environmental treatments including TSP. Lucas Davis discusses the wide set of environmental problems caused by burning coal. TSP is just one of them. It is possible that TSP floats more uniformly around power plants and coal heating systems than these other toxics but Davis' results suggest that the Greenstone team may over-state the role of TSP in causing death in China because the coal burning simultaneously raises TSP and another vector of toxics that they don't measure. Since they can measure TSP, they attribute all of the deaths to TSP but this implicitly zeroes out all of the other marginal health effects caused by other pollutants that increase because of coal burning.
Comment #4: How much money did local governments and households north of the river save because they spent nothing on winter heating? What did they do with this extra money? If they bought cigarettes then they further injured their health? If the local government invested in cleaner water then this would improve health. A future study should investigate differential consumer expenditure across the border.
UPDATE: Towards the end of the published paper, the authors discuss this point. Here is a quote. "Further, the free provision of coal is an in-kind transfer that increases households’ disposable income, and this may cause northern households to alter their consumption patterns in ways that are protective
(e.g., medical care) or harmful (e.g., tobacco or alcohol) for health." They acknowledge that if the policy changes household or government behavior on health related inputs that the policy does not isolate the causal effect of TSP on mortality holding all else equal.
Comment #1: What is the elasticity of demand for winter heating in China?
"The quasi-experimental empirical approach is based on China’s Huai River policy, which provided free winter heating via the provision of coal for boilers in cities north of the Huai River but denied heat to the south. "If the elasticity of demand equals zero, then this policy should have induced no differential pollution effect across the policy border. The more elastic the demand for winter heating then the larger the environmental impact.
Comment #2: What was the efficiency of the coal boilers used by the Chinese heat providers located in the North of the Huai River? If they had very efficient boilers then they would have needed less coal to make the heat and thus less TSP would have been released.
Comments #1 and #2 suggest that if either the boilers had been efficient or the elasticity of demand was low then there would have been no differential TSP at the border. A "natural experiment" existed because these conditions were not satisfied.
Comment #3: Coal burning bundles many nasty environmental treatments including TSP. Lucas Davis discusses the wide set of environmental problems caused by burning coal. TSP is just one of them. It is possible that TSP floats more uniformly around power plants and coal heating systems than these other toxics but Davis' results suggest that the Greenstone team may over-state the role of TSP in causing death in China because the coal burning simultaneously raises TSP and another vector of toxics that they don't measure. Since they can measure TSP, they attribute all of the deaths to TSP but this implicitly zeroes out all of the other marginal health effects caused by other pollutants that increase because of coal burning.
Comment #4: How much money did local governments and households north of the river save because they spent nothing on winter heating? What did they do with this extra money? If they bought cigarettes then they further injured their health? If the local government invested in cleaner water then this would improve health. A future study should investigate differential consumer expenditure across the border.
UPDATE: Towards the end of the published paper, the authors discuss this point. Here is a quote. "Further, the free provision of coal is an in-kind transfer that increases households’ disposable income, and this may cause northern households to alter their consumption patterns in ways that are protective
(e.g., medical care) or harmful (e.g., tobacco or alcohol) for health." They acknowledge that if the policy changes household or government behavior on health related inputs that the policy does not isolate the causal effect of TSP on mortality holding all else equal.
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