economic development – Page 3 – The Menace of Privilege

Progressive proposal from Kenya

detail from photo by Jennifer Wu via flickr (cc)

Writing in Standard Digital, Charles Kanjama proposes that “If government was clever, it would include a value-capture approach in project financing.” He’s writing about big infrastructure projects, which in his time (2014) and place (Kenya) include railway and port improvements. He suggests that perhaps half the cost should come from land value tax, without explaining why it would be appropriate for landowners to receive half the benefit of improvements paid for by the general community. (Kanjama is an attorney and accountant who was rated among the top 100 legal minds in Kenya as well as one of the 100 most influential people in that country.)

The same edition (January 4 2014) carries another article showing a problem resulting from failure of the community to collect all the rent. It seems that the government wanted to remove a large number of squatters who had settled in a protected forest. Ordered to vacate, they each received 400,000 shillings ($4604.67 US, according to Wolfram Alpha) to purchase land elsewhere. Now the time for relocation has expired, and many spent the money on things other than land. Of course I don’t know these people, don’t know what land was available, don’t know their needs, but very clearly if land were nearly free (as results from a high land value tax) they would almost certainly be better off.

Getting back to blogging — just in time for football

Football Cake by Sweet Pea 0613 via flickr(cc)

After a couple of months’ diversions, I hope I am getting back to something like regular blogging, starting with a nice article — as far as it goes, at least– by Gregg Easterbrook about the subsidies and political favors governments provide for professional football. A lot of this, on stadium subsidies (not just for football), has been covered in the past by Heartland, most recently here (pdf). But Easterbrook covers some additional ground, noting the federal favors done for the football business. I hadn’t been aware that NFL has a special anti-trust exemption (I thought it was just one of the many many cases where feds choose not to enforce laws.) And I’d never made the connection between stadiums paid for by the public, and the “intellectual” “property” of football game images, which of course are government-created privilege.

Easterbrook does seem to be a football fan, which is a skill (affliction?) far beyond my capabilities. My preferred remedy for “sports” subsidies has always been for the audience to go away and do something else. But even tho I’m just as happy watching an amateur softball game, many people evidently get pleasure from seeing the professionals in action. Easterbrook suggests that it’s necessary that “public attitudes change.” Great idea, but as long as the public feel compelled to watch these games, it’s difficult to imagine any politician willing to risk the wrath of those who control them.

Economists theorizing about Detroit

Hazen Pingree statue in Detroit. Photo by Dave Hogg via Flickr (cc)

Econ Talk is at it again, applying economic theory to real problems, not getting hung up on matters historical or spatial. In the most recent episode, Edward Glaeser of Harvard talks with regular host Russ Roberts about the problems of Detroit. They do make some valid points about economic development, such as the need for adequate basic services rather than flashy new projects, and that a city which has lost a lot of population probably doesn’t need additional infrastructure (but reluctantly agreeing that perhaps some repair or modernization might be good.)

But the main theme seems to be privatize, privatize, and privatize, which includes giving public money and public assets to private operators (such as charter schools), and funding infrastructure and services from direct user fees, exemplified by toll roads. Curiously they don’t say much about taxes, not even asserting that lower taxes are needed, and certainly they betray no knowledge of the value of taxing land.

It’s interesting, if disconcerting, to compare this to “quite possibly Detroit’s finest mayor,” Hazen Pingree. This January 6 2013 Detroit News article tells the story. Having built a successful shoe-manufacturing business, Pingree found himself drafted by Republicans in 1889 to run for mayor against the dominant Democrats. He won, and started working to improve the city. Republicans, having a fair share of the monopolies and sweetheart deals that Pingree wanted to eliminate, were not pleased. But he turned out to be a skilled politician, was elected three more times as Mayor, then twice as Governor of Michigan.

Detroit at the time of Pingree’s election had few paved streets, mainly because paving had to be paid by the owners of adjacent property (and was done by politically-connected contractors). Pingree’s solution was to use the City’s general tax revenues, not only for streets but also for sewers and other infrastructure needs. His remedy for a failing public school system was to arrest the school board. His preferred tax policy: A single tax on land value, no special deals (one of his important reforms as Governor was to bring about proper taxation of railroad property.) More about Pingree at Wikipedia, with additional links there.

None of this means that the interview isn’t worth listening to, but let’s remember, everything takes place at a location, every useful urban location has value, and the value rightly belongs to the community who creates it.

The other downside of export subsidies

Boeing and Airbus products photo by contri via flickr (cc)

Entrenched U S carrier Delta Airlines complains that their foreign competitors can buy Boeing jets cheaper than Delta can. Why? Because the federal Export-Import Bank offers loan guarantees, intended to make Boeing’s products more cost-competitive in the international marketplace, particularly against Airbus.

Of course this is a case where we might be better off allowing the “free market,” whatever that is, to set the cost of financing. Abolish the ex-im bank, let manufacturers offer subsidized financing from their own resources if they wish, and don’t worry about the “balance” of trade. But Boeing has sufficient political power that is unlikely. Perhaps some favors will be offered to Delta, who doubtless also has political friends, in order to get them to drop the suit or minimize its practical impact.

As some indicator of the likely outcome, Influence Explorer says that Delta spent $4,154,382 on lobbying during the most recent reporting period, whereas Boeing spent $24,120,000.

Curious land tenure arrangement at Glencoe

2551764103_df684d2509_m — photo detail of a former theater building on Belmont, by Terence Faircloth via flickr (cc)

As reported yesterday by Chris Jones of the Tribune, Writers’ Theater is planning a new $30 million home on the site of the Glencoe Women’s Library Club. Being ignorant of things theatrical, I find the interesting part of Jones’ article to be

The building would rise on the Tudor Court site of the Glencoe Woman’s Library Club, which, unusually, would continue to own the land after its building was demolished. Writers’ Theatre would be granted a 99-year lease, with a rent of $1 a year.

Construction of buildings on leased land isn’t all that uncommon, and 99 years is a typical term. But at a rent of $1/year, this obviously isn’t an investment decision. And as (presumably) a nonprofit association, neither the Club’s members nor their heirs can expect to benefit from an increase in the selling price of land by the year 2111. The now-unborn who will be members of the club at that time might benefit, but it’s hard to imagine current members thinking that way.

So there must be something else involved. Perhaps the Theater will be obligated to provide some space to the club, or perhaps the land title is encumbered so that it cannot be donated. Probably if we had all the information we’d find some implications for elaborate income tax trusts of some kind that were advantageous to someone in the past. Hopefully someone will come up with more information.

Jones also notes that the location is “not far from the Metra/Union Pacific train tracks,” which implies that theatergoers could ride Metra to and from performances. Perhaps, if they’re lucky as to where they live and when the show ends, but the Metra service is sparse and nighttime connecting bus service essentially nil in the north suburbs. Patrons who dine in any restaurant or bar before or after the show will have the opportunity, however, to pay some of the costs of providing the uncoordinated, inconvenient service.

Are subsidies driving Chicago land prices back up?

Image from the Crain's article — Image linked from the Crain’s article

Of course they are, but it’s convenient to see it illustrated as Crains Chicago Real Estate Daily explains.

The proposal seems to be for Pam Gleichman and Karl Norberg to sell their 4.9 acre parcel (the Tribune story says 3.67 acres) near McCormick Place, in pieces, for a total of $195 million, which works out to something over $900/square foot, a level which I don’t recall seeing so distant from the loop. We also learn from Crains that $90 million in TIF (real estate tax) money will be sought to help pay for these developments. And of course the entire McCormick Place complex benefits from the 1% tax which all restaurant patrons in the central portion of Chicago (as far north as Diversey and as far west as Ashland) pay, not to mention the basic urban services, such as fire protection, transit, and streets, which are funded from other taxes. We’re all paying so Gleichman and Norberg can get their $195 million. It’s only slightly comforting to realize that their venture is in bankruptcy, and the only reason we get to see these details is because they’re part of a court filing. But it seems that, if everything works out as they claim, they’ll get to keep a large portion of this money.

Just for fun, we can consider what would have happened under a land value tax. If the land was taxed at something approaching its full economic rent, it would likely already be developed pretty fully because nobody could profit by holding it underused. There would likely be no bankruptcy because nobody would have loaned money on land with a modest selling price.

Dangers of China’s cities– and ours

4512012308_2f3170c122_n — photo credit: Beth Burdick via Flickr (cc)

China Daily’s article “Hidden Danger Hazards of Big City Living” is really an infrastructure and construction story. Sinkholes open up and swallow people, sections of glass-walled buildings drop down and kill people, big cities flood. Of course, pretty much the same things happen in Chicago: The loop floods (tho the streets are spared); neighborhoods flood regularly; windows fall from buildings killing pedestrians; sinkholes swallow cars (tho not pedestrians, probably because we have so few pedestrians). Sure, it’s not an everyday occurrence, but China’s urban population is about 250 times Chicago’s, so it’s not surprising that more accidents happen.

The article quotes officials saying that coordination among infrastructure construction and maintenance actors is poor, as is the quality of construction and building inspection. Probably true, and surely in Chicago the inspectors are trustworthy and respected, and infrastructure work is usually well-coordinated.

What really does seem to be a difference is how long infrastructure is expected to last. The China Daily article says 1200 out of 5100 total km of Beijing sewers (possibly referring only to storm sewers) is “at least 30 years old, with some of it dating back six decades. This is typical for most cities, experts say.” One infers that Chinese sewers are expected to last only 30 years. In Chicago by contrast, 1/4 of the water pipes is said to be over 100 years old, apparently the age at which replacement is likely to be justified. Sewers are perhaps even older. And I think this age profile is typical of mature American cities.

Value capture is different from collecting the land rent

5662410503_523564a5be_n — Photo by Sean Munson via Flickr (cc)

Henry George phrased his main proposal in various ways, from “make land common property” to the more pragmatic “abolish all taxation save that upon land values.” Certainly a land value tax is a practical way of capturing land rent, and to the extent land value figures in existing assessments and taxation we are already capturing some of it.

But it’s important to recognize that land value, or more properly the selling price of land, is only a close relative, not an identical twin, to land rent. One difference is that selling price is affected by estimates of what the future rent will be. And land selling price is much more directly affected by the cost and availability of credit than is land rent. Use of credit, in turn means an opportunity for banksters to get involved, decreasing the likelihood of real public benefit from public investment.

Which brings us to the World Bank’s 2008 report on Unlocking land values to finance urban infrastructure. This report really could be entitled “Worldwide Catalog of Methods More Complicated and Prone to Corruption than Collection of Land Rent, Which Could Be Used to Finance Some Infrastructure But More Importantly Involve Borrowing and Lending of Large Sums Which Is, After All, What The World Bank Does.” In addition to involving large loans, the outstanding feature of all of these methods is that none provide any resources for operation or maintenance, thus they can help bring about the need for new infrastructure in the not-too-distant future.

New ideas on taxation, and why most of us usually don’t know about them

5247992684_b7b580d02f_m — Photo of Dilbert model by Jon Stefansson via Flickr (cc)

Six weeks without a post, OMG! Not because I had nothing to say, but perhaps too much to organize into something readable. Or maybe I’ve just found it too difficult to locate suitable images to go with the posts. Well, forget that, it’s time to get back to blogging.

And it was nearly six weeks ago that Miles Kimball blogged about some great ideas expressed by Dilbert creator Scott Adams for improving taxation of the “rich.” Adams’ piece was published in WSJ, I can’t figure out which date, I don’t know how long the public link will last and I can’t actually figure out the title of the article. Adams’ point, if I understand it correctly, is those who pay the greatest amount of taxes would more willing to do so, if given suitable nonmonetary incentives. He suggests maybe the top 100 taxpayers should be invited to a celebratory dinner at the White House, where they’ll be praised for their contributions to America. (I wonder whether richest-men Warren Buffett and Bill Gates would qualify for this event. More likely a bunch of wealthy heirs and heiresses who got poor tax advice). Another idea is that top taxpayers should get certificates allowing them to violate certain regulations, such as parking in handicapped spaces or using carpool lanes alone. (Of course, the very wealthy wouldn’t worry much about the fines such actions would impose if unauthorized). Or, suggests Adams, maybe the top taxpayers should each get two votes (which would make no difference in election results compared to the influence the wealthy can already buy).

More important, I think, is Adams’ point that, if you can’t think of a good idea, it’s best to think of some bad ideas and offer them for criticism. It’s a technique I have used with fair success (my role being to offer the bad idea).

But the main lesson we can draw from Adams essay is that,if your idea regards public policy, then no matter how good (or bad but creative) it is, nobody powerful will pay attention to it until it’s expressed by somebody who is already influential. Thank you, Scott Adams.

How China and Wal-Mart Help the Poor to Pay more Rent

Good interview last week on EconTalk, with Enrico Moretti who has a new book, The New Geography of Jobs. Some places are growing and innovating, some stagnating and declining. Which one would you rather live in? Enrico seems to prefer the innovative one, where workers are more educated (at least in the credential sense), jobs are available, and even if you’re working in a local service job — barber, dentist, whatever — your wage will be higher. Host Russ Roberts keeps Moretti pretty much honest, sure wages will be higher but so will — they don’t dare use the phrase — economic rent. And so if you’re a homeowner, you benefit (assuming of course that you bought before the innovative, growing local economy was widely recognized), while if you’re a renter, perhaps not.

From the interview, it appears that the book includes some analysis of how working people benefit from low-cost imports and big-box stores. I don’t doubt it, if the working person can afford to support an auto-centric way of life then these developments do benefit her/his standard of living.

Moretti suggests that places will be better off if their workforce has more formal education. Roberts is at his best here, pointing out that, sure, college professors would say that. Moretti does seem to recognize that, as more people get credentialed (“skilled”), this will tend to reduce the earnings gap between the unskilled and the specialised. He does not say that it does so by reducing earnings of the skilled, but we can figure that out.

The most irritating part, for anyone who understands political economy, is the assertion that wages for service workers are higher in innovative, growing regions because service workers are more productive there. I don’t know if they’re more productive, maybe a dentist fixing the teeth of $100,000 engineers is more productive than one who does the same for $25,000 laborers, I have no idea. But regardless, wages aren’t determined by productivity. They’re determined by the alternatives: If the employer can get competent labor for less, she almost certainly will do so, over time if not right away. And if the worker can find a job that, all things considered, is more satisfactory, why wouldn’t he take it?