Monday, October 22, 2007

Election Special: Measure 49

This post presents an almost impossible task. What I aspire to do in general here is to try and give readers some sense of what economics has to say about an issue or specific policy so that they can use this information (or not) when they form opinions. As Measure 49 is an amendment to Measure 37, the issues here are pretty much the same. It is a complicated, messy situation and economics will not really help much in the details. So I am going to go the other direction to talk about land use planning in general and what economics has to say about that.

I once read a letter to the editor in The Denver Post in which a person was frustrated that, in building his new home, he had to comply with a multitude of building codes. Why, he asked, should the government interfere with what I do on my private property? If I build a house that is unstable and it collapses on my head, I suffer the cost myself. His conclusion: government should stay out. The absurdities of this statement are fairly self-evident, for example I immediately thought of things like the faulty wiring that starts a fire that eventually spreads to neighbors and the cost of the fire fighters that have to come and put it out. These are direct costs to society. There are also others' rights to consider, like the interest of the state to protect the health and well-being of this person's children in the face of unstable construction, etc. There are also the indirect costs of, for example, this person's health care costs in the face of inadequate insurance when the house collapses. All in all building codes are pretty easy to defend government intrusions into private citizens rights.

But how far is too far? Does a city code that stipulates that houses cannot be painted pink make sense, for example? Pink houses create a cost for neighbors if it lowers their own property values. But so might a slightly brown lawn or not impeccably manicured shrubs. This is also not just an economic question but a legal question: at what point do we restrict private rights for the public good? What economics is clear about is the justifications for governmental infringement. Markets with externalities and public goods markets can have outcomes that are quite inefficient. Land use planning is no different: values of surrounding properties, traffic and congestion, pollution, stresses on common-property resources (e.g. groundwater) and protection of natural areas are all very legitimate economic reasons for governments to engage in land-use planning. However, deterring private investment, creating inflation in property values by limiting the available land, adversely affecting individuals property values by the imposition of new land use regulations are all legitimate economic reasons for limitations on government intrusion into private property rights as well.

Beyond this, very little is objective. I do believe that over time these government intrusions are going to have to get deeper and our society is going to have to accept the larger coordinating role governments will have. This is a simple demographic and resource scarcity argument. More people and increasingly scarce resources call for more attention paid to the externality and public goods problems we face because the inefficiencies become more severe. Consider a simple story. What if there is one road that connects a rural area to the urban core. Before any development only a few cars per hour travel on it. Now suppose first 100, then 200, then 300 houses are built that use this road as the only access. The road become increasingly congested but still flows. Then perhaps 400 houses starts to create delays, 500 houses creates 30 minute delays and 600 houses creates 2 hour delays, etc. In other words, the next house contributes even more to congestion than the house before. Thus the stakes of land use planning become increasingly higher as time passes. So if I owned a piece of land in this area and I built the very first house, I would not have contributed anything to congestion. If I built house 601, I would have contributed much more to congestion. Is it fair then that I might have had the right to build before any houses were built, but now that 600 have been I no longer have that right. Perhaps: economic conditions have changed and the social cost of your house is now no longer tolerable. On the other hand, that 601st house created construction jobs, bought materials and helped keep house prices lower. What I assert is that over time the social costs continue to increase rapidly, but the social benefits do not increase at nearly the same pace.

What the passage of Measure 37 symbolized for me then, was a rejection of this idea that governments have an ever increasing role to play in land use planning. That private rights trump social considerations. It appears that this is where minds are at in Oregon these days. However, proponents of 49 believe that Oregonians did not appreciate the role government plays in land use planning at that 37 has shown Oregonians, well, just what I mean when I say externality and public goods problems. I agree things like 37 and recessions seem to focus attention on what government does and voters seem to take government less for granted in the wake. I will be very curious to see how 49 fares, because I believe this is one of those moments when we will get a sense of how people feel about the appropriate public interest/private right division.

As an aside, I imagine people will often talk about 'fairness' in response to M37 and M49. But I am honest when I say I don't understand what they mean. Do changing land use restrictions during a single ownership represent unfair government intrusion? Is it OK at the time of transfer of ownership? Is is 'fair' for others to so congest my local road that I have to leave 30 minutes earlier to work than I did 10 years ago? Since we are talking of private v. social interests, it is impossible for me to speak of fairness in the equation, because then it makes me have to impose some kind of moral judgement on the weight of different welfare effects (do 100 affected neighbors count the same as one private land owner?). But then, I am an economist, so I must be kinda dense...


Evan said...

Thanks for the well-written note.

Just a clean-up note: you often slip into "47" instead of "49" (or perhaps "37"?) -- something many people do as they discuss.

Patrick Emerson said...

Oops, thanks for that! Yes just a slip - I'll correct it.

Shawn said...

slightly OT: your road analogy sounds alot like west hwy. 26 that links Portland to points west (the 'Tron, Hillsboro, etc). the traffic became so bad, the state went through a 10 year road construction project that, by the time if was finished, was already obsolete.

the traffic delays now are just as bad as they were when they started the construction...all because of the crazy development in all points west of Portland. it's a mess.

Portland Prole said...

As a low-income renter with no hope of buying a home (especially under current land use and zoning regs), I believe I literally need all the housing the private sector is willing and able to supply. Put another way, affordable housing depends on ample supply, especially for those of us living on the margin.

My concerns have not been addressed by supporters of Measure 49. What can the esteemed economist tell me?

Patrick Emerson said...

I don't know what an esteemed economist can tell you, but I would reply that you are right in pointing out that land-use restrictions can diminish the supply of housing and thus push prices higher. But I would also assert that unregulated development is not a particularly good way to address the problem of a lack of affordable housing. The benefit of cheap housing on the periphery does not counter balance the cost of overtaxed infrastructure and other tradgedy of the commons concerns.

The appropriate response, I believe, is through income transfers, housing credits and the like. These are not cheap but can be sustained by higher property tax revenues from increased housing values, for example. (And yes, I am talking about a world not exactly like the real one we inhabit)

But by the way, I am a little bit skeptical that there won't be any attention paid by developers to lower income renters even with increased density. It doesn't pay to ignore a substantial population of potential renters. It probably will mean smaller apartments though.