Oregon Election Results

With the passage of Measure 49 it seems to me that Oregon voters have learned a lesson in externalities and public good and have found that individual rights should not always be advanced at the expense of social objectives. That, in fact, in a market based economy the government has a large role to play to balance the needs of society as a whole and the rights of individuals. It is never an easy line to draw and voters spoke loudly when Measure 37 passed that government had exercised too little restraint. But they also spoke loudly yesterday when they decided that Measure 37 constrained government too much. Perhaps we have found balance, only time will tell. I hope, though, that this can serve as a moment in which most Oregonians can learn to appreciate the delicate balancing act that a democratic government must perform in a market-based economy.

Measure 50 is, for me as an amateur spectator of politics, an extremely interesting litmus test. I have made it clear in an earlier post that I disliked the populist twist of Measure 50 - a sort-of Rube Goldberg device to make it appealing by punishing bad behavior to help kids. I applaud both goals however (trying to reduce smoking and providing health care for uninsured kids) as I think both smoiking and uninsured kids impose heavy costs on society that are born by all of us. However I cannot lament the failure of Measure 50, it just smacked too much of politics and populism. I am also afraid of special taxes that have earmarks, as these do not allow government the flexibility to respond to changing conditions. The real answer is wholesale tax reform in Oregon, a great resetting of government fiscal policy and powers to stop the madness of measure-driven politics and return to representative democracy. I am saddened that the governor has backed away from this just because revenues are up...but I'll leave that for another post.

Economist's Notebook: Correlation is not Causation

Yesterday (Sunday) the Oregonian ran an op-ed piece by two OSU economists who have studied land values in areas with and without stringent land-use restrictions and found that land use restrictions have not depressed land values. From this one might be led to conclude that land use restrictions do not depress land values (as the headline writer seemed to do). But the evidence they produced doesn't actually tell us much about that.

NB: The authors are very careful to refrain from any causal statement - I am commenting on how this research will likely be presented, not on any error on their part.

To find a correlation (or lack of one) between land-use restrictions and property values does not tell us that land-use restrictions have had no affect on property values. In fact, I can imagine that places that are experiencing or are anticipating high growth rates are more prone to enact land-use restrictions. These restrictions might serve to limit growth and thus, after-the-fact, the growth rates in property values might look the same in low-growth no restriction areas. But the contra-positive (which is unobservable because it never happens) could very well be that without restrictions land values would appreciate a great deal faster than 'average.'

It is interesting that the authors point out themselves the problem with drawing causal conclusions from correlations, but in the opposite direction (they fail to point out the reverse argument that would reduce the value of their data to proponents of M49):

Because of the complex ways that land markets work, it is easy to confuse the effects of land-use regulations with "after-the-fact" opportunities created by those same regulations. For example, regulations that limit the supply of developable lands may give the impression that lucrative development opportunities abound for property owners. However, as we have demonstrated elsewhere, this perceived increase in property value is not the same thing as a reduction in value because of regulation.

To give an example supporting the quote above: suppose you have a property just outside an urban growth boundary and within the boundary property values are skyrocketing. What can you say about the affect of this land-use restriction on the value of your property? You cannot say that without the land-use restriction on your property it would have appreciated as fast as those within the boundary because in the absence of the land-use restriction, those properties might not have appreciated at nearly the rate that they did.

Still the message is the same, these are correlations - any conclusion about the affects of land-use restrictions on property values drawn from such data (anecdotal or survey data) would be inaccurate - including any claim about how land-use restrictions lower the values of private property. So, in the end, any real attempt to measure the true causal link is probably a fool's errand.

The reason I bring this up is not because I do or don't like land-use restrictions. Simply that I think the more sophisticated people become when confronted with statistics, the better the public policy that will result because you reduce the effectiveness of populist appeals.

What I would love to see discussed with M49 is the social cost / private right division. Like in my previous post (yes, 'I like to hear myself talk' is the obvious conclusion).

Is Voting on Taxes for Specific Services a Good Idea?

In addition to voting on Measure 49 and Measure 50, I am also being asked to vote on a measure, 02-64, that would levy $0.90 per assessed $1,000 to support services in Benton County, most notably the County Sheriff's department and justice system. Last year, Corvallis residents were asked to support a levy to support local schools. Measure 50 is, of course, a special tax on cigarettes to support children's health care access. And so, time and again, we see voters being asked to support a tax for a specific public service or infrastructure project.

Some celebrate this type of measure-driven public policy arguing that it gives voters more control over what they want government to do. Economics tell us, however, that this is a poor way to provide public goods - goods that have at least partial non-excludability and non-diminishability. As an example of public goods consider police protection: the fact that I enjoy police protection does not exclude any other person from enjoying it and the fact that I may need police assistance from time to time does not in any substantial way diminish what is available to others. This is true of other services (fire, ambulance, street cleaning, etc.) and infrastructure (roads, bridges, libraries, etc.). The reason that voting for the funding of specific government functions is a poor way to do things can be easily seen in this simple example I have been teaching undergrads for 10 years. The story goes like this: suppose a town beside a river is considering building a bridge over the river. There are only five residents in this town and they each would value having that bridge differently. Suppose their own private valuations for having the bridge are: $800, $600, $300, $200, $100. In other words one person would be willing to pay up to $800 to have the bridge built, the next $600, etc. Note that the total benefit to the town of a bridge is $2000. Suppose that the bridge would cost $1600 to construct. Socially then constructing the bridge would lead to $400 in surplus. But will it be built if an equal tax were to be voted on? No. The proposed tax would be $320 and only the top two valuation residerns would vote yes. The tax would fail a popular vote 3 to 2. What about asking for voluntary contributions? It is likely that each individual would contribute little, hoping that others will contribute more. So, in the end the community is likely to loose the $400 in surplus a bridge would provide. What if the government had a general fund from which it could draw the $1600? Given the $400 surplus, this would be an easy choice to make - build the bridge, everyone is better off.

Now there are ways to make the tax progressive that might help. (But note that I have said nothing about income or wealth - just valuation: so the $800 person might be the poorest but work directly across the river and without the bridge has to travel 50 miles each day) Sill there is a good chance that socially beneficial projects or services will not be provided. A bigger problem arises in the from of free-riders. Since I can enjoy a public good if you pay for it, what is best for me is to enjoy it without contributing (like OPB for example). It is these same motivations that provides the rationale for government provided services in the first place. Allowing voters to decide on them al-a-carte style makes no sense: it makes it likely that public goods will be underprovided. This is why a goverment staffed with skilled beaureaucrats is the model we use - it allows us to escape many of the problems of free market provision of public goods.

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...