Market Urbanism

Liberalizing cities | From the bottom up

“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

Irrational, or responsive to incentives?

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In the Washington Post Brad Plumer editorializes on the choice of many Americans to accept longer commutes by car in exchange for larger homes far from their workplaces. He says that consumers are unable to accurately calculate the cost of their commutes, including time spent driving, leading them to make “irrational” choices about where to live. However, Plumer downplays the policies that encourage consumers to buy homes rather than rent and that allow them to partially externalize the costs associated with driving.

Plumer asserts that when buying a house, consumers think they will value additional space more than they do, but he gives no convincing reason that their subjective valuation of home size is incorrect. If in fact if consumers did undervalue the time they spend commuting in relation to home size when they purchased a home, he gives no reason why they would not eventually realize this error and improve their situation by moving to a smaller home closer to a city center.

His piece is written in response to Congressman Earl Blumenauer’s recent report on the topic of shielding Americans from volatility in the oil market. Blumenauer does credit the policy environment dating back to the 1944 Federal Highway Act for shaping the car-centric culture that many Americans live in today, and he supports policies that provide incentives for decreased reliance on cars.

Blumenauer asserts, “For too long, the Federal government has disproportionately subsidized highways at the expense of other modes, reducing consumer choices.” Rather than moving away from determining transportation and urban development through legislation, he provides policy prescriptions at the federal, state, and local level to decrease consumers’ dependence on oil.

For example, Blumenauer suggests that mortgage lenders should be encouraged to take transportation costs into account, making it easier for those living close to their workplaces to get loans. If the recession has taught us anything, it should be that government involvement in lending markets is dangerous. Banks could easily access data on the risk of loaning to consumers who live far from where they work, so if in fact these mortgagees are at increased risk of foreclosure, banks could freely factor this information into their interest rates.

Blumenauer also says that the federal government should provide an index of transportation costs associated with living in various places. Plumer promotes this prescription, writing that it would improve transparency in the housing market. In reality, however, no government body could come close to accurately representing the transportation costs for each individuals’ commute; rather, they could provide averages that may be far from household’s actual costs. Individuals can calculate their own commuting costs across different homes much more accurately than any centralized authority could.

All policies come with unintended consequences. Today in the United States we can see clearly the unintended consequences of policies that subsidize driving and prevent high-density housing — sprawl, congestion, and long commute times, along with the pollution that comes with cars. However this does not mean that the smart growth policies that Plumer and Blumenauer suggest will not come with their own unintended consequences.

We should assume that consumers act rationally given the incentives that they face. Repealing the policies that have shaped current behavior such as undervalued public parking, density restrictions, and tax breaks for homeowners will result in people moving closer to their work places and driving less. Rather than seeking to create a new vested interest that will support  mortgage incentives for those who live in smart growth communities, Blumenauer should work to raise awareness of the costs of mortgage interest tax breaks and driving subsidies that are currently borne by taxpayers.

Comments

  1. No mention of the contribution of the mortgage tax credit to sprawl? I’m saddened but not surprised. Some people just can’t conceive of the possibility that it could be better to remove a government program than to add one.

  2. I would note that a recent study about the Seattle metro area indicated that only 17% of all SOV trips are work/school commute trips.  So even people do generally move closer to work, there’s a lot more driving that would be relatively unaffected.
    (I will try and find a link to that study…)

  4. If the recession has taught us anything, it should be that government involvement in lending markets is dangerous.
    …
    We should assume that consumers act rationally given the incentives that they face.

    The government is at fault in the same way that a preschool teacher is at fault if he/she left the room and comes back to find children wounded from running with scissors and poisoned from consuming paste.

    It’s the scissors-sprinters and paste-eaters whose combination of cupidity and stupidity created this mess. Government allowed it to happen by letting everyone from Wall Street to Main Street gorge themselves without wondering whether it’s all too good to be true.

  5. At the same time, I no longer see a possibility of good government. For that matter, I’m not placing my bets on what a/the solution will be. I do like Alon’s “better to remove a government program than to add one”.

    Americans don’t need a state homeownership apparatus anymore. The real estate segment of the economy is going to be moribund for years, and possibly a whole generation will never experience any price appreciation. The only possible solution to real estate price stability involves bulldozers and sledgehammers. Real estate doesn’t go bad like agriculture.

    As for urban form, the most advantageous city regions will look like a good investment portfolio — ones that have diversified their mobility, housing, energy and water policies.

  6. I remember reading something like that recently too! And to be honest, I’m not sure that I believe it. If you do find a link though, please do share it, because I’m very curious to see how they arrived at the number.

  7. Yes, even if. I rent, and so do most people who are in or on the brink of poverty in the US. I get zero tax credit for housing. And if I buy, I get more money back the richer I am: 15% of my mortgage interest at my grad school salary, 25% at my postdoc salary, and 35% if I ever become a hotshot professor with consulting gigs.

  8. We should assume that consumers act rationally given the incentives that they face.

    No we shouldn’t. People are only sometimes rational, as Behavioral Econ tells us.

    Best,

    D

  9. This is likely more of an indicator of the paucity of nearby non-motorized destinations, rather than an indicator for preference for driving. It may also show how rain affects mode choice.

    Best,

    D

  10. One longstanding, and interesting, facet is the high correlation between single-family homes and owner-occupation, vs multifamily housing and renting.  Some of this, no doubt, has to to do with the economic situations of residents–larger structures are generally more expensive, all else being equal; and those who can afford them are more likely to be able to get financing.  Part of it is a generation of often-racist practices in both government and finance, making financing available to suburban communities while denying it to black-dominated inner cities.  Some has to do with the issue of management of common areas–joint ownership of commons can be a pain in the butt.

    But there is a longstanding assumption in these debates that those who live in detached houses own them, and those in apartments rent.  Indeed, in US English, we have a separate term, “condominium”, for multifamily housing that is owner-occupied, whilst the word “flat” used elsewhere in the English-speaking world says utterly nothing about the tenancy arrangements.

    One thing that the current recession and credit crunch (getting a mortgage is hard as it has been in a long time) are doing, though, is starting to sever the detached=owner-occupied assumption.  Here in Portland, there is a large surplus of housing stock, but a shortage of creditworthy buyers (including many former homeowners who lost homes in the recent collapse and now no longer qualify for a mortgage); thus there has been a significant increase in investors buying up distressed properties at fire-sale prices and turning them into rentals.

  11. Indeed, in US English, we have a separate term, “condominium”, for multifamily housing that is owner-occupied,

    No. This is single-family attached. It is not multifam. And I don’t know where you live, but almost every place I have lived has had several rental houses on the block. Not uncommon at all.

    But I do agree with the implication that there will be more SFD home rentals in the future.

    Best,

    D

  12. While I don’t want to get into arguments about terminology; the term “condo” isn’t as limited in practice as you seem to think: there are plenty of high-rise residential buildings that are owner-occupied here in Portland (and I imagine, elsewhere), which are called condominiums.  And a few years back, when the housing bubble was still in full swing, “condo conversions” were a common occurrence:  it would be announced to tenants that at the termination of their leases, they had the option of either buying the unit they were presently renting, or moving out.  Such conversions didn’t involve any major modifications to the building, just modifications to the terms under which one could live there.  (And more recently, we’ve seen the opposite phenomenon–management of condos starting to rent out units which were still owned by the management, and/or being more tolerant of third-party owners leasing their units).

  13. There’s a cultural factor that I think also comes into play, one that I’ll call the “Martha Stewart factor”.  (This despite the fact that it predates Ms. Stewart by centuries, and is observed by many who have no use for the home decorating icon).

    In much of US culture, there is an implicit expectation that “proper” members of society ought to be capable of hosting formal gatherings in their homes.  I’m not discussing friends and family crowding around the kitchen table; I’m talking about formal occasions, including the hosting of business meetings, political events, and other occasions where professional acquaintances (as opposed to relatives and personal friends), are invited to the home, and served in a “professional” manner.  (And likewise, many holidays such as Thanksgiving and Christmas, typically involve a feast at the end of the day; one which is by tradition prepared and served at home, and often involves a large number of guests).  As a result of this, many US homes, especially the larger ones, have hundreds of square feet nominally dedicated to formal entertaining:  our homes have things like “dining rooms” and “living rooms” and the ubiquitous 0.1 bath, all of which exist to permit a semi-public space in which the dirty laundry (literally, in some cases) of family life do not intrude (and likewise, where guests at formal gatherings can be contained, and kept out of the private parts of the home).  These things are often redundant with other rooms in the house intended for the family’s own use–kitchen tables, “family rooms”, etc.–and contain redundant sets of furnishings (table and chairs, sofas, lighting).  And our homes also come with oversized kitchens where large feasts can be prepared and large quantities of dishes can be cleaned and stored, should it be necessary.  This cultural expectation even affects land use; it seems our suburban neighborhoods are designed to accommodate the possibility that on any given night, someone might have 10 or more car-driving guests at their home, all of whom need a place to park.

    In many other cultures, the idea of formal entertainment in the home is considered ridiculous (at least unless one is extremely wealthy).  If one needs to formally entertain clients or host large gatherings, one charters a restaurant for the purpose.  This is especially true for gatherings outside family or social circles; inviting business clients into the home is considered highly inappropriate.  (One other cultural difference–many other cultures have far less attachment to “home cooking” than is found in the US, and view professionally-prepared cuisine to be superior to that whipped up in a home kitchen.  Of course, in many parts of the US, the local dining scene is limited to fast food, greasy spoon diners, and chain restaurants of dubious quality; in that environment, a home-cooked meal may well be the preferred gastronomic choice).  In these cultures, there is no need for individual dwelling units to come equipped with miniature banquet facilities; which permits greater levels of density.  And greater levels of density permit a more robust restaurant scene, that can handle the formal entertainment needs of the populace.

  14. Behavioral economics is overrated. She’s not saying that people necessarily always act rationally, just that that should be out starting position – our “null hypothesis” – and the onus should be on those who would have the government intervene to prove the market failure.

  15. That is indeed interesting, but I think that the culture is a result of the anti-density regulators rather than a cause. But that’s interesting what you say about restaurants – I never thought about it that way, but it’s definitely true that when I lived in Romania, only my stepdad’s very close business partners – basically, his close friends – would come into the house. In fact, though our apartment and late house were more than big enough to host people for formal dinners (as opposed to small family dinners), the only time I remember having people over was when my mom hosted an American Thanksgiving! I guess that’s proof that you need to develop the culture over a period of time, and that Europeans don’t just switch to the American way of hosting people when they get bigger apartments/houses.

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