Wednesday, February 19, 2014

Robert Waldman's really clever, really bad idea

Over at interfluidity, Robert Waldman posted a really clever bad idea. Tax property rights on things where exclusivity has high costs on others (he nominates real estate and patents) at whatever price the owner sets -- with the proviso that the state (or possibly all comers) then have the right to acquire the property at the stated value.

Patents raise a host of awkward issues, so I will leave them alone. I will also note in passing that Ancient Athens had a somewhat similar provision as Waldman suggests and that SF author Robert Heinlein offered a similar suggestion in one of his later novels. I will also leave aside the issues with eminent domain. I will confine myself to the implications for the interaction between public policy and real estate.

The incentive to restrict supply
His proposal is, using the terminology of a recent Quadrant article, a suggestion for reducing consumer surplus (the difference between what a consumer paid for good and what they would be willing to pay for the good) and increasing rents. It is so because of the incentives it creates for public policy.

Land is an asset. Some uses of land have more value than others. Other things being equal, the more one restricts the supply of an asset, the higher the price for it. So, if one taxes land at its market price, then governments have a revenue-generating incentive to drive up the price of, for example, land-for-housing by restricting how much land is approved for use as housing. Retarding the ability of supply to respond to demand will drive up the price of land.

Since government has far more power to restrict use of a class of assets than any individual, increasing the revenue to government from restricting its use increases the cost of exclusivity and rewards government for increasing said cost.

This is not the effect I suspect that Robert Waldman had in mind.

Protecting incumbents
There is a general tendency for intrusive regulation to protect economic incumbents (existing home owners, job holders, etc) and the well-connected. Particularly if official approval is required. Cities with lots of positional goods (beachfront views, nice hills, etc) to defend encourage the well-connected to use regulation (particularly approval systems) to defend their positional goods.
Land of very different value next to each other.
Land of very different value next to each other.

But it is worse than that, Jim. Increasing the value of an asset rewards economic incumbents. Who vote. Which is why regulatory restriction of land use tends to be strongest in jurisdictions with lots of migrants -- entrants to the housing market who do not vote. Aggravating the positional goods effects, since those also tend to be cities attractive to migrants. (Texas is a bit of an exception to this effect, both because it cities tend to lack such positional goods and because its foreign migrants are largely Hispanics, and there are lots of Hispanic voters in Texas for them to "network into" -- there are reasons why a former Texan Governor was the first bilingual US President for many years.)

Furthermore, restrictive regulation of land use (particularly through official approvals) promotes donations to political parties and candidates by developers -- since they need access to officials to operate. Creating further incentives to restrict supply of land-approved-for-housing.
Not helping
Not helping small operators

Use of approval systems also discourage small builders: bigger developers can manage the costs of dealing with the regulatory system better. In particular, they can manage the risk of delays in approval much better. Having encouraged bigger developers, such approval systems then encourage the now sizeable players to game the system, which they area better able to do. Moreover, the stamp of "official approval" not only reduces transparency in general, it can discourage more precise attention to appropriate requirements, helping larger developers to game the system. The effects of which are then blamed on "wicked developers" thereby encouraging support for the regulatory structures which create large developers gaming the system in the first place. A form of the Baptists and bootleggers problem.

Complex regulations and zoning restrictions are excellent barriers to entry. See above comments about protecting economic incumbents and the well-connected.

Poorer serviced
Driving up the price of real estate by restricting supply also undermines infrastructure provision. For it raises the cost of the land, reduces the tax benefit to governments to provide infrastructure and increases resident resistance. (They want to keep the anticipated capital gains: being near infrastructure raises the value of housing, being right next to it, not so much.) Why build expensive and politically contentious infrastructure when making (housing) incumbents happy, increasing political donations and raising revenue can be done simply by restricting land use?

There is a reason Texas is much better provided with freeways and motorways than Zoned Zone US, or Australian cities. Texans get more road infrastructure for any given level of taxes because cheaper land makes infrastructure cheaper to provide, reduces opposition to same and increases the revenue return.

Official incentives
Having something like the German right to build constitutional requirement would help, as requiring official approval is a nicely un-transparent way of generating the above "benefits". (Obscuring who benefits is often part of the appeal of government provision and regulation.) But as even that permits restrictive laws, it would be far from a complete solution. (German local government revenue is partly per head, reducing further the incentive to restrict land supply.)

Taxing private benefits from exclusion is not going to generate a net social gain if it magnifies the political benefits from governments imposing more such exclusions. Incentive effects apply to governments too. (Public  choice theory in a nutshell.)

Not that this mere theory. Texas has a higher population than Australia, higher population growth rates and crams more of its population into its five biggest metropolitan areas, yet its urban housing is half to a third of Australian house prices (measured by [pdf] the ratio of median houses to median household income). Because Australian State governments see expensive land as a revenue- and political donation- generating, and existing home-owner protection, mechanism. (The old joke that if the Soviet Union took over the Sahara, within 5 years there would be a shortage of sand, is all too resonant when it comes to metropolitan land use in Australia.)

Doing as Robert Waldman's suggests, giving governments an incentive to profit from driving up the prices of assets via restricting supply, is not a good plan. They do that too much already.

[Cross-posted at Skepticlawyer.]

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