Mutual exclusivity of smart growth policies

A friend recently posted a link to a blog post that had me shaking my head. It was written by an advocate for "smart growth" policies in urban areas along the west coast. Some of the policies advocated in the post were: height restrictions on buildings, mandatory provision of affordable housing in any new development, and funding for public transit. It seems to me that it would be difficult to imagine three policies that are more at odds with one another.

Start with public transit. In order for buses, metro lines, or commuter rail to be desirable, there must be a high enough population density. Automobiles offer greater independence, and a look around the world shows that urban residents favor this independence unless the cost of driving is sufficiently high. Such costs could come in the form of congestion, expensive parking, or shortage of parking spaces. When significant population density drives these costs up public transit becomes more attractive to residents. Shorter buildings mean lower population density. Lower population density makes public transit less desirable. It seems fairly clear, then, that limiting the height of buildings would encourage the use of automobiles and make public transit less attractive. (And I'm not even touching on the fact that even cities with very high population density often need to subsidize public transit.)

Inherent in the call for legislation that requires developers to supply "affordable" housing is the claim that housing is unaffordable. In order for prices to drop there must be an increase in supply or a decrease in demand. A limit on the height of buildings is an excellent way to limit supply. In order to increase supply, and therefore lead to lower prices, restrictions on new development should be eliminated. Capping the height of new buildings is directly contradictory to the goal of creating cheaper housing because it limits supply and does nothing to demand, therefore making the problem worse, not better.

My intent is merely to show that smart growth policies can be self-defeating, so I have not provided any data. In his books Applied Economics and Economic Facts and Fallacies Thomas Sowell goes into much greater detail with supporting evidence.

Austrian Theory explained - Part 2: Business Cycle

Disclaimer: This is bound to be a clumsy attempt at explaining the Austrian theory of business cycles. For a much better explanation please listen to the April 13, 2009 and January 5, 2009 episodes of Econtalk, or watch the famous Hayek vs. Keynes music video.

The Austrian theory of business cycles stresses the role of interest rates in valuing alternative investment options. As an example I'll use an investment option that many people consider at some point: going to college. Pursuing a degree, whether it be an associates, bachelors, masters, or any other, is an investment in one's own human capital. Like any investment one must consider the costs and the expected returns. A change in costs affects decision making. Lower costs mean future returns don't need to be as high, while higher costs mean future returns must increase to compensate.

Imagine that an election takes place and a new congress and president are elected. The newly elected politicians decide that more bridges are needed. In order to achieve this they create a new fund to provide scholarships, grants, and low interest loans to students pursuing a degree in structural engineering. This makes it less burdensome to pay tuition fees. Yay, interest rates have gone down! Education is more affordable! This leads more people to enroll in a structural engineering degree program than otherwise would have. These students eventually graduate and enter the job market. The aforementioned bridge loving politicians have decided to allocate more money to transport infrastructure, and recent graduates enter a favorable job market. As one might expect, this encourages even more people to pursue a structural engineering degree, adding the existing incentive created by lower interest rates. Many bridges are built, and many engineers are trained. Unfortunately, there comes a time when more bridges are unnecessary. We're all bridged out, one might say. What to do with all of those bridge-building structural engineers? They are no longer needed, and many lose their jobs. Furthermore, the tools and machinery they used to use are no longer utilized. Their staff is let go. There are surplus stocks of rebar and concrete laying around. This loss of jobs and misuse of resources happened because distorted interest rates caused too many people to pursue a degree in structural engineering. School was too cheap. The interest rate signal was wrong. If the interest rate had been higher, fewer people would have opted to enroll in structural engineering programs, and therefore fewer engineers would be produced.

Wait, many are quick to say, we need to put those bridge building engineers back to work! That's the solution! The problem is that we don't need more bridges. We've got plenty, thanks. Paying them to make more won't help, it just pushes more resources to an already unnecessary use. Austrian theory points out that a correction must be made. The engineers, their staff, the machinery, and the supplies need to be put to different uses. This transition will not be painless. Many bridge builders will face hard times. This is very sad. This highly regrettable situation does not mean, however, that pouring more money into bridges is a solution. The Austrian theory is that the structural engineers need to find another application for their skills, an entrepreneur must figure out a use for old rebar and concrete, and so on. This adjustment is the only real way to recover from malinvestment due to distorted interest rates.

Distorted interest rates lead to changes in investment decisions. Those investment decisions eventually prove to be poor choices. The resources allocated to those investments must be reallocated to other uses. This transition is the bad times in the business cycle. When interest rates have adjusted and resources are better allocated in response, we see the good times in the cycle. Refusing to accept the consequences of misallocation, either by further distorting interest rates or propping up wasteful uses, merely compounds the problem and delays the inevitable.

Austrian Theory explained - Part 1: Knowledge

I've been sitting in on Christopher Coyne's Micro Theory class. Tonight's lecture was particularly good. The topic was Hayek's theories on the market and the use of knowledge. At one point, Coyne referred to the old joke about the economist who sees a $20 bill on the sidewalk but his economist friend insists it couldn't actually be there. In my first of what will probably be a few posts attempting to explain Austrian theory, I'll use that joke to illustrate a bit about knowledge in the market.

The second economist in the joke is meant to be a subscriber to the perfect markets idea. The joke - playing a bit fast and loose with the word, if you ask me - highlights how ridiculous it is to assume perfect knowledge. I've encountered a few people who triumphantly confront me with the point that "economics is silly because it thinks people are perfect and know everything and markets are infallible." The beauty of Hayek's theory is that it recognizes humans are not perfect, do not know everything, and do make mistakes...and that free markets are necessary for this very reason. Perhaps it is petty of me, but I do love responding to the aforementioned straw man by calmly noting that sound economics makes no such assumption, but that this only strengthens the case for markets.

There are, obviously, $20 bills on the sidewalk. They are not strewn about on every corner of every block, but they do exist. This is, I believe, precisely what Hayek meant in saying that knowledge is acquired over time as individual preferences and circumstances change, and when someone acquires the right information at the right time AND recognizes the opportunity, they are able to offer something new in the market. When an entrepreneur recognizes the opportunity to use new knowledge to create wealth, a $20 has been found. Sometimes no one acquires sufficient knowledge to recognize an opportunity to create wealth, or the knowledge is there but the individual makes a mistake in valuing the opportunity and it is therefore unfulfilled. In this case, no $20. As one might guess, the number of times a proverbial 20 is found pales in comparison to the number of times it isn't. Humans aren't perfect, and there is a lot of information out there, so it shouldn't come as a surprise that $20's aren't carpeting the pavement.

Some find it difficult to swallow the fact that humans are imperfect, and like to think that intervention in the market can make things better. In my opinion, though, it is pretty wonderful, even awe inspiring, that markets emerge so that people can interact, exchange information, and help each other find as many 20's as possible.

Jo Koy's Insights on Labor Freedom

The issue of labor freedom keeps popping up for me. In the last few weeks I heard Christopher Coyne give a lecture on Mises' observations about socialist central planning, read Thomas Sowell's Applied Economics, re-listened to Milton Friedman on Econtalk, and just today heard comedian Jo Koy make a very relevant comment (as a guest on the Adam Carolla Podcast). Labor unions came up, and Koy noted that old labor union pictures are exclusively white.

Perhaps I'm reaching a bit, but it seems to me that the case for labor freedom can be summarized by the things mentioned above. Mises said that central planning eliminates ownership, therefore eliminating the ability to exchange and establish a price for resources, therefore eliminating the possibility of proper allocation. Sowell and Friedman, it seems to me, build on this by commenting on the consequences of limiting labor freedom through minimum wage, licensing, and other barriers. These barriers limit the real ownership of one's own labor, distort the price of labor and, perhaps most importantly, violate personal liberty. Sowell's discussion of slavery covers all of these evils and I doubt anyone would dispute his argument, yet many people seem to deny this same reality when it comes to labor unions and minimum wage laws. This is where Koy's aside comes in. Noting the racial homogeneity of labor unions was not intended as an insightful point about protectionist practices in the labor market, but it was nonetheless. Koy, a comedian not an economist, is obviously aware of the history of unions. In order to keep out competition in the labor market they advocated wage floors and barriers to entry, thereby greatly intruding on the labor freedom of non-union workers. While this process tends to be remembered as a valiant fight for the exploited working masses, Koy exposes it for the racist infringement of freedom that it actually was.

The case made by Mises, Sowell, Friedman, and Koy seems pretty strong, though if you'd like to hear it from a better and wiser blogger I'd recommend checking out Don Boudreaux over at Cafe Hayek. Limiting labor freedom eliminates proper market allocation (Mises), it tends to be used to keep out competition and enable discrimination (Sowell and Friedman), yet the prevailing historical view is an incorrect belief in egalitarian struggle for the proletariat.