Welcome back to Sunday reading. This week, we’re starting with a look at the law of unintended consequences. At Vox, Brad Plumer describes how “Europe’s love affair with diesel cars has been a disaster“:

Europe’s diesel push seemed like a perfectly sensible idea at the time. But they execution was badly botched, full of unintended consequences over the next 20 years.

One main drawback of diesel cars is that they can emit higher levels of other harmful air pollutants like particulates and nitrogen oxides. And those ended up being much harder to clean up than experts initially predicted. We now know that Europe’s regulators have failed spectacularly to control diesel pollution, relying on weak rules and flimsy testing procedures. Lots and lots of automakers — not just Volkswagen — have been manufacturing diesel cars that emit far more gunk than they’re supposed to. It’s one reason why cities like London and Paris are still clogged with unhealthy levels of air pollution, causing thousands of premature deaths each year.

It also appears that Europe’s diesel push didn’t actually do much to help global warming, as one 2013 study by Michel Cames and Eckard Helmers found. The CO2 benefits from switching to diesel cars were overrated and likely offset by the extra soot the engines produced. On top of that, Europe’s entrenched diesel industry has impeded progress on hybrid and electric car technologies that might have provided far deeper emissions cuts.

And on the topic of unintended consequences, I try to keep an eye on happenings in San Francisco, where a tech boom has collided with geographic constraints and regulatory limits on intensification to produce a shortfall of (affordable) housing. Given San Francisco’s reputation for progressive politics, many people are tempted to see this as a failure of the left. Not so, argues Robert Cruickshank at Calitics: “Progressives didn’t cause the San Francisco Housing Crisis“:

Metcalf argues that progressives allied with NIMBYs to make it difficult if not impossible to add new housing supply in SF. But this misses the fundamental purpose and point of progressive housing activism in SF. The goal is to stop displacement – and given SF’s attributes, a free market approach won’t solve that.

Because SF is built out, and because land values began to rise in the mid-1970s, and because of macroeconomic policies that began to push investors to demand bigger profits from the private sector, this all meant that new construction in San Francisco was going to be expensive to build and therefore expensive to rent. The private sector was never all that interested in building housing for the poor or the low-income. And after 1980, the private sector certainly was not interested in building that kind of housing.

So for many progressive San Franciscans, private housing development was seen as a way to get rid of the leftists, the people of color, LGBT residents, and the poor. Stopping the loss of affordable housing became a priority.

However, this did not mean that SF progressives became anti-supply – or that they are responsible for the city’s present crisis.

Since Mayor George Moscone and Supervisor Harvey Milk were assassinated in 1978 by a right-wing former cop, SF has been governed by pro-business moderates. There has been only one exception to this, the four-year term of Art Agnos from 1987 to 1991, and it’s not clear whether he was more of a progressive or more of a NIMBY (in reality he appealed to both, but for different reasons).

Progressives haven’t held the SF mayor’s office in at least 24 years, by even the most charitable reading. Surely pro-business mayors like Frank Jordan, Willie Brown, and Gavin Newsom should be held accountable for the city’s housing crisis.

During the last two decades, SF progressives worked hard to advance their own solutions to the housing crisis. Those solutions always included new supply…

Locally, of course, people have been proposing a profusion of solutions to New Zealand’s housing issues. This week, the Productivity Commission’s final report on their Using land for housing inquiry was released. Greg Ninness at Interest.co.nz summarises thusly: “Productivity Commission recommends changing everything“:

It has made 70 wide ranging recommendations which, if adopted, could have a major impact on the way new housing is developed in this country.

Some of its recommendations are clearly aimed at making it easier to develop more high density housing such as apartments.

These include:

  • Requiring councils to undertake a cost-benefit analysis before introducing height restrictions on buildings and increasing current height limits where it cannot be shown that the benefits they create outweigh the costs.
  • Avoiding wide-ranging heritage or special character policies that restrict redevelopment of housing stock. The report recommends that councils should instead concentrate heritage and special character policies on individual structures rather than whole suburbs.
  • Councils in high growth areas should avoid explicit limits on housing density and review existing limits with a view to removing them.
  • Remove requirements for apartments to have balconies and restrictions requiring apartments to be a minimum size.
  • Remove minimum parking requirements from District Plans.

The report also recommends changing the way councils calculate their rates.

It recommends basing rates on the land value of a property rather than its capital value (which includes the value of any buildings on it).

This would also favour multi-unit dwellings such as apartments and would be likely to increase the share of rates paid by houses on larger sections.

It would also encourage owners of vacant land to develop it more promptly rather than land banking.

But there’s more to housing than just the supply side – the quality of accommodation in New Zealand continues to be a major issue. Radio New Zealand reports new data suggesting that renters have it much tougher than home owners:

Statistics New Zealand has found that people who rent a home live in far worse conditions than people who buy one.

It said just under half of all renters reported problems with dampness or mould, compared with about a quarter of home-owners…

The report says cold was the biggest problem, and this also affected renters worse than buyers.

Other groups to complain about poor housing were people renting in groups, single-parent families, younger adults and Māori and Pacific people.

Māori were the most likely group to say extensive repairs were needed on their homes, with 13 percent of those surveyed claiming that, while out of Pacific people surveyed, 43 percent reported their homes were often or always cold.

Eleanor Chisholm at One Two Three Home puts forward the argument for a rental warrant of fitness (WOF) regime aimed at bringing poor quality rental accommodation up to standard:

A rental housing warrant of fitness (WOF) sets out a list of fundamental features of a safe and healthy house. If a house fails any component of the WOF, it’s not fit for people to live in. There is a lot of public support for a WOF because of the way that unhealthy housing affects the wellbeing of tenants all over New Zealand.

Despite this support, the Government announced that they had rejected the idea of implementing a warrant of fitness for rental housing. At they same time, they proposed a number of amendments to the Residential Tenancies Act. Some of the important amendments will make smoke alarms and a minimal level of insulation mandatory in rental homes. They also released a slew of documents that they considered when they made their decision.

One document I found particularly interesting was the cost-benefit analysis for a housing warrant of fitness, commissioned by MBIE. This showed that the changes that were announced are insufficient and inconsistent with the advice the Government has received. In this blog post, I’ll discuss what the cost-benefit analysis showed, and how the proposed amendments to the Residential Tenancies Act are unlikely to allow us to reap the full benefits of healthy housing.

Overall, Chisholm observes that a rental WOF scheme would return around $1.50 in benefits for every $1 of cost – suggesting that it could be an efficient way to bring rental housing up to standard.

On a separate note, apparently Wellingtonians aren’t mistaken about the weather down there. Karl Mathiesen at The Guardian looks at the data and finds that Wellington may in fact be the world’s windiest city:

The capital of New Zealand is, by reputation, the windiest city on earth and it can make every day something of a trial.

“I would never say I have learned to ‘love’ Wellington’s most famed element and, at times – most times – I find it to be exhausting,” says Patte. “However, you know you’re home when there’s a southerly blowing.”

Judging which is the world’s windiest city is tricky, as no global database for cities exists and measurement techniques are not standardised. Other contenders include Rio Gallegos and Punta Arenas in Argentina and Chile’s windswept southern Patagonia. St John’s in Canada is north America’s windiest city, averaging between 13 and 15mph.

Wellington sits on the Cook Strait, a passage between New Zealand’s north and south islands. The winds of the Roaring Forties, which spin uninterrupted from South America thousands of miles to the west, are funnelled into this 14-mile-wide gap, creating a “river of wind” that rocks the boats in the harbour day and night at an average of 16.6mph. The north island’s strongest recorded gust of 154mph was measured on Hawkins Hill in 1962, just a few kilometres from the city centre.

When I lived in Wellington, I used to run in the weekly waterfront 5k series. On some days, I had the distinct impression that the wind was somehow blowing in my face in both directions. It seemed a bit unfair.

Since we’re on the topic of remote but scenic capital cities, Jarrett Walker (at HumanTransit) took a visit to Reykjavík and has put together a photo essay and a word essay about the place. I appreciated these photos:

And here are some classic waterfront photos reminiscent of Vancouver.

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Note the cyclist’s shadow; at 64 degrees latitude, the beautiful qualities of evening side-light last for much of the day.

IMG_6370

That giant tennis ball floating in the harbor seemed a perfect bit of whimsy.  It’s a park, with a military history.

Jarrett also considers what the public transport situation looks like in a small city like Reykjavík:

Iceland’s most interesting challenge is that it’s a small country at a time when we’re all supposed to worship bigness, so it probably takes some effort for Icelanders to stay focused on solutions that suit their scale.  Iceland’s population is only about 330,000, of which 2/3 are in greater Reykjavik.  If it were in the EU, Iceland would be the smallest member by population, smaller than Malta and certainly smaller than giant Luxembourg.

What’s more, Iceland’s population is small for good reasons, mostly limitations of land, sunlight, and climate.  For most of Icelandic history, fish has been the only abundant food resource, but today even that is in need of management.  Agriculture so close to the Arctic Circle will always face limits even if much of the soil hadn’t washed away — the result of medieval Norse colonists cutting the ancient birch forests faster than they could regenerate.  Today, Iceland is a world leader in the sustainable management and restoration of natural resources, but in such a remote and challenging location there’s not much point in growing beyond what the bare land and low-angle sunlight can support.

So one basic challenge for Icelanders is how to listen to all the roving “experts” whose message is just an appeal to presumed feelings of international envy.  “You’re a European capital!,” they say.  “How can you not have streetcars and subways and a ‘high-speed train’ to the airport?”  This peer-pressure is supposed to overrule all the facts of Iceland’s own geography and situation.  You might as well tell Reykjavík that “real European capitals” need medieval and Renaissance buildings, even though there wasn’t a town here until the 1700s…

These abstract, envy-based rules are always the death of public transit.  They also imply that no other feature of a place could possibly compensate for the failure to satisfy – that nobody would come to Iceland because they want what only Iceland has to offer.

Finally, here are two articles on how our societies – global and local – function. First, in the New York Times, Tyler Cowen takes a look at “the egalitarian tradition of economics” – referencing economists historical opposition to slavery and their contemporary support for more open immigration:

Professors Levy and Peart coined the phrase “analytical egalitarianism” to describe the underpinnings of this tradition. For example, Adam Smith cited birth and fortune, as opposed to intrinsically different capabilities, as the primary reasons for differences in social rank. And the classical economists Jeremy Bentham and John Stuart Mill promoted equal legal and institutional rights for women long before such views were fashionable. Their utilitarian moral theories placed individuals on a par in the social calculus by asking about the greatest good for the greatest number…

So where will a cosmopolitan perspective take us today?

One enormous issue is international migration. A distressingly large portion of the debate in many countries analyzes the effects of higher immigration on domestic citizens alone and seeks to restrict immigration to protect a national culture or existing economic interests. The obvious but too-often-underemphasized reality is that immigration is a significant gain for most people who move to a new country.

Michael Clemens, a senior fellow at the Center for Global Development in Washington, quantified these gains in a 2011 paper, “Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?” He found that unrestricted immigration could create tens of trillions of dollars in economic value, as captured by the migrants themselves in the form of higher wages in their new countries and by those who hire the migrants or consume the products of their labor. For a profession concerned with precision, it is remarkable how infrequently we economists talk about those rather large numbers.

Truly open borders might prove unworkable, especially in countries with welfare states, and kill the goose laying the proverbial golden eggs; in this regard Mr. Clemens’s analysis may require some modification. Still, we should be obsessing over how many of those trillions can actually be realized.

And on a more local scale, Anya Kamenetz from the (US) National Public Radio takes a look at school zoning. As anyone who’s ever talked to a real estate agent in Auckland’s inner suburbs knows, school zoning exerts a powerful influence over property prices and, indirectly, the shape of our cities. But Kamenetz finds that concerns that letting in the “wrong sort” of student will reduce educational outcomes are overblown:

The tacit assumption was that sending children to a majority-minority school would entail a sacrifice, one that pits their own children against their (presumably) progressive ideals.

But there’s plenty of evidence that suggests the opposite: White students might actually benefit from a more diverse environment.

Here are three reasons why.

1. Their test scores won’t be any lower.

The federal government just released a report looking at the black-white achievement gap. It found something remarkable: “White student achievement in schools with the highest Black student density did not differ from White student achievement in schools with the lowest density.”

Translation: After controlling for socioeconomic status, white students essentially had the same test scores whether they went to a school that was overwhelmingly white or one that was overwhelmingly black.

This finding “confirms decades of research that white students’ achievement is not harmed” by the color of their classmates’ skin, says Genevieve Siegel-Hawley, an education professor at Virginia Commonwealth University, who researches race, stratification and inequality in American schools.

That’s it for the week. See you next time.

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33 comments

  1. Bernard Hickey has a good article on the Productivity Commission’ housing crisis report over on Interest.co.nz

    “The Productivity Commission report into land use for housing used a surprising word this week to describe what was needed to solve Auckland’s housing crisis — credibility.

    It essentially said Governments needed to make property investors believe that they would do whatever it took to stop the mad land price inflation that has made Auckland one of the least affordable cities in the world……”

    http://www.interest.co.nz/opinion/78261/bernard-hickey-challenges-ministers-and-councillors-adopt-productivity-commissions

  2. Property investors are among the biggest government welfare beneficiaries going. Massive incentives for them in taxation, Reserve bank rules etc.

    1. The biggest welfare is the accommodation supplements that effectively allow landlords to put rents up above what the market can afford (and that in turn pushes house prices up). Not sure I know a good solution other than govt building more state houses.

  3. I support the idea of charging rates on land value. But they need to grant only one vote in local government elections per rates bill. Tenants dont pay so should be allowed to vote and cross-leased properties would have one vote between them.

      1. One of the slogans of the American Revolution was ‘No taxation without representation” I say the converse should be true as well.

        1. Because tying political representation to wealth worked so well in feudal times? Even if you don’t own a house, you pay the rates bill for it as landlords cover rates with rental income.

    1. Yup and only petrol stations pay fuel tax. Only shopkeepers pay GST. And local government isn’t captured by rent seeking property owners enough already. It’s time they had even more of a say.

  4. Firstly, someone on Reddit made a good point about buildings. Old texts from Babylon suggest that a builder who built a building which falls and kills the owner, shall be put to death for his negligence in construction. Obviously that’s a little extreme, but the point is good – constructors should be held up to serious penalties if they fail to build good buildings.

    Secondly, I happened to be thinking about Reykjavik due to a picture from there, and came across an idea.

    Reykjavik is bad in that it seems to have a lot of “suburban high rise”, you know, high rise, high density buildings separated by a sea of roads. Of course, this makes sense if you think about it – Icelanders clearly don’t mind apartments. But they also don’t care for going outside much.

    Perhaps Reykjavik would be the ideal location for a new mixed use, all indoor, easy to add on complex. Just like Mineapolis’ skypaths. Start with apartments, with nearby parking if deemed necessary. From some multiuse development on the ground floor. Instead of then developing elsewhere, continue to expand, with enclosed connections to new buildings. Make it easy for other developers to connect, providing they allow others to connect on as well.

  5. Personally I think land tax is a step too far. Why go from preventing people from dividing their property like we do now to instead effectively force them to divide their property through land tax. Isn’t there a middle ground where people can decide what to do with their property without the council and government forcing them?

    1. Rating based on land value wouldn’t *force* anybody to do anything different. If you want a big yard, you could still have it. All it would do is change the *incentives* and *costs* that people face. In my opinion, the Productivity Commission’s proposal would incentivise more efficient development patterns.

      1. I find it fair to tax based on income level or wealth, but I don’t think a land tax is necessarily a good measure of either. Why should a middle class family that own a modest house on a largish section pay more rates than a rich family with a large house on a smaller section? While I would love to see more density in Auckland, I think it is just a case of allowing it rather than forcing it.

        1. Again, you’re confusing an *incentive* with a *compulsion*. Saying that land taxes would force people to have small yards is like saying that Countdown forces me to buy store-brand white bread rather than Vogels because it’s cheaper.

          1. Yes but would you think it was fair if the gst component of bread was based on how much it weighed rather than how much it cost? The rich should pay more rates than the poor, ragardless of whether they are land rich or building rich.

          2. You’re ignoring the *dynamic* effects of tax policies, which (in my view) imply that land taxes would be both more efficient and equitable.

            First, households have the option to move. Rating based on land value rather than total capital value would give low-income families *much better* options for reducing their rates bills. For example, they could move into an apartment or townhouse and pay lower rates by consuming less land. Currently, their main option for minimising rates is living in really run-down properties, which has negative health impacts. I’m not sure why you think living in an uninsulated but cheap house is a wonderful option for low-income families.

            Second, the structure of property taxes has an impact on the efficiency of land development. All else equal, taxing improvements on land means that people will want to build fewer dwellings (to avoid higher rates). However, taxing land has no distortionary effects, as the total quantity of land is (roughly) fixed. So it’s likely that taxing land rather than improvements will encourage a modest increase in the amount of new housing that’s brought to market. Again, this will mainly benefit low-income families, who suffer most from limited housing supply.

          3. Rates are based on the value of the land plus the buildings on it, it has nothing to do with the size (except the fact that larger plots cost more, all else being equal).

            A small plot in St Marys Bay pays more than a huge section in Clevedon. A small plot with a big fancy house pays more than the same size plot next door with a little cottage on it.

            In that regard it is clearly a tax on wealth, the more valuable your property the more you pay.

    2. We don’t force people to stop drinking by charging an excise on alcohol. We simply discourage economically wasteful behaviour by taxing it.

  6. Taxing home owners is nothing more than a jealousy tax. The rates are supposed to pay for council services. As you can only use these services once, regardless of how many homes you own, you should only pay the tax once.
    It would be much more honest and fair is every adult living in Auckland paid a council tax for the services they benefit from and not just burden the home owners. Why on earth do renters think they deserve a free ride? Rates are never passed on to the tenants

    1. “Why on earth do renters think they deserve a free ride? Rates are never passed on to the tenants”

      Apparently you think that rental property owners are too stupid to realise that they should charge prices that accurately reflect the cost of providing accommodation. That’s really insulting to property investors.

      1. Actually Peter most charge as much as they can regardless of costs. We don’t live in a cost plus society. The problem with giving everyone a vote in local elections but only charging property owners is it incentivises spending. Councillors know that the people who vote for them won’t have to pay off Council loans so they over borrow and over spend.

        1. Where, exactly, is the market failure that prevents landlords from pricing based on their actual costs? NZ doesn’t set price ceilings on rents, and tenants haven’t organised to enable them to exert market power over landlords.

          So I struggle to see why prices _wouldn’t_ simply be set by the interception of a (downward sloping) demand curve and an (upward sloping) supply curve. In that context, raising rates will shift the supply curve up and thus increase the price paid by tenants.

          1. Now I think you are assuming fixed demand or a vertical demand curve. Add $500 onto rates doesn’t mean all landlords can add $500 to rents. If the demand curve slopes then some of the increase comes out of the landlords pocket. Add to that the simple fact that all Council loans are a cost to the future return on properties then it is the property owners who have liability. Tenants can move to a better run city if they wish.

          2. Yeah. What would happen is that the landlords with higher cost structures would get out of the market – i.e. sell their houses to some people who used to rent. The remaining landlords would be covering their full costs, including the new, higher level of rates.

            As I said at the start, where’s the market failure that would prevent landlords from passing on the costs they face?

          3. OK now I understand why we have different views. You have assumed landlords buy a house to participate in the market for rental housing. That isn’t the case. They buy to participate in the bigger housing market in the expectation of capital gain. Rent is a by-product of that. When a Council over-spends through high rates or high borrowing they are taking money off property owners. Some will be passed on to renters but not 100% as the demand curve slopes. The rest comes off the owners wealth through a reduction in yeild and a lower property price than would have occured. For proof look at the Kaipara effect. Anyone buying there knows they have to cover the cost of Council mis-spending so you offer less at the outset.

        2. Exactly. They charge as much as they can… which means landlords don’t set the price of rent, the market sets the price.

          Included in that market pricing are costs such as rates, just because the owner forwards the money to the council on behalf of the occupant doesn’t mean it isn’t factored into the rent.

          1. Yes but the demand for rental housing is not perfectly inelastic. Therefore when costs go up landlords can’t pass it all onto tenants. Some comes out of the owners return on investment.

    2. So if I own 20 houses I should only pay one set of rates? And should I still expect roads and pipes and rubbish collection to all houses or just one?
      No taxes are ‘fair’, rates are just another tax except the recipient is the council not the government. At least with rates the rich tend to pay more unlike government taxes where the rich tend to pay next to nothing.

  7. As someone else points out very well. If the council knows the rates are only charged to home owners they can get the votes of all the renters as they never pay for any services.
    There is no way a landlord sits down and adds up all his costs to set a rent. He charges what the market sustains which in Auckland will not cover the home loan and rates.
    There is simply no good argument against a council tax that is applied to all Aucklanders. The Europeans have worked this out and it is time we did too.

    1. Your understanding of basic economics is wrong – there is no market failure that prevents costs such as rates being passed on to tenants – and your theory of local government politics is even more wrong.

      If local governments responded mainly to the demands of renters, why do we have planning policies aimed at restricting intensification? Those policies benefit homeowners to the detriment of renters and first home buyers, as they push up house prices. It’s impossible to explain the persistence of such policies unless you realise that homeowners, not renters, have much more influence over local government processes.

  8. Interesting comments on Reykjavik. Just come back from being there the second time. Yeah I understand Jarrett’s point about international experts telling them what to do and how they needed to have this to be considered a real European capital. After being to so many other European capitals it is indeed a shock not to have such comprehensive PT. However apart from the main city centre suburb, Reykjavik didn’t appear to me to be like a European city. No, instead more like a US one, pretty spread out for a city of its population with a large amount of highways, again for a city of its population. That’s probably not a surprise since the US has had a big presence there since WW2 and arguably Icelanders look to the US for inspiration as much as Europe. I guess in that respect Iceland, as with quite a few other things, in my opinion is quite similar to NZ.

    There are a good number of European style 3-4 storey residential buildings in the centre. Sadly, as can been seen in the first picture, they have made the same mistake as many other cities around the world and pushed a motorway right through their foreshore area with the usual result. the walkway/cycleway was nice to walk on but the foreshore area particularly away from the city centre where the Harpa performing Arts centre etc is, is pretty bleak, and I’m not talking about the weather!

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