Thursday, February 22, 2018

How Building Regulations Subsidize Mansions

From Alex Tabarrok of Marginal Revolution.

"Regulations that prevent land from being fully developed raise the price of housing. That’s true but land use regulations can also make some types of housing less expensive. In particular, Jaap Weel has a good post explaining how land regulations subsidize mansions.
Consider the buildings below: a mansion on a 1 acre lot in Atherton, and a 350 unit mixed use condo on a 1.6 acre lot 2 miles further up the peninsula in Redwood City. The mansion just sold for $6m. The condo building, when finished, will probably fetch hundreds of millions.

If it weren’t for Atherton’s zoning code, you’d never be able to buy that mansion for a mere $6m. A developer that wanted to tear it down and build condos could bid far more than that. But the zoning code mandates single-unit buildings with a floor area ratio below 18% on lots of at least 1 acre, so $6m it is. Quite the bargain.
In a market economy bidding tends to move resources from low-valued uses to high-valued uses. Regulations that prevent bidding freeze resources into low-valued uses–that’s bad for the resource owners and bad for society as the total value of production is reduced but it can be good for the consumers of low-valued uses.

Addendum: For more on floor area ratio regulations, see my video on skyscrapers and slums in Mumbai."
Wikipedia on Floor area ratio.

"Floor area ratio (FAR) is the ratio of a building's total floor area (gross floor area) to the size of the piece of land upon which it is built. The terms can also refer to limits imposed on such a ratio through zoning.

As a formula FAR = (gross floor area) / (area of the plot)"

The legalization of the cannabis market across US states is inducing a crime drop

Crime and the legalization of recreational marijuana by Davide Dragone, Giovanni Prarolo, Paolo Vanin and Giulio Zanella in Journal of Economic Behavior & Organization.


"First-pass evidence is provided that the legalization of the cannabis market across US states is inducing a crime drop. We exploit the staggered legalization of recreational marijuana enacted by the adjacent states of Washington (end of 2012) and Oregon (end of 2014). Combining county-level difference-in-differences and spatial regression discontinuity designs, we find that the policy caused a significant reduction in rapes and property crimes on the Washington side of the border in 2013-2014 relative to the Oregon side and relative to the pre-legalization years 2010-2012. The legalization also increased consumption of marijuana and reduced consumption of other drugs and both ordinary and binge alcohol. Four possible mechanisms are discussed: the direct psychotropic effects of cannabis; substitution away from violence-inducing substances; reallocation of police effort; reduced role of criminals in the marijuana business."

Wednesday, February 21, 2018

The More Gender Equality, the Fewer Women in STEM

A new study explores a strange paradox: In countries that empower women, they are less likely to choose math and science professions.

By Olga Khazan of The Atlantic. Excerpt:

"Though their numbers are growing, only 27 percent of all students taking the AP Computer Science exam in the United States are female. The gender gap only grows worse from there: Just 18 percent of American computer-science college degrees go to women. This is in the United States, where many college men proudly describe themselves as “male feminists” and girls are taught they can be anything they want to be.

Meanwhile, in Algeria, 41 percent of college graduates in the fields of science, technology, engineering, and math—or “STEM,” as its known—are female. There, employment discrimination against women is rife and women are often pressured to make amends with their abusive husbands.

According to a report I covered a few years ago, Jordan, Qatar, and the United Arab Emirates were the only three countries in which boys are significantly less likely to feel comfortable working on math problems than girls are. In all of the other nations surveyed, girls were more likely to say they feel “helpless while performing a math problem.”

So what explains the tendency for nations that have traditionally less gender equality to have more women in science and technology than their gender-progressive counterparts do?

According to a new paper published in Psychological Science by the psychologists Gijsbert Stoet, at Leeds Beckett University, and David Geary, at the University of Missouri, it could have to do with the fact that women in countries with higher gender inequality are simply seeking the clearest possible path to financial freedom. And often, that path leads through STEM professions.

The issue doesn’t appear to be girls’ aptitude for STEM professions. In looking at test scores across 67 countries and regions, Stoet and Geary found that girls performed about as well or better than boys did on science in most countries, and in almost all countries, girls would have been capable of college-level science and math classes if they had enrolled in them.

But when it comes to their relative strengths, in almost all the countries—all except Romania and Lebanon—boys’ best subject was science, and girls’ was reading. (That is, even if an average girl was as good as an average boy at science, she was still likely to be even better at reading.) Across all countries, 24 percent of girls had science as their best subject, 25 percent of girls’ strength was math, and 51 percent excelled in reading. For boys, the percentages were 38 for science, 42 for math, and 20 for reading. And the more gender-equal the country, as measured by the World Economic Forum’s Global Gender Gap Index, the larger this gap between boys and girls in having science as their best subject. (The most gender-equal countries are the typical snowy utopias you hear about, like Sweden, Finland, and Iceland. Turkey and the United Arab Emirates rank among the least equal, according to the Global Gender Gap Index.)

The gap in reading “is related at least in part to girls’ advantages in basic language abilities and a generally greater interest in reading; they read more and thus practice more,” Geary told me.

What’s more, the countries that minted the most female college graduates in fields like science, engineering, or math were also some of the least gender-equal countries. They posit that this is because the countries that empower women also empower them, indirectly, to pick whatever career they’d enjoy most and be best at.

“Countries with the highest gender equality tend to be welfare states,” they write, “with a high level of social security.” Meanwhile, less gender-equal countries tend to also have less social support for people who, for example, find themselves unemployed. Thus, the authors suggest, girls in those countries might be more inclined to choose STEM professions, since they offer a more certain financial future than, say, painting or writing.

When the study authors looked at the “overall life satisfaction” rating of each country—a measure of economic opportunity and hardship—they found that gender-equal countries had more life satisfaction. The life-satisfaction ranking explained 35 percent of the variation between gender equality and women’s participation in STEM. That correlation echoes past research showing that the genders are actually more segregated by field of study in more economically developed places."

The Shocking Election That Saved Israel's Economy: It wasn't easy, but the capitalist reforms set in motion by Prime Minister Menachem Begin 40 years ago were transformative

By Zev Chafets. Zev Chafets is a journalist and author of 14 books. He was a senior aide to Israeli Prime Minister Menachem Begin and the founding managing editor of the Jerusalem Report Magazine.
"It was May 17, 1977."

"There had never been a change of governing party before in Israel. For the first time, Mapai, the socialist party founded by David Ben-Gurion and now led by his disciple Shimon Peres, was out of power."

"Perhaps the worst accusation they had leveled against Begin was that he was a capitalist."

From Israel's founding until the 1977 vote, Mapai or its affiliated Histadrut labor organization tightly controlled most of the country’s agriculture and industry, health care and social welfare, infrastructure and development, education, housing and radio."

"Begin, who had spent an instructive year in a Siberian Soviet gulag during World War II, was skeptical of such power. He had simple instructions for his finance minister, Simcha Ehrich: Free the economy and make life better for the common people (by which he meant Likud voters).

"Ehrlich was devoid of formal education or economic training. The Israeli media began calling him a follower of Milton Friedman, the free market guru who had recently won the Nobel for economics. But Ehrlich, who couldn’t read or write English, didn’t know Milton Friedman from Kinky Friedman.

A few months before the 1977 election, in an address to a business group, Ehrlich set out his core economic belief: “Israel is too small and too poor to maintain a welfare state.”"

"In some ways, the economy had more in common with the Communist satellites of Eastern Europe than with Western countries. But as welfare states went back then, Israel was pretty good. It provided free public schools and cheap university tuition; affordable, high-quality public health care; subsidized food; available work with strong labor protections; and decent social services. But the price for all this was confiscatory income taxes, high tariffs on foreign-made luxury goods (almost anything fancier than a can opener qualified), low incomes and poorly made local products.

Like Begin, Ehrlich thought that Israel’s economic potential was being stifled by misguided ideology and political self-interest of the socialists. His mission was to turn things around. Rarely has anyone been less suited for a task.

When Ehrlich arrived at the Finance Ministry, he came alone. The senior staff, largely Labor Party loyalists trained in Keynesian economics and fond of the status quo, gave him very little help. But Ehrlich plowed ahead with his agenda: deregulating foreign currency, lowering import barriers, allowing the Israeli pound to trade freely, cutting government spending, shrinking the bloated bureaucracy, and weakening the power of the labor by introducing mandatory arbitration.

As a free market plan, this sounded good. As a practical matter, it provoked an epic fiasco. Only a few small reforms were put in place. Foreign currency moves were popular. Small businesses were intoxicated. But the budget cutting didn’t go over well with the Likud’s base of working-class voters. The niceties of fiscal policy and foreign currency didn’t mean much to these folks, and they did not want their subsidies cut just because some Tel Aviv businessmen thought it was inflationary or wasteful. They complained loud enough for Begin to hear. He told his finance minister that government spending cuts were no longer a priority. Shortfalls could be covered at the printing press.

Inflation had been a problem in Israel since the 1973 Yom Kippur War. Rebuilding the army and air force required the kind of money Israel couldn’t print. And, in the wake of the oil boycott, fuel prices drove inflation to about 30 percent -- which helped put the Likud in office in 1977.

Unfortunately, the Likud had no answer. Within two years, the Israeli pound was inflated by 110 percent, and Ehrlich was sent to political Siberia as minister of agriculture.

Things would get worse before they got better. The signature move of the next finance minister, Yigal Horowitz, was to scrap the pound and replace it with the shekel, a Biblical name that didn’t fool anyone. Israeli currency was nearly worthless, by any name. Soon the entire economy was being conducted in dollars, the price of which soared on the black market.

During this time, Begin focused on making peace with Egypt, planning the destruction of the Iraqi nuclear reactor, building settlements and infrastructure in the West Bank, and fighting the Palestinian terrorism emanating from across the northern border. On the eve of the 1982 War in Lebanon, the Ministry of Finance, now under its fourth minister, warned about the economic burden of a military campaign. Begin shrugged, and quoted Napoleon: “The cavalry charges ahead, while the supply mules follow behind.”

The ministry, however, had a point. When Begin retired in 1983, inflation was about 300 percent and rising. After new elections, Labor and Likud finished in a near tie and, in 1985, formed a government of national unity led by Peres, now of Labor. He and Likud Finance Minister Yitzhak Modai put together a bold and politically fraught plan to stabilize the economy. It called for deep budget cuts and a deficit reduction, wage and price controls, and another new currency -- the “new shekel,” which came with 20 percent devaluation and limits on the freedom of the Bank of Israel to print more.

Amazingly, it worked. In its first year, the plan lowered inflation by half, and it reached a manageable 10 percent within a decade. The prospect of social and economic collapse gradually became a memory.

It pained the socialist Peres to make a deal that would, in effect, end the Labor Zionist dream of a centrally controlled egalitarian workers’ democracy. But Peres clearly saw what Ehrlich had dimly perceived -- that free market global capitalism was the irresistible wave of the Israeli future.

The process had been set in motion. In the 1990s, a million Jewish immigrants full of energy and entrepreneurial dreams arrived. Universities and elite military units began turning out a generation of cyber wizards, high-tech innovators and MBAs. Prime Minister Yitzhak Rabin (another son of socialist Mapai) capitalized on this windfall of human capital by offering very generous tax incentives to foreign investors. A few years later, Benjamin Netanyahu, a genuine Friedmanite serving as finance minister, implemented a major round of privatization and cut income and corporate taxes.

But we shouldn't discount Begin's leadership that set up Likud, despite all the economic stumbles and rough patches, to rule the country for most of the last 40 years and rules it still.

In 2010, Israel was accepted into the Organization for Economic Cooperation and Development, the club of prosperous free market nations. Its population now exceeds 8 million. It is neither “too small nor too poor” to be a viable welfare state, as Ehrlich once said, nor too idealistic to brag about its capitalist credentials."

Tuesday, February 20, 2018

Sarbanes-Oxley promotes inequality

See A Pox on SOX, It’s Bad for Stocks: Sarbanes-Oxley promotes inequality by discouraging companies from going or remaining public by Scott S. Powell. Mr. Powell is an economist and senior fellow at Discovery Institute in Seattle. Excerpts:
"Section 404 of Sarbanes-Oxley imposed an intrusive audit regime on almost every aspect of a public company’s operation. This has proved to be one of the most costly and counterproductive regulations ever introduced, with compliance adding about $2 million in annual costs for the smallest public companies and far more for bigger companies.

Section 404 audits focus on minute operational details, not on detecting the kind of high-level accounting fraud that took WorldCom down. The costs Section 404 imposes have disproportionately affected small public companies and discouraged many promising venture-capital-backed enterprises from going public."

"Combined with the impact of mergers, acquisitions and corporate failures, Sarbanes-Oxley has dramatically reduced the number of public company investment opportunities in the U.S. In 1996 there were 7,322 public companies listed on U.S. stock exchanges; today there are 3,671. With fewer initial public offerings, powerful incumbent firms have raised barriers to new entrepreneurship and made it harder for competing startups to raise funding, tamping down innovation.

Before Sarbanes-Oxley, young companies on the path to an IPO could remain entrepreneurial and nimble. But the law created massive disincentives to seeking capital from public markets. Instead of going public and accepting the huge costs of SOX compliance, young companies increasingly sought acquisition by other larger public or private businesses. Many startups chose to stay private in the portfolios of venture-capital and private-equity firms.

Wall Street and the capital markets also adjusted to the law. Investment banks redirected resources into originating, structuring and trading real-estate mortgage debt, which helped create the financial excesses that nearly sank the economy in 2007-08. Investment dollars increasingly fled from public markets, finding their way instead into private equity and venture capital firms.

By reducing investment opportunities for middle-class Americans, Sarbanes-Oxley had the unexpected consequence of exacerbating wealth inequality. The world of venture capital and private equity is an exclusive club for the rich, while the public markets cater to diverse investors—both affluent and of modest means. When companies went public earlier in their lifetimes, employees and average investors had more opportunities to build wealth.

The share of wealth owned by the top 1% of Americans has surged over the last generation in part because those not already at the top have been increasingly shut out of the wealth-creation process. To redress this growing wealth disparity and invigorate entrepreneurial dynamism in the U.S. economy and capital markets, Congress can take some fairly simple legislative action."

The High Cost of ‘Affordable Housing’ Mandates

‘Inclusionary zoning’ laws create a vicious circle of higher prices and reduced demand.

By Paul Kupiec and Edward Pinto of AEI. Excerpts:
"Philadelphia, Detroit and Atlanta are requiring developers to set aside some portion of their new units to sell or rent at below-market prices to low-income households. Like many progressive promises, this is a fool’s errand. These laws will reduce the cost of housing for targeted political groups if they increase the cost of housing for everyone else."

"While the intent of these laws is to increase the supply of affordable housing, history shows they increase the cost of housing and limit the supply of new affordable units."

"Consider a project plan to produce 100 identical new housing units with development outlays for land, materials, zoning site preparation and other costs of $23.75 million. Including a 5% return for the developer, the project costs $25 million. Without government involvement, the market price for each housing unit will be $250,000. The successful sale of 100 units at this price would cover all out-of-pocket development costs and earn the developer a competitive profit.

What happens if the municipality requires the developer to sell 10% of these new units at below-market prices? Laws are rarely so specific, but assume that the municipality caps the price on affordable units at $125,000. The law doesn’t change the cost of building. It merely changes the price the developer can legally charge for some of its new housing units. The total cost of $25 million must now be spread over 10 units, each with a maximum legal price of $125,000, and 90 units priced to cover the remaining cost. Each of the 90 “market price” units must sell for $263,889 for the developer to cover costs.

Policy makers may view inclusionary zoning as a free lunch, but requiring developers to sell or rent 10% of their housing units at below-market prices to “qualified households” means charging above-market prices to everyone else. The affordable-housing requirement increases the median house price in the development by 5.5%."

"If the potential pool of nonsubsidized qualified home buyers falls short of 90 households when new units are priced at $263,889, the developer won’t undertake the project."

"A 2004 study by the Reason Foundation found that inclusionary zoning laws led to less affordable housing in the San Francisco Bay area. The total production of new housing units declined, and the production of new affordable-housing units declined precipitously."

"Studies by both the Cato Institute and the Brookings Institution show that housing is more affordable where there are fewer land-use restrictions. If zoning, building codes, fees and inclusionary zoning laws raise development costs, housing will be expensive."

Monday, February 19, 2018

In 2016, solar and wind provided just 0.8% of the world’s energy

From Mark Perry.
"In 2016, solar and wind provided just 0.8% of the world’s energy, even after trillions of dollars in taxpayer-extracted subsidies, and will reach only a 3.6% share of energy in 2040, according to the International Energy Agency World Energy Outlook 2017 forecast (see graphic above). The world’s energy future of tomorrow, even almost a quarter century from now in 2040, will look very much like it does today, with fossil fuels supplying the large majority of our energy (81% today vs. 75% in 2040) and renewables playing a relatively minor role as energy sources.

Sources: Bjorn Lomborg and Matt Ridley (“Shale is the Real Energy Revolution”)."