Pur Autre Vie

I'm not wrong, I'm just an asshole

Tuesday, January 29, 2019


Just a quick observation that the word "bailout" has become one of those meaningless words that simply connotes a negative view of a situation. Saying "I oppose bailouts" is pretty much tautological. When someone I don't like benefits from government policy, it's a bailout. When someone I like benefits from government policy, it's the government serving its proper role.

I suppose this was inevitable because of the way English works, but I am going to find bailout rhetoric annoying for the rest of my life and I wish it didn't have to be this way.

Friday, January 18, 2019

The Last Vestige of Racism

Over the course of my lifetime it has become far less acceptable to be racist in public in the United States. And even when I was young, overt racism was already looked down on for the most part—there was plenty of it, and it often passed without objection, but it was far less acceptable than it had been 20 or 30 or 40 years before. Of course I realize Trump has unleashed a new wave of racism, but that's confined mostly to the conservative movement. Relatively few liberals say racist things in public, and when they do they're generally forced to apologize quickly.

I have to say, though, that there is one glaring exception, and it's distressingly common on both ends of the political spectrum. This is racism against Puerto Ricans. I can't count the times I've seen people refer disparagingly to "Puerto Rican people" (usually abbreviated as "PR people"). "Did some P[uerto ]R[ican] person draft this?" "You sound like a P[uerto ]R[ican] person right now." "Oh great another P[uerto ]R[ican]-drafted statement instead of full disclosure and an honest apology."

As I understand it, the "joke" is that Puerto Ricans often use English in a somewhat stilted or indirect way, deflecting blame and issuing non-apology apologies. It's a weirdly specific racist thing to say or to believe, and I hope it goes the way of all other flagrantly racist tropes.

Wednesday, January 16, 2019

On the Horns

A quick followup to my previous post. What I hope I made clear is that U.S. cities are caught on the horns of a dilemma. If it were (politically) easy to build more housing, they could easily solve their affordability problems (at least in the short term). If it were easy to build more transit, they could easily solve their affordability problems (again, at least in the short run). You only need one of those things to be true in order to address housing affordability. The problem is that in the U.S. it tends to be difficult to do either of those things, and so we are left with very expensive housing in our most productive cities, with all that follows.

Well-Located Housing and the Tokyo Option

This post is meant to make a simple observation about cities, which I hope to expand later.

The high cost of housing in many cities is a function of supply and demand. But supply and demand of what? I think the answer is basically "housing from which it takes about x minutes to get to high-paying jobs." The point of formulating it this way is to capture the intuition that what we mean by "housing" isn't just raw number of units, but rather units that are usefully located.  For the rest of the post I'll use the term "well-located housing" to refer to housing from which places of employment can be reached relatively quickly.

There isn't a sharp threshold here—housing that is within 15 minutes of jobs is obviously better than housing that is 30 minutes from jobs, but in most big cities either of those would qualify as "well-located housing." However, you might want to attribute more value to the 15-minute housing than to the 30-minute housing, and there are various ways to do this. For instance, to determine how much "well-located housing" a particular development will add, you could divide the square footage by the average commute time to the city's employment centers. Or you could divide the square footage by the commute time to the nearest employment center, on the logic that people will generally choose to live near work. Or you could sort housing into tiers (1-10 minutes from work, 10-20 minutes from work, and so on), and attribute more value to the low-commute-time tiers. Or maybe square footage isn't the right measure and you should care more about number of bedrooms, or something. I think my argument would work for a wide variety of approaches, so I won't worry too much about the precise definition of "well-located housing."

The point I want to make is that there are several different ways to increase the supply of well-located housing. One way is simply to permit the construction of more housing in areas that are already well-located. This is the focus of the YIMBY (yes in my backyard) movement, which favors relaxing legal limits on housing construction in urban and suburban areas.

But it would also work (in a sense) to take existing housing and make it better-located. Imagine a city that is built along a river and that has a central business district adjacent to the river where most good jobs are located. Also imagine that the nearest bridge across the river is 5 miles away and there is no ferry. In the status quo, the housing immediately across the river from the city is not well-located (unless there is some other employment center nearby, and let's assume there's not), so its existence does not meaningfully contribute to the supply of housing for the city. Building a bridge across the river near the central business district will dramatically lower the commute time for residents of the housing across the river. In our framework this amounts to an increase in the supply of well-located housing and, other things being equal, a drop in the price of well-located housing.

Of course there are complications. First, the "new" well-located housing (maybe the better term is "newly well-located housing") may be located in a different political jurisdiction from the city where the central business district is located, with important consequences that are beyond the scope of this blog post.

Second, there will be winners and losers from the construction of the bridge. As with any increase in supply, the incumbent owners of well-located housing will suffer as prices fall (and their tenants will benefit). Meanwhile the owners of housing across the river will enjoy a windfall, while their tenants will pay higher rents but enjoy shorter commutes, with mixed effects on welfare (for instance, retirees will pay higher rents but might not care much about short commute times). On net the metro area should benefit (depending, of course, on how expensive it is to construct the bridge), but the distributional effect may be large and for many people may completely swamp the average effect. (To put it another way, there may be a lot of losers from the policy even if it is quite beneficial on the whole.)

Third, if the bridge dumps a lot of new drivers into an already-congested downtown, it may lengthen commute times for the rest of the city, so the net effect on well-located housing may be ambiguous.

You can substitute almost any transportation infrastructure for the bridge and the logic will stay the same, with some differences depending on the particular form of transportation chosen. For instance, in a large city grade-separated rapid transit tends to make nearby housing much better-located. I bring this up because YIMBYs are often surprised at the low density of the Tokyo metropolitan area. Tokyo is, famously, the most populated metro area in the world, with tens of millions of people "well-located" relative to its job centers. But Tokyo accomplished this not by building (very) densely, but rather by building an excellent train system that created a sprawling megalopolis of well-located housing, much of it single-family and relatively little of it taller than three or four stories. (It is not an entirely fair comparison, but you would struggle to find a single ward of Tokyo that is denser than the neighborhood of Park Slope, which itself is not particularly dense by the standards of New York City.)

Unfortunately the "Tokyo option" is not really available to very many cities in the U.S., if any. This is because (A) construction costs are ludicrously high for new trains in the U.S. (and, relatedly, our transit systems are notoriously poorly run), (B) our political institutions are not designed to encourage mass transit (in particular, our transit-oriented cities tend to be boxed in by affluent suburbs that make Tokyo-style sprawl difficult or impossible to achieve), and (C) we are to some degree "locked in" to our existing housing stock, which is generally not transit-oriented. However, I think YIMBYs who are motivated by a desire to reduce housing costs should consider transit construction/improvement as a complement to/substitute for upzoning. Where density is already high (as in much of New York City), the lowest-hanging fruit probably consists of transit improvements. Transit improvements offer the possibility of increasing the stock of well-located housing while avoiding a political backlash from NIMBYs who, as I've argued previously, tend to be influential in urban politics.

(As an aside, I have read conflicting accounts of land use regulation in Tokyo. Some YIMBYs seem to believe that zoning is quite strict, while other YIMBYs seem to believe that Tokyo has few if any zoning restrictions. In a future post I will try to resolve this question.)

I want to bring up one more option to increase the supply of well-located housing, which is to build lots of little employment centers rather than a few big ones. This is the approach favored in the sprawling car-based cities that have grown in the southern and western United States, and I think urbanists tend to underrate its effectiveness. It is true that we observe agglomeration effects in lots of industries, where a firm's productivity is a function of proximity to other firms in the same (or related) industries. This would tend to favor development of a few large business districts, which in turn favors (above a certain scale) the use of mass transit and dense residential construction to achieve a lot of well-located housing.

But agglomeration is often industry-specific. The movie studios in Los Angeles don't particularly need to be near its financial industry, or its aerospace industry, or its beer breweries, or whatever. By developing lots of small job centers, each of which is easily reachable by car from the nearby housing stock, a city can do a pretty good job of capturing agglomeration effects while delivering well-located housing.

Of course there are complications. A car-based city is one that will be hard to navigate for anyone who can't drive (for financial or other reasons). However, I don't want to exaggerate this point—I imagine that once you take into account the cost of housing, most sprawled-out sunbelt cities are more affordable than New York City even accounting for the cost of a car.

Another complication is that once you have specialized job centers, "well-located" becomes specific to the industry in which the individual works. A brewer may not need to live near a movie studio for work purposes, but if she is married to an actor she may want to anyway. If the brewery cluster and the movie studios happen to be across town from each other, it creates a problem. Also, a worker who switches industries may also need to switch houses, which involves significant moving costs. This would be rarer in cities where jobs are all clustered together, because in that case switching jobs should not affect your commute much.

Finally, the car-based model probably doesn't scale very well. Beyond a certain point, traffic congestion starts to degrade the "well-locatedness" of most/all of the housing in the metro area. Car infrastructure is noxious (no one wants to live too close to the highway, and parking lots use up expensive, well-located land and are unpleasant to walk past). Moreover, car-based development is (to a certain degree) incompatible with evolving toward a transit-oriented, pedestrian-friendly city structure. In other words, up to a certain city size car-facilitated sprawl is probably the best policy, but as the city continues to grow it finds itself stuck in a pattern of development that no longer makes sense. Unfortunately it is hugely expensive and politically difficult to reorient the city toward a development pattern that is suitable for a large population. For this reason I think it's worth considering transit-oriented development at a relatively early point in a city's lifetime, although I admit this is a very tricky issue.

Monday, January 14, 2019

Undercapitalization and Insurance

This is a kind of off-the-cuff post about capitalization of businesses.

The simplest way to think of corporate finance is to divide investors into two categories. You have bondholders (or lenders) who get a specified rate of interest in exchange for their up-front investment. Then you have shareholders (or owners) who get everything that is left over once the business has paid its costs (raw materials, labor, taxes, and so forth, as well as principal and interest on the bonds). Another way to put it is that the company's owners are residual claimants—they don't get a defined return, they simply get the surplus after all the fixed costs are paid. This implies that the marginal dollar goes to the shareholders. That is to say, in ordinary circumstances, if the firm earns an extra dollar of profit, the dollar accrues to the shareholders. Likewise, if profits fall by a dollar, the shareholders get less than they would have. Typically the residual claimants are entitled to make decisions about the way the company will be run. (So for instance, in a public company the stockholders elect the board of directors, who hire the company's managers and have input into important decisions like mergers.)

As I said, that's a simple way to think about it, but it leaves out a lot. You can introduce various tweaks to get the description closer to reality. I'll introduce two.

First, the owners/shareholders aren't always the residual claimants. If there's a shortfall of funds so that not all the fixed costs can be paid, the lenders may not get paid in full, meaning that the marginal dollar now goes to lenders (and other creditors) rather than to shareholders. This is particularly important in light of the fact that the shareholders generally control the company (albeit indirectly).

Imagine a company that in a typical year has $50 million of fixed costs (including principal and interest on its debt) and earns revenues of $65 million. This company could pay its shareholders $15 million per year in dividends or whatever. Now imagine the company has the opportunity to embark on a project that has a 50% chance of increasing its revenue by $50 million per year and a 50% chance of reducing its revenue by $50 million per year. Of course the latter possibility will bankrupt the company because it won't be able to pay its fixed costs. But the shareholders might nevertheless find it to be an attractive project because they will either get $65 million per year or $0 per year, for an average expected return of $32.5 million per year. That's better than the $15 million they're currently getting. (Of course it depends a little on how risk averse the shareholders are, but you'd have to be pretty risk averse to turn down a coin flip that more than doubles your expected return.)

Why are the shareholders' expected returns better than the company's overall expected return? Because a large portion of the losses can be shunted off onto the company's fixed claimants (its workers, suppliers, bondholders, and other creditors), while the gains all accrue to the shareholders.

This is a known problem and lenders can protect themselves by contract. Loans will often contain restrictive covenants that prevent companies from embarking on projects like the one described. It may be more difficult for workers and suppliers to protect themselves, but it is at least theoretically possible for them to protect themselves contractually. (Some protections are written into law. Most states have various workman's liens that attach to any property improved by a contractor.)

Of course there is a category of people who can do almost nothing to protect themselves: tort claimants. Someone who is injured by a company's actions can't be protected by contract because it's impossible to identify who the parties to an accident will be before it happens.

This means that companies have a bad motive for operating on a somewhat undercapitalized basis. What I mean is that a company with lots of capital can absorb large losses caused by tort claims. Those losses come out of the pockets of the shareholders (in an economic sense stemming from the shareholders' status as residual claimants on the company, not in the sense that shareholders are personally liable for the damages). But a thinly capitalized company—one that will be insolvent if it encounters even a medium-sized loss—puts some of the risk onto its victims. If it does well and doesn't injure a lot of people, everyone will be paid in full. If it does poorly or injures a lot of people, it goes bankrupt and its fixed claimants pay the price. For the bondholders, this is generally a negotiated-for outcome. If you don't like the bond indenture's financial covenants, then don't buy the bond. When a company is known to be thinly capitalized, its bonds tend to bear a relatively high rate of interest to compensate the bondholders for the additional risk. But tort claimants get no such protections and (of course) earn no interest until they've obtained a judgment against the company (at which point I believe they would earn statutory interest).

When it is predictable that there may be large tort claims against a company, there are several policies that can protect the tort claimants. One is simply to require companies to be well capitalized. This is difficult because it is hard to know what counts as "well capitalized" and because capitalization itself is a function of the company's reported financials, which can be manipulated.

Probably the better approach is to require the company to obtain insurance policies that protect anyone injured by its operations. The premiums for those policies amount to a fixed cost of doing business (that is, at the margin they come out of the shareholders' pockets). The insurance company is itself subject to capital regulation, and it can protect itself by contract. In fact the insurance company amounts to a sort of informal third-party monitor of the insured company's activities, because it will raise its premiums if it comes to believe that the company's activities have become more risky over time. To put it another way, requiring insurance coverage means that there is a sophisticated entity charging a market price and inserting whatever contractual protections it considers prudent to control the risk that the insured company will injure people.

It's not a perfect solution. Getting the required level of coverage right is tricky. Historically, companies that used asbestos often exhausted their insurance coverage before compensating all victims. But it's often the most effective solution.

Thursday, January 10, 2019

Technology Is Good

One thing I really like about Windows is that when an application starts, it often pops up at the "front" of your screen and your cursor automatically moves to it. That way if you're typing something into another application, you start typing the text into the new application, with unpredictable results. It's a pleasing and stress-free way to use a computer, and I love it.