Month: April 2016

Regulatory Arbitrage, Rent-Seeking and the Deal of the Year

united-charities-building-287-park-avenue-south-777x959The NYTimes ran a full page ad yesterday congratulating NY real estate broker Mark Weiss for winning the Real Estate Board of New York’s Most Ingenious Deal of the Year Award. I was curious, so I did some research and found some information about one of Weiss’s most succesful deals.

A Chinese developer bought 287 Park Avenue South, a nine-story building built in 1893, in order to convert it to a mix of condos and retail. But a problem arose:

The 1893 landmarked building straddled two zoning districts, which left one half of the property overbuilt….trying to expand the building at 287 Park Avenue South would be like struggling in quicksand: additional FAR purchased would essentially be sucked up bringing the overbuilt part of the property into compliance.

That’s what prompted listing broker Geoffrey Newman and his Newmark Grubb Knight Frank colleague Mark Weiss to MacGyver a solution that earned the brokers a nomination for the Real Estate Board of New York’s “Ingenious Deal” award.

Here’s what they did:

By removing several floors from the interior part of the building that was overdeveloped, Newman realized, a buyer could bring the entire building into compliance, freeing the way to add bonus square footage from inclusionary housing certificates the NGKF team identified in the area.

“The idea was, that by removing 4,000 square feet we were able to add 27,000 square feet onto the building,” he told The Real Deal. “That was really the basis of what differentiated our approach to other ways of selling the building.”

The idea was indeed ingenious but you will also note that all of the ingenuity was devoted to evade the zoning and the price of evasion was high. In order to work around the zoning law, 4,000 square feet of very valuable New York real estate had to be destroyed. (Not to mention all the hours of ingenuity and legal effort that was used up devising and implementing the deal).

When thinking about why it’s so expensive to build in many American cities just remember that the deal of the year is when you build 31,000 square feet of space and only have to destroy 4,000 square feet of space to do it.

London markets in everything

A new pop-up restaurant coming to central London this summer will give diners the option to eat in the nude.

The Bunyadi, which is opening in June for three months, will be split into clothed and unclothed sections, and even feature staff in the nude with certain body parts covered up, Time Out reports.

The concept is already wildly popular. So far, nearly 4,000 people have signed up for tickets on the restaurant’s website.

Here is the story, via the excellent Samir Varma.

And here from Washington,D.C., via Ninjaeconomics, is “on-demand limousine service for pets.

Paul Krugman on a carbon tax

If reducing emissions really has to involve moving on many fronts, anything that looks like an administrative solution — telling, say, power companies what to do or not to do — is going to be much more costly than carbon pricing that exploits all the possibilities. But if a large part of the solution is going to involve a fairly limited set of measures — such as putting a quick end to the practice of burning coal to generate electricity — getting to broad-based carbon pricing is much less central.

And what I gather from reading various analyses of our prospects is that we’re closer to case #2 than to case #1: the problem of limiting climate change isn’t all that complex. End coal-burning and you’ve gone a significant way; a few other big things get you another substantial part of the way. Yes, comprehensive carbon pricing would be best, but it’s not the sine qua non of effective action.

Most of his points concern the status of Econ 101.

Addendum: Ashok Rao comments.

Optimal tax policy for a Keynesian recession?

This paper offers recommendations for how the design of labor income taxes should change during recessions, based on a simple model of a recessionary economy in which jobs are rationed and some employees value working more than others do. The paper draws two counter-intuitive conclusions for maximizing social welfare. First, subsidize non-employment. This draws marginal workers out of the labor force, creating “space” for those who really need jobs. Second, subsidize employers for hiring, not the employees themselves. The problem during recessions is having too few jobs; subsidizing employers creates more jobs, while subsidizing employees confers benefits on those who already won the job lottery. Tax policy in the recent recession has done a poor job of following these recommendations.

Recommendations or reductios?  It still seems that extensions of unemployment insurance somewhat raised the rate of unemployment (if only by a small amount), contrary to many Keynesian predictions.  The implied multiplier in that data seems to be zero, as Garett Jones has pointed out.  And do hiring and wage subsidies still make sense, as opposed to job search subsidies, if unemployment follows from matching problems rather than traditional aggregate demand deficiencies?  Unclear, to say the least.

The paper is from Zachary D. Liscow and William A. Woolston, via the excellent Kevin Lewis.

Might CRISPR prove to be regulatory arbitrage?

Last week, the U.S. Department of Agriculture (USDA) confirmed that it will not regulate the cultivation and sale of a white-button mushroom created using CRISPR

In this case, no foreign organism’s genetic material was introduced into the food, and that makes all the difference. If Yang had tackled mushroom browning by adding bits of genetic code from another organism, it would have been subject to USDA scrutiny as other non-browning produce has been. Until recently, genetic modification required the insertion of foreign viruses or bacteria, but CRISPR is more advanced than that. Because of that loophole, it’s not under the USDA’s jurisdiction. The EPA only regulates GMOs designed for pest control, and the FDA considers all GMOs to be safe. That leaves this non-browning mushroom cleared for take-off.

Scientists are excited. Anti-GMO advocates are disturbed. The public will probably continue to be more confused than anything else.

Here is the Rachel Feltman piece.  For the pointer I thank Cleveland Cavaliers fan Philip Wallach.

What I’ve been reading

1. Pieter M. Judson, The Habsburg Empire: A New History.  Belknap Press, a carefully researched take on the political history of a poorly understood era.  A bit dry, but very well done and full of information.

2. Richard E. Feinberg, Open for Business: Building the New Cuban Economy.  A good introduction to where the Cuban economy is at right now, from Brookings, coming out in June.  Here is my earlier post on why I am skeptical about the country’s prospects.

3. Maya Lin, Topologies.  What has she done since the Vietnam Veterans’ Memorial? Lots, though much of it is scattered widely and hard to see.  Pictured below is her Bell Tower at Shantou University. Here is the Box House in Telluride, and the Children’s Defense Fund in Tennessee.

Overall picture books are underrated.


4. Duncan Clark, Alibaba: The House that Jack Built.  Books on China, tech companies, and corporate leaders are all usually bad, but this one is pretty good.  Most of all a window into how Chinese entrepreneurs built up the country’s major tech companies.

5. Myra Strober, Sharing the Work: What My Family and Career Taught me About Breaking Through (and Holding the Door Open for Others).  The memoir of a female economists who started her career teaching at Berkeley in the 1970s.  There should be many more books like this.  It is a micro-history of discrimination, and how it changed, in addition to looking at the profession through the lens of a “normal” economist rather than one of the super-famous.  Bravo.

Ruchir Sharma on Brazil

Today the average Brazilian income is about 16% of the U.S. average, with basically no gain for 100 years.

Even more striking, since the mid-1980s Brazil has seen its GDP growth rate track commodity prices more closely than any other nation in the world. Brazil’s fortunes are so closely tied to the global commodity cycle in part because so little works inside the country. The private economy does produce some internationally competitive companies in auto parts, aerospace and other industries, but they thrive by dodging a growing bureaucracy that smothers the rest.

Spending by local, regional and national governments amounts to 41% of Brazil’s GDP, the largest for any country in its middle-income class, and a scale close to those of much richer European welfare states such as Germany and Norway. Brazilians face the heaviest tax burden of any emerging country, with collections amounting to 35% of GDP. The widespread sense that they get a lousy return in public services is another reason for mass protests against Ms. Rousseff.

Here is the WSJ piece.  Ruchir has a new book coming out on emerging economies, The Rise and Fall of Nations: Forces of Change in the Post-Crisis World.  I have not yet read it, but it is surely of interest.

The Number of Publicy Traded Firms Has Halved

In the past twenty years [the] U.S. has lost almost 50% of its publicly traded firms [from 6,797 in 1997 to 3,485 in 2013, AT]. This decline has been so dramatic, that the number of firms these days is lower than it has been in the early 1970s, when the real gross domestic product in the U.S. was one third of what it is today. This phenomenon has been a general pattern that has affected over 90% of U.S. industries.

A rather stunning finding from Grullon, Larkin and Michaely.

The total number of firms has dropped far less than the number of publicly traded firms, so in part this is probably due to laws affecting publicly traded firms in particular such as Sarbanes-Oxley. But there has also been a small drop in the total number of firms (depending on year measured) and concentration ratios have increased which suggests that competition might have fallen. (I wish the authors had looked more closely at the entire size distribution). Have international firms risen to offset the decline of publicly-trade firms? The authors discuss but discount the role of globalization. I don’t see, however, how their findings of small effects on output competition are consistent with big labor market effects. Nevertheless the bottom line is that as concentration rates have increased so have profits, as a recent CEA report also argues.

Is this all the after-effects of the Great Recession? I hope so but the decline in the number of publicly traded firms is also consistent with the research on long-run declining dynamism (including my own research on regulation and dynamism) which shows that startup and reallocation rates have been trending down for thirty years.

Guy Rolnick at Pro-Market also discusses these trends and adds another thought to keep you up at night:

…One question may even loom larger: given that more and more Americans’ pensions and long-term savings today are invested in the stock market in defined contribution schemes, have we created a pension model that is based on a growing share of investments in rent-seeking activities? Put another way, are we facing an economic model in which tens of millions of Americans’ pensions are relying on the ability of companies to extract rents from consumers and taxpayers?

Market urbanism and tax incidence

I put some of my worries about market urbanism being overrated by its proponents in an earlier post, and I thought I would clarify a bit.  I fully agree that we should deregulate building in major cities such as San Francisco, and just as importantly (or more so) stop rising cities such as Atlanta or Houston from going down that same route.  That said, I’m still not happy with how market urbanists handle the distributional implications of their proposals.  Let’s try putting the argument in terms of tax incidence.

If urban land currently reaps monopoly rents, a new tax on building largely will fall on the value of land.  Both Ricardo and Henry George understood that.

Similarly — and here is the important point — the gains from removing taxes/restrictions on building largely will be captured by landowners for exactly the same reason.  More stuff will be built, urban output will expand, land still will be the scarce factor, and by the end of the process rents still will be high.

In other words, if we deregulate building, landowners will capture a big chunk of the benefits.  I’m fine with that, it is a Pareto improvement and I am not a capuchin monkey.  But as I read market urbanists, many are more prone to talk about making various major cities affordable again as part of a broader reformicon program.  I’m not convinced that will happen, or if so the case has not yet been made.

Just think of urban space as “a license to produce in a high MP of labor area.”  As long as the city is not hitting diminishing returns, issuing more licenses probably will not lower their marginal value and thus will not lower rents.

Maybe — maybe, maybe, maybe — if you remove so many building restrictions, land won’t be the scarce factor any more and the gains from the tax reduction will be distributed in many directions.  Alternatively, you may have a less simple model of tax incidence than the “first order effect” I laid out above (try this pdf too).  Great, let’s try to figure that out, but then building restrictions may not much raise rents!…let’s be consistent.

In any case, I think the above is the basic dilemma facing market urbanists.  It can do much to enhance efficiency and productivity, with attendant trickle-down benefits, yet without much solving the distributional problem in any direct way, as it is sometimes advertised as doing.


By the way, have I mentioned that I love landowners?  My school, George Mason University, is a significant landowner.  So were the people who built up the northern Virginia area, such as Til Hazel.  Great stuff, great efforts, great people.  Landowners, love ’em or leave ’em.

p.s. I also love trickle-down benefits.  Most benefits are trickle-down benefits.

*Buddhisms: An Introduction*, or what do Buddhists argue about?

That is the new book by John S. Strong, which I recommend highly.  It won’t charm you or interest you in the subject if you don’t already care, but the already-motivated can learn a great deal from it.

I find most books on Buddhism frustrating.  One you know the basics, they just feed you the same blah blah blah, running your mind in empty circles.  But perhaps Buddhism is like macroeconomics — you can’t understand it until you know what people argue about, and that is what John S. Strong clues us in on.  Here is one typical summary passage:

We have, in this chapter, sought to explore various iterations of the Middle Way, a notion which the Buddha sets forth at the start of his First Sermon.  In order to unravel the many implications of this principle and its applicability to other Buddhist doctrines (something the Buddha did not do in his sermon), I have presented several of its expressions and sought to set them within the context of various philosophical and religious movements that may have been around at the time of the Buddha.  Thus, early Buddhists can be seen as finding their way between karma-deniers and karmic absolutists; and as combining views of saṃsāra both as a real material trap and as an illusory trap; and as shying away from the extremes of affirmation of an Absolute Self and denial of personal continuity.  The Middle Way, however, is not the only thing set forth in the First Sermon as we have it, a text which is mostly devoted to the doctrine of the Four Truths, to which we shall now turn.

Another good way to read about Buddhism is to look at up through p.59 in Nicholas Ostler’s Passwords to Paradise: How Languages Have Re-Invented World Religions.  It covers the differential historical spread of Buddhism through the languages of Pali, Gandhari, Sanskrit, and Chinese.  Ostler himself claims to have a working knowledge of eighteen different languages.

Here is a Berkeley class on Buddhist economics.

Why Germany doesn’t like negative interest rates

The business models of German financial institutions depend critically on the presence of positive nominal interest rates. The International Monetary Fund noted in its latest Financial Stability Report that the pre-tax profits of German and Portuguese banks are most affected by negative rates.

German life insurers are also vulnerable. They have to guarantee a minimum rate of return, which is now 1.25 per cent a year. This is hard to do when the yield of the 10-year German government bond is only 0.13 per cent. Germany and Sweden are the two EU countries where life insurers face the biggest gap between market rates and guaranteed rates. To achieve the promised returns, the insurers have to take on more risk, for example by buying corporate bonds or tranches of complex financial products. If, or rather when, the next financial crisis arrives and triggers a change in the valuation of these assets, we may find that sections of the German financial sector are insolvent.

Of the German banks, the Sparkassen and the mutual savings banks are most affected. They are classic savings and loans outlets in that they lend locally and fund themselves through savings. Credit demand is more or less fixed. So when savings exceed loans, as they now do in Germany, the banks deposit their surplus with the ECB at negative rates — known as “penalty rates” in Germany. They cannot offset the losses by cutting interest rates on savings accounts because of the zero lower bound. Savers would switch from accounts to cash in safe deposit boxes.

That is from the always superb Wolfgang Münchnau at the FT.  Regulatory and federalistic issues are another and underdiscussed reason why the eurozone is not an optimal currency area.

Monday assorted links