Category: Law

YIMBY for commercial real estate

That is the topic of my latest Bloomberg column, here are some bottom line results:

What would “Yes in My Backyard” even mean in the context of commercial real estate?

A new economic research paper offers a hint of an answer: Most likely, there would be taller buildings, more mixed-use neighborhoods and considerably more wealth.

One way to approach this question is to look at less regulated cities. According to one widely used index, the least regulated metro area in the US is Midland, Texas. Midland isn’t particularly large or well-known, with a population of about 132,000, yet one of its nicknames is the “Tall City” because of its downtown skyline. When there is freedom to build, going vertical often is most cost-effective…

The research paper estimates the total social gains if every US city deregulated to the level of Midland, including the evening out of regulations within each city. The gains are strikingly large (though with some caveats): National output would rise by between 3% and 6%, and the gains in well-being would be in the range of 3% to 9% of lifetime consumption. Think of it as Americans getting a lifetime raise of at least 3%.

And:

Another caveat is that the data behind these estimates is based on 2018 numbers, when a little more than 5% of the work force worked from home. Under one more recent estimate, 12.7% of all full-time employees work fully from home. (Hybrid work is more common yet, but that typically still requires office space.)

So the researchers ran their model again, this time assuming that 40% of workers were at home full-time. They still found a 1.5% output gain. Of course, given that the US is not currently close to 40% work from home, the actual gains from commercial real estate deregulation, circa 2023, lie somewhere between 1.5% and the larger numbers — the 3% to 6% output boost — I cited earlier. The researchers suggest that the gains from deregulation are almost linear in the share of workers who need offices, so the larger measured gains should be closer to the truth.

Here is the underlying research by Fil Babalievsky, Kyle F. Herkenhoff, Lee E. Ohanian, and Edward C. Prescott.

Constructing Influence

VoxDev: A pervasive politician-developer nexus exists in Indian cities, where politicians receive illicit financial support from real estate developers in exchange for favourable building policies and accelerated approvals. This “quid pro quo” facilitates the flow of “black money” — income hidden from tax authorities — into campaign coffers. The nexus is difficult to discern in detail due to the opacity of the system, but we uncover what is plausibly a natural consequence: when politicians turnover, building construction slows down.

From a summary in VoxDev of my Journal of Development Economics piece (with Tandel and Gandhi) on the politics of development in Mumbai.

Addendum: See also my Journal of Urban Economics piece on the dangers of public interest litigation in slowing development and also my videos Skyscrapers and Slums and Rent Control in Mumbai for more on these issues.

Reassessing China’s Rural Reforms: The View from Outer Space

We study one of the central reforms in China’s economic miracle, the Household Responsibility System (HRS), which decollectivized agriculture starting in 1978. The HRS is commonly seen as having significantly boosted agricultural productivity—but this conclusion rests on unreliable official data. We use historical satellite imagery to generate new measurements of grain yield, independent of official Chinese statistics. Using two separate empirical designs that exploit the staggered rollout of the HRS across provinces and counties, we find no causal evidence that areas that adopted the HRS sooner experienced faster grain yield growth. These results challenge our conventional understanding of decollectivization, land reform, and the origins of the Chinese miracle.

That is a new paper by Joel Ferguson and Oliver Kim, with Kim being on the job market from Berkeley this year.  Here is Kim’s thread on Twitter.  Intriguing results, which have won praise from Pseudoerasmus…

The Big Fail

The Big Fail, Joe Nocera and Bethany McLean’s new book about the pandemic, is an angry book. Rightly so. It decries the way the bien pensant, the self-righteously conventional, were able to sideline, suppress and belittle other voices as unscientific, fraudulent purveyors of misinformation. The Big Fail gives the other voices their hearing— Martin Kulldorff, Sunetra Gupta, Jay Bhattacharya and Emily Oster are recast not as villains but as heroes; as is Ron DeSantis who is given credit for bucking the conventional during the pandemic (Nocera and McLean wonder what happened to the data-driven DeSantis, as do I.)

Amazingly, even as highly-qualified epidemiologists and economists were labelled “anti-science” for not following the party line, the biggest policy of them all, lockdowns, had little to no scientific backing:

…[lockdowns] became the default strategy for most of the rest of the world. Even though they had never been used before to fight a pandemic, even though their effectiveness had never been studied, and even though they were criticized as authoritarian overreach—despite all that, the entire world, with a few notable exceptions, was soon locking down its citizens with varying degrees of severity.

In the United States, lockdowns became equated with “following the science.” It was anything but. Yes, there were computer models suggesting lockdowns would be effective, but there were never any actual scientific studies supporting the strategy. It was a giant experiment, one that would bring devastating social and economic consequences.

The narrative lined up “scientific experts” against “deniers, fauxers, and herders” with the scientific experts united on the pro-lockdown side (the following has no indent but draws from an earlier post). But let’s consider. In Europe one country above all others followed the “ideal” of an expert-led pandemic response. A country where the public health authority was free from interference from politicians. A country where the public had tremendous trust in the state. A country where the public were committed to collective solidarity and public welfare. That country, of course, was Sweden. Yet in Sweden the highly regarded Public Health Agency, led by state epidemiologist Anders Tegnell, an expert in infectious diseases, opposed lockdowns, travel restrictions, and the general use of masks.

It’s important to understand that Tegnell wasn’t an outsider marching to his own drummer, anti-lockdown was probably the dominant expert opinion prior to COVID. In a 2006 review of pandemic policy, for example, four highly-regarded experts argued:

It is difficult to identify circumstances in the past half-century when large-scale quarantine has been effectively used in the control of any disease. The negative consequences of large-scale quarantine are so extreme (forced confinement of sick people with the well; complete restriction of movement of large populations; difficulty in getting critical supplies, medicines, and food to people inside the quarantine zone) that this mitigation measure should be eliminated from serious consideration.

Travel restrictions, such as closing airports and screening travelers at borders, have historically been ineffective.

….a policy calling for communitywide cancellation of public events seems inadvisable.

The authors included Thomas V. Inglesby, the Director of the Johns Hopkins Center for Health Security, one of the most highly respected centers for infectious diseases in the world, and D.A. Henderson, the legendary epidemiologist widely credited with eliminating smallpox from the planet.

Nocera and McLean also remind us of the insanity of the mask debate, especially in the later years of the pandemic.

But by the spring of 2022, the CDC had dropped its mask recommendations–except, incredibly, for children five and under, who again, were the least likely to be infected.

…Once again it was Brown University economist Emily Oster who pointed out how foolish this policy was…The headline was blunt: Masking Policy is Incredibly Irrational Right Now. In this article she noted that even as the CDC had dropped its indoor mask requirements for kids six and older, it continued to maintain the policy for younger children. “Some parents of young kids have been driven insane by this policy,” Oster wrote, “I sympathize–because the policy is completely insane…”

As usual, her critics jumped all over her. As usual, she was right.

Naturally, I don’t agree with everything in the Big Fail. Nocera and McLean, for example, are very negative on the role of private equity in hospitals and nursing homes. My view is that any theory of what is wrong with American health care is true because American health care is wrong in every possible way. Still, I don’t see private equity as a driving force. It’s easy to find examples where private equity owned nursing homes performed poorly but so did many other nursing homes. More systematic analyses find that PE owned nursing homes performed about the same, worse or better than other nursing homes. Personally, I’d bet on about the same overall. Covid in the Nursing Homes: The US Experience (open), my paper with Markus Bjoerkheim, shows that what mattered more than anything else was simply community spread (see also this paper for the ways in which I disagreed with the GBD approach). More generally, my paper with Robert Omberg, Is it possible to prepare for a pandemic? (open) finds that nations with universal health care, for example, didn’t have fewer excess deaths.

The bottom line is that vaccines worked and everything else was a sideshow. Had we approved the vaccines even 5 weeks earlier and delivered them to the nursing homes, we could have saved 14,000 lives and had we vaccinated nursing home residents just 10 weeks earlier, before the vaccine was approved, as Deborah Birx had proposed, we might have saved 40,000 lives. Nevertheless, Operation Warp Speed was the shining jewel of the pandemic. The lesson is that we should fund further vaccine R&D, create a library of prototype vaccines against potential pandemic threats, streamline our regulatory systems for rapid response, agree now on protocols for human challenge trials and keep warm rapid development systems so that we can produce vaccines not in 11 months but in 100 days.

The Big Fail does a great service in critiquing those who stifled debate and in demanding a full public accounting of what happened–an accounting that  has yet to take place.

Addendum 1: I have reviewed most of the big books on the pandemic including the National Covid Commission’s Lessons from the COVID WAR, Scott Gottlieb’s Uncontrolled Spread, Michael Lewis’s The Premonition, Andy Slavitt’s Preventable and Abutaleb and Paletta’s Nightmare Scenario.

Addendum 2: I also liked Nocera and McLean’s All the Devils are Here on the financial crisis. Sad to say that the titles could be swapped without loss of validity.

Same-sex marriage and priestly employment

We study the effect of legalization of same-sex marriage on coming out in the United States. We overcome data limitations by inferring coming out decisions through a revealed preference mechanism. We exploit data on enrollment in seminary studies for the Catholic priesthood, hypothesizing that Catholic priests’ vow of celibacy may lead gay men to self-select as a way to avoid a heterosexual lifestyle. Using a differences-in-differences design that exploits variation in the timing of legalization across states, we find that city-level enrollment in priestly studies fell by about 15% exclusively in states adopting the reform. The celibacy norm appears to be driving our results, since we find no effect on enrollment in deacon or lay ministry studies that do not require celibacy. We also find that coming out decisions, as inferred through enrollment in priestly studies, are primarily affected by the presence of gay communities and by prevailing social attitudes toward gays. We explain our findings with a stylized model of lifestyle choice.

That is from a new working paper by Avner Seror and Tohit Ticku.

Bona Vacantia

Bona vacantia are unowned assets–primarily the assets of people who die without a will and without heirs. In Britain, as in the United States, unowned assets generally pass to the government but Britain is full of ancient and strange traditions and one of them is that the estates of people resident in the “ancient county palatine of Lancashire” who die without a will or heirs go to the Duchy of Lancaster.

The Duchy of Lancaster is “a portfolio of lands, properties, and assets held in trust for the sovereign.” The Duchy dates back to 1265 but in 1461 Edward IV made it a distinct and private inheritance of the reigning monarch. As such the reigning monarch is not allowed to sell the Duchy but is due any returns. To be clear, this is all different from the Crown Estate which are a bunch of land and property nominally owned by the monarch and dedicated to funding the monarchy but yet not owned by the monarch privately. Having fun yet?

Periodically someone discovers the duchies and kicks up a fuss and there is a debate about making the revenues public and giving the monarch a stipend instead. The latest fuss was kicked up by the Guardian with an article that describes the whole thing in accurate but lurid terms:

The king is profiting from the deaths of thousands of people in the north-west of England whose assets are secretly being used to upgrade a commercial property empire managed by his hereditary estate, the Guardian can reveal.

Great stuff! It could only have been improved by adding “the king and his son” are profiting from the deaths of thousands of people because there is another Duchy in Cornwall which is owned by the eldest son of the reigning monarch, in this case Prince William, where the same rules apply. Prince William also has the rights to all the royal fish caught off the shores of the Duchy—namely to whales, porpoises, and sturgeon (obviously).

Despite having once read a book on the subject, I am obviously not an expert in the intricacies of British inheritance law. Who is? But I found the back story very amusing.

Carrying opioids in legal imports?

The U.S. opioid crisis is now driven by fentanyl, a powerful synthetic opioid that currently accounts for 90% of all opioid deaths. Fentanyl is smuggled from abroad, with little evidence on how this happens. We show that a substantial amount of fentanyl smuggling occurs via legal trade flows, with a positive relationship between state-level imports and drug overdoses that accounts for 15,000-20,000 deaths per year. This relationship is not explained by geographic differences in “deaths of despair,” general demand for opioids, or job losses from import competition. Our results suggest that fentanyl smuggling via imports is pervasive and a key determinant of opioid problems

That is from a new NBER working paper by Timothy J. Moore, William W. Olney, and Benjamin Hansen.  One core lesson seems to be that interdiction is largely a futile endeavor.

Canada Poaches Talent that Competes with American Workers

As I wrote earlier, Canada is poaching talent that should be American! A new working paper by Agostina Brinatti (on the job market) and Xing Guo studies this in detail. The paper first documents that Canada attracted more immigrants when America shut the door but then it traces the consequences through the growth in Canadian firms and on through international trade to American firms and workers. Computer scientists were especially affected by the US policy and the bottom line is that when the US started to deny many more H-1B visas computer scientists went to Canada, increasing the creation of Canadian businesses, jobs and exports. American computer scientists gained because they had less competition but they gained less than the direct effect because they faced more Canadian imports. Moreover, other lower-skilled Americans were harmed because they had fewer higher-skilled workers to work with.

By the end of 2018, there was a decrease of 140,000 H-1B approvals (relative to trend) and an unprecedented spike in H-1B denial rates. Denial rates increased from about 6% in 2016 to 16% in 2018….Immediately following this policy change, Canada experienced a surge in the number of skilled immigrant admissions, equivalent to 76,000 additional admissions in the period between 2018 and 2019. This inflow represents 3.5% of the stock of college-educated immigrants in Canada, or about 2% of all workers in the high-skilled service sector.

…Our event-study estimates imply that a 10 percentage point increase in H-1B denial rates increases Canadian applications by 30%. A back of-the-envelope calculation suggests that for every four forgone H-1B visas, there is an associated increase of one Canadian application.

[the inflow was especially large in computer science]….This inflow decreases the welfare of Canadian computer scientists because they are relatively close substitutes to the incoming immigrants. However, the inflow increases the welfare of workers in other occupations because Canadian sectors expand, especially high-skilled service sectors. For instance, in these sectors, the welfare of computer scientists decreases by 2.9% and that of lower-skilled workers increases by 0.9% approximately.

In the U.S., immigrant labor decreases by 1.6% and is particularly pronounced among computer scientists. As a result, we find that the drop in U.S. approval rates benefits primarily American computer scientists but tend to harm American workers employed in other occupations, especially if their sector contract. For instance, computer scientists in high-skilled service sectors experience a 0.7% welfare increase, while lower-skilled workers experience a 0.3% welfare decrease. These effects on American workers include both direct and indirect effects.

Addendum: Tyler reminds us that in the long-run, immigrants who get Canadian citizenship may immigrate to America! The basic point that Canada and the US are in a more or less free trade area is well taken and so we can thank Canada for making US immigration policy less harmful than it might otherwise be. Still, I’d rather see fewer artificial barriers distorting the allocation of talent.

The Indian Challenge to Blockchains: Digital Public Goods

In my post, Blockchains and the Opportunity of the Commons, I explored the potential of blockchains to create new commons:

Blockchains and tokenization are a way to incentivize the creation of a commons. A commons is an unowned place, platform, or protocol that helps people to meet, communicate and transact. Commons underlying modern life include TCP/IP, SMTP, HTTP, GPS and the English language. We don’t see these commons clearly because they are free, ubiquitous and, like air, taken for granted. What we do see are platforms like Airbnb, Uber and the NYSE and places to meet and communicate like OkCupid, Twitter, Facebook and YouTube. What blockchain and tokenization offer is the possibility of creating commons to replace all of these services and much more.

For the most part, the potential has not been realized. But the core idea of substituting a protocol for a firm has been taken in a different direction in India. Instead of blockchains, India has been experimenting with digital public goods. A digital public good is open source software with open data and open standards–available for use or even modification and adaption by anyone. The blockchain community, for example, has long aspired to develop a blockchain-based Uber, connecting drivers and riders without a corporate intermediary. India has achieved this through digital public goods instead.

Namma Yatri is an open-source, open-data Uber-like protocol with 100% of the commission flowing directly from rider to driver. Namma Yatri is built on the Beckn Protocol, a product of the Beckn Foundation which is backed by Infosys co-founder Nandan Nilekani (Tyler and I had the opportunity to talk with many people behind the project including Nandan on a recent trip to India). Namma Yatri has booked over 15 million trips in just one year of operation, mostly in one city, Bangalore. I expect it will expand rapidly.

Namma Yatri is only one example of a digital public good in the India Stack, a collection that includes identity (Aadhaar), payments (UPI) and digital data sharing (e.g. digital lockers). Since its launch in 2008, for example, India’s Aadhaar system has created a digital identity for over 1.2 billion people allowing them to open some 650 million bank accounts. This has enhanced financial inclusion and facilitated direct government payments of pensions and rations, reducing corruption. Likewise, the UPI system built modern payment rails which are then leveraged by banks and firms such as Google Pay and WhatsApp. The resulting payments system does some 10 billion transactions a month and is one of the fastest and lowest cost in the world.

Challenges remain. The development of digital public goods relies on funding from non-profits, governments, and private consortiums, raising questions about long-term sustainability. These goods need regular maintenance and updates, and some require backend support. Namma Yatri began as a completely free app for drivers and users but if there is a problem who do you call? To support the back-end office, and to pay for updated inputs (such as maps) the service has started to use a subscription fee. Nothing wrong with that but it’s a reminder that firms are not so easily dispensed with. Privacy is another concern. While blockchains offer privacy at the technology layer, privacy for digital public goods depend on legal and normative frameworks. For instance, India’s Aadhaar system is legally restricted from police use, a smart balance that needs to be maintained in changing times.

Despite these challenges, there is no denying that India has built digital public goods at scale in a way that demonstrates an alternative pathway for digital infrastructure and a challenge to blockchains.

England is underrated, a continuing series

The UK has said it will refrain from regulating the British artificial intelligence sector, even as the EU, US and China push forward with new measures.  The UK’s first minister for AI and intellectual property, Viscount Jonathan Camrose, said at a Financial Times conference on Thursday that there would be no UK law on AI “in the short term” because the government was concerned that heavy-handed regulation could curb industry growth.

Here is more from the FT.  And also from the FT: “UK approves Crispr gene editing therapy in global first.

A Tax Puzzle

Analyze the following four images. For each image, guess what is being taxed. Use only the information in the image.

FYI ChatGPT was not able to solve this question directly, although it was very good at analyzing what was distinctive or odd about each image and thus suggesting some possible answers.

Hat tip: Lionel Page, via Shruti Rajagopalan, includes answers and some variants.

Pharmaceutical Price Controls and the Marshmallow Test

The pharmaceutical market is in turmoil. On the one hand we have what looks like a golden age of medicine with millions of lives saved by COVID vaccines, a leap in mRNA technology, excellent new obesity and blood sugar drugs, breakthroughs in cancer treatments and more. On the other hand, the Inflation Reduction Act includes the most extensive price controls on pharmaceuticals we have ever seen in the United States.

In Washington-speak the “Inflation Reduction Act” requires HHS to “negotiate” drug prices for Medicare Part D and Part B to establish a maximum “fair” price. In reality there is no negotiation–firms who refuse to negotiate are hit with huge taxes. The “negotiation,” if you want to call it that, is “your money or your life” and fairness has little to do with it. The IRA also requires very costly inflation rebates, i.e. a price control/tax. In essence, the IRA is a taking; for drugs with a large Medicare market it is similar to abrogating patents to 9 years for small molecule drugs and 13 years for biologics. For the included drugs there will be a significant reduction in revenues. Moreover, we don’t yet know whether the plan will be extended to more and more drugs. There is significant uncertainty affecting the entire market. What will be situation in 10 years? Will the US be like Europe?

Our government is failing the marshmallow test, big time.

Reduced revenues mean less R&D. The value of extending life is very high and so in my view medical R&D is underprovided. Thus, price controls are taking us in the wrong direction.

The positive effects of price controls are immediate and easy to see: Prices are reduced.

The negative effects of price controls take time and are harder to see. Namely:

  • Fewer drugs for Medicare market.
  • Less research on post-approval indications and confirmatory trials.
  • Reduced incentive for generics to enter quickly.
  • Most importantly: Less R&D spending leading to fewer new drugs, a reduced pharmaceutical armory, lower life expectancy and higher morbidity. By one calculation, ~135 fewer new drugs through to 2039 (see also here and here and here and here).
  • Fewer new drugs means more spending on physicians and hospitals so in the long run price controls may not even save money! (Most prescriptions are for generics. Drugs fall greatly in price when they go generic but physicians and hospitals never go generic!)

Price controls are a classic example of political myopia. Price controls, like rent controls and deficit financing, have modest benefits now and big future costs and thus they are supported by politicians who want to be elected now. Unfortunately, current citizens don’t forecast the future well and future citizens don’t have a vote so it’s easy to create big future costs without engaging an opposition.

The emergence of groundbreaking pharmaceuticals and the increasing implementation of price controls are probably related trends. Everyone wants the great new pharmaceuticals without paying for them. We need to think more long-term–we have much more to gain from a continuing flow of new pharmaceuticals than from lower prices on the last generation. Don’t forget that children who fail the marshmallow test do less well later in life. Well, our government is failing the marshmallow test, big time.

Pharmaceutical price controls driven by myopia and the failure to delay gratification are greatly harming future patients.

Zoning Deregulation Increases Affordable Housing

Geetika Nagpal and Sahil Gandhi study zoning deregulation in Mumbai, India. As I pointed out in my video, Skyscrapers and Slums: What’s Driving Mumbai’s Housing Crisis?, Mumbai has very restrictive floor area ratio regulations (also called Floor Space Index, FSI, regulations, see the video for an explanation) which means taller buildings require more unused land. In 2018, however, FAR was liberalized for some streets:

Mumbai’s stringent FAR limits, which are much lower than those of comparable megacities, are often criticized for causing housing unaffordability (Bertaud, 2004). Despite the criticism, establishing a causal effect has been challenging because of a lack of changes in FAR regulations. The relaxation in 2018 linked a parcel’s FAR to the width of its bordering road, providing incremental FAR relaxation for parcels on roads wider than 12 meters. Parcels on narrower roads remained ineligible for the relaxation. Our reduced-form specification uses a DID design to compare developments built between 2014 and 2022 on wider roads with FAR relaxation with those on narrower roads that remained ineligible.

…The FAR relaxation results in a significant supply response, driven by less expensive, smaller housing units. Developers fully utilize the FAR relaxation, increasing the average
number of apartments in each treated multifamily development by 28% relative to the control.

…We develop a structural model of housing supply and demand that incorporates the provision of amenity floorspace and shows that average home buyer incomes are 3.18% lower post-relaxation.

GO YIMBY!

Geetika Nagpal is on the market from Brown.

Freer Indian reservations prosper more

Several disciplines in social sciences have shown that institutions that promote cooperation facilitate mutually beneficial exchanges and generate prosperity. Drawing on these insights, this paper develops a Reservation Economic Freedom Index that classifies institutions on a sample of Indian reservations concerning whether these intuitions will enhance the prosperity of Indians residing on these reservations. The development of this index is guided by the research of political scientists, economists, other social science disciplines, and research in law. When correlating this index with Indian incomes, the evidence shows a statistically significant positive correlation between reservations with prosperity-enhancing institutions and their economic prosperity.

That is from a recent article by my colleague Thomas Stratmann, recently published in Public Choice.  Here is the SSRN version.  Here is the index itself.  Here is a related Op-Ed.

The Latin American option

Estimates for the number of Palestinians, Syrians, and Lebanese in Brazil range from 10 to 12 million, with a reasonable degree of uncertainty.  Most of them came over before those were distinct countries, for one thing.  Other Latin American countries also have migrants from that region, Panama in particular, and as you may know Bukele of El Salvador is of Palestinian origin.

I don’t know of any formal statistics, but by repute those individuals have done quite well in Latin America.  And it is hard to argue they have increased rates of violence or political disorder.

I would gladly see Brazil and other Latin polities open their immigration to current Palestinians in the Middle East.

The major Latin economies have very low fertility rates, about 1.55 for Brazil.  They will need more people, and more young people, in any case.  Now seems like a good time to act.