Why is Manhattan so expensive?
is the title of a new working paper by Ed Glaeser, Joseph Gyourko, and Raven Saks. The paper is a part of an ongoing research project, in which Glaeser attempts to document the ways in which regulatory restrictions inflate housing prices throughout the US's. Not surprisingly, then, Glaeser et al conclude that the high cost of housing in Manhattan is largely the result of explicit and implicit regulation. More precisely, they conclude that roughly half the cost per square foot of an average Manhattan apartment can traced back to various sorts of implicit "regulatory taxes".
The general thrust of Glaeser et al's argument here is not terribly surprising, although I suspect his study overstates the degree to which Manhattan housing prices are due to regulatory factors. But what interests me here is the further conclusion Glaeser et al draw from these claims: namely, that at least from a social welfare perspective, the level of regulation that Manhattan imposes upon builders is unjustifiable.
Implicit in Glaeser et al's discussion is the idea that the appropriate level of regulation within a market is determined by the various externalities imposed upon current residents of the market by new construction there. So, for example, according to Glaeser et al, if the externalities related to a unit of new construction with a market M impose a net loss of X dollars worth of welfare on M's current residents, it is reasonable to impose implicit and explicit regulatory taxes on new construction within M up to X dollars per unit.
Now there are any number of questions one might raise about this framework for evaluating the appropriate level of regulation within a given market. For, of course, it is often quite misleading to think of even the economic impacts and purposes of regulation solely in terms of an implicit "regulatory tax". But even allowing this point, the question Glaeser et al are asking here seems an interesting one. For if it really is the case that the level of regulatory "taxation" in Manhattan far exceeds the external social costs associated with new construction there, this fact surely will have some significance for the evaluation of such regulation.
The question, then, is whether Glaeser et al have correctly identified the various factors that generate externalities associated with new construction in an area like Manhattan. Glaeser et al's discussion focuses on three potential sources of external social costs: (i) the effect new construction can have on existing views, (ii) the congestion caused by new construction, and (iii) the effects new construction might have on a municipality's fiscal bottom-line. Of these three, Glaeser et al conclude that only the first is likely to the source of considerable externalities in the case of new construction within Manhattan. For, they argue, the effects of new construction on congestion are likely to be minimal, and the effects of it on the city's bottom-line will on balance probably be positive.
But it is natural to wonder whether Glaeser et al have really captured all of the relevant externalities here. After all, when one hears people describe the reasons why they support restrictive zoning regulations in their neighborhood, the primary reason stated is almost always that such regulation is required in order to preserve the current "character" of the neighborhood. And in so far as Glaeser et al's discussion touches on this issue, it does so solely via the question of whether new construction will effect existing views, which hardly seems to capture all the concerns that motivate support for zoning within the actual world.
The question, though, is whether this, admittedly common, vague sense that new construction would negatively impact upon the character of a given neighborhood in other ways actually corresponds to significant external social costs that come with new construction. In some cases, it seems relatively easy to argue that it does. Take, for example, neighborhoods - like the Lower East Side or East Williamsburg - in which new construction threatens to dramatically alter the current ethnic or economic make-up of a neighborhood. In such cases, it seems clear that current residents may have a very real interest in maintaining the current make-up of their neighborhood. And so, at least in cases which involve these sorts of transformations, there may be many externalities associated with new construction that Glaeser et al's discussion simply ignores.
In a related vein, one might point to the ways in which new construction might affect the architectural or aesthetic character of a neighborhood, over and above any effects such construction might have on existing views. So for example, a set of new 20-story buildings of the sort Glaeser et al discuss, even if they do not negatively affect my view, may have a dramatic impact on what it is like psychologically to live in my neighborhood. In more wealthy neighborhoods, it is often - I take it - considerations of this sort that are the source of much of the opposition to new construction. And while it is easy to dismiss these sorts of considerations as insignificant, they are plainly not regarded as such by many Manhattan residents. Which raises the question of why Glaeser et al once again ignore them.
Once again, none of this is meant to suggest that the question Glaeser et al raise are uninteresting. For, quite on contrary, the task of evaluating the social costs associated with new urban construction seems to me a fascinating one. But it is clear that Glaeser et al have not done nearly enough to give us anything like a complete picture of what these costs may or may not involve.
The general thrust of Glaeser et al's argument here is not terribly surprising, although I suspect his study overstates the degree to which Manhattan housing prices are due to regulatory factors. But what interests me here is the further conclusion Glaeser et al draw from these claims: namely, that at least from a social welfare perspective, the level of regulation that Manhattan imposes upon builders is unjustifiable.
Implicit in Glaeser et al's discussion is the idea that the appropriate level of regulation within a market is determined by the various externalities imposed upon current residents of the market by new construction there. So, for example, according to Glaeser et al, if the externalities related to a unit of new construction with a market M impose a net loss of X dollars worth of welfare on M's current residents, it is reasonable to impose implicit and explicit regulatory taxes on new construction within M up to X dollars per unit.
Now there are any number of questions one might raise about this framework for evaluating the appropriate level of regulation within a given market. For, of course, it is often quite misleading to think of even the economic impacts and purposes of regulation solely in terms of an implicit "regulatory tax". But even allowing this point, the question Glaeser et al are asking here seems an interesting one. For if it really is the case that the level of regulatory "taxation" in Manhattan far exceeds the external social costs associated with new construction there, this fact surely will have some significance for the evaluation of such regulation.
The question, then, is whether Glaeser et al have correctly identified the various factors that generate externalities associated with new construction in an area like Manhattan. Glaeser et al's discussion focuses on three potential sources of external social costs: (i) the effect new construction can have on existing views, (ii) the congestion caused by new construction, and (iii) the effects new construction might have on a municipality's fiscal bottom-line. Of these three, Glaeser et al conclude that only the first is likely to the source of considerable externalities in the case of new construction within Manhattan. For, they argue, the effects of new construction on congestion are likely to be minimal, and the effects of it on the city's bottom-line will on balance probably be positive.
But it is natural to wonder whether Glaeser et al have really captured all of the relevant externalities here. After all, when one hears people describe the reasons why they support restrictive zoning regulations in their neighborhood, the primary reason stated is almost always that such regulation is required in order to preserve the current "character" of the neighborhood. And in so far as Glaeser et al's discussion touches on this issue, it does so solely via the question of whether new construction will effect existing views, which hardly seems to capture all the concerns that motivate support for zoning within the actual world.
The question, though, is whether this, admittedly common, vague sense that new construction would negatively impact upon the character of a given neighborhood in other ways actually corresponds to significant external social costs that come with new construction. In some cases, it seems relatively easy to argue that it does. Take, for example, neighborhoods - like the Lower East Side or East Williamsburg - in which new construction threatens to dramatically alter the current ethnic or economic make-up of a neighborhood. In such cases, it seems clear that current residents may have a very real interest in maintaining the current make-up of their neighborhood. And so, at least in cases which involve these sorts of transformations, there may be many externalities associated with new construction that Glaeser et al's discussion simply ignores.
In a related vein, one might point to the ways in which new construction might affect the architectural or aesthetic character of a neighborhood, over and above any effects such construction might have on existing views. So for example, a set of new 20-story buildings of the sort Glaeser et al discuss, even if they do not negatively affect my view, may have a dramatic impact on what it is like psychologically to live in my neighborhood. In more wealthy neighborhoods, it is often - I take it - considerations of this sort that are the source of much of the opposition to new construction. And while it is easy to dismiss these sorts of considerations as insignificant, they are plainly not regarded as such by many Manhattan residents. Which raises the question of why Glaeser et al once again ignore them.
Once again, none of this is meant to suggest that the question Glaeser et al raise are uninteresting. For, quite on contrary, the task of evaluating the social costs associated with new urban construction seems to me a fascinating one. But it is clear that Glaeser et al have not done nearly enough to give us anything like a complete picture of what these costs may or may not involve.
posted by kds at 6:36 AM
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