Econ333 Notes Part 2

8/8/2019 Econ333 Notes Part 2

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March 11

Chapter 15: Role of Local Government

Chapter 16: Local Government Revenue (basically raised by property)

When we talk about local government, we have a few different governments inmind:

- Counties, towns, cities, school district, homeowners association (notmention by author)

Alternative Roles of government

a. Stabilization Policy

i. Fiscal Policy (about what the government spends its money on andhow it raises more)

ii. Monetary Policy (determined by the Fed, who controls interest rates)

1) inefficient to provide these at the local level for a number ofreasons

b. Income Redistribution or Distribution

i. Rich people move! So you want to distribute not just to help poor,

but to attract/keep rich people

c. Resource Allocation -- This is basically the everything else category

i. managing local monopolies

ii. internalizing externalities

iii. control local public goods

- Public Good:

* non-rival thing (when you use something, it doesnt

decrease the utility for someone else to go to the park not competitive)

* non-excludable (cant prevent me, Joe Taxpayer, fromusing the good)

* local


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* See Graph in the Book (15-1: optimum versusEquilibrium Local Public Good). Marginal Social Benefit =MB1 + MB2 + + MBN, which is influenced by marginalsocial cost line and tax per person per acre line.

BONUS: Median Votam Theorem

- we have some decision to make about public good provision

* we have people lined up in terms of needing differentlevels of that good

- In a series of paired votes, the median of the voterspreferences will be chosen

ARTICLE: How do local governments solve problems?

- Tiebout (Tiebort ?) Model (voting with your feet)

* municipal choice base on level of local public good provision

* no interjurisdictional spillovers

* no scale economies

* local (?) taxes

- Households sort with respect to demand for local public goods

preferences vs. budget constraints (income)

- Problem with identifying with this model empirically:

1) Even within jurisdiction, there is no homogeneity

2) this stuff is circularly defined: are public goods available because thatswhere rich people live, or do rich people live there because of all the publicgood

So you have cities making policies, but the neighborhood associationsprovide the heterogeneity needed to help these communities.

March 13

Review of last time provisional local goods


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Heterogenuity in demand for public good

- Tiebont (Tiebort?) Model

Lindahl Taxes

- SEE GRAPH- taxes that match marginal benefits

LOOK MORE AT PUBLIC PROVISIONS

Natural monopoly

i.e.: utilities (water, sewage)

usually involves some sort of high fixed cost

increasing returns to scale

- socially optimal output (MB = MC)

subsidy from the city (SEE GRAPH it is the shaded area)

Externalities

- polluters

- public education

voting

productivity spillovers

reduction increase

What makes public education different than taxing polluters?

- is it a matter of positive vs. negative reinforcement? Who knows. But

Public Provisions vs. Subsidies

charter schools (indirect provision)

vouchers

When would we want to use vouchers (means-tested vouchers normalize income)?


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-paternalism (some parents would under-provide even WITH the schoolvouchers

- perhaps efficiency is an issue as well

When would we want to use charter provision?

-

Externalities from Public Safety

- crime/police

* capturing externality crime lowers across all cities

*chasing externality (crime increases in other cities)

* Fire protection

Federalism

When is local provision efficient?

* diversity in demand for public goods is large

* externalities are relatively smaller geographic area

- inter-jurisdictional free-riding

* scale economies are relatively small (so doesnt make sense of local govt.to provide defense)

-moderate scale economies in water and sewer service

- other public goods: scale economies disappear at population =100,000

GRAPH: Think of a U-shaped average cost curve

Rationale for metropolitan governments

* inter-jurisdictional externalities are large

- traffic transportation

- pollution

- water

Examples (in book) : Portland, Minneapolis


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Revenue (In order to pay for all these public goods, local governments need it)

* 36% come from taxes, 41% come from inter-governmental grants (any level,most from state govts and school districts)

- most municipalities and townships rely heavily on taxes (schooldistricts rely heavily on grants)

- Property taxes: 73% of total taxes in towns, 41% for municipalities

- Sales tax: 17% of total in towns, 30% for municipalities

* Who bears cost of property tax (incidence of the tax: different because you cantmove the land)?

- variation in tax rates: 0.37% 4% (examples of effective property tax ratesin the book)

- Property Tax Calculation

* annual tax on the market value of property

* value = structure value + land value

100,000 = 80,000 + 20,000

Tax of 1% 1000 800 + 200

- Taxation Model

* all land used for rental housing (i.e. mobile homes)

* housing firm: perfectly competitive

- inputs: capital (mobile houses) and land

- mobile homes rented from capital owners

- land rental from absentee landlords

- FIXED lot size (so they cant economize on lot size to pay lesstax)

* example

Conditions

i. Pre-Tax housing rent = 5,000 4,000 (structure) + 1,000(landlords)

ii. Property tax is paid in legal terms by housing firm


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800 (structure) + 200 (land)

****Note: this model is meant to explan the effect on

1. landlords

2. owners of housing firms3. renters

4. capital owners

Land portion: 900 lots, @1,000 rent, landlords bear at least the landportion of the tax

GRAPH: y axis is $$$, x axis is lots

- there is a straight vertical line at 900 (bc of 900 lots max)

- there are two demand curves. Demand curve SHIFTS TO THELEFT (down the 900 line) when a property tax is increased

Structure portion

- partial equilibrium approach (doesnt include spillover effects, etc. )

*one city

- tax of $800

* increases MC

*GRAPH:

- Housing firm doesnt pay any of tax

* normal consequences of tax is preferably competitive market

* How to local governments respond to inter-governmental grants

- at different level of government, there are these grants for differentpurposes (i.e. schools should buy more computers, etc. )

March 25

Review example


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Value of property = land + structure = 20,000 + 80, 000 = 100,000

Tax of 1% = 1,000 = 200 + 800

Example 2: the City of Taxton

- mobile homes

- p.f. housing firm

- rent mobile homes from capital owners

- rent land from landowners

- collects rent

- housing rent = 5, 000 = (4, 000 structure) + (1,000 land)

- tax 800 (structure) + 200 (land)

- 900 lots (equal cost of $1,000 landowner pays land portion of tax)

Structure portion of tax GRAPH (control rent is x axis, and y is number of mobilehomes)

* MC = Supply w/out tax ($4,000) horizontal line

* Demand curve is downward sloping

* S = MC + tax horizontal line above MC

* rent equilibrium is where supply and demand intersect

General equilibrium effects

- partial equilibrium: 200 mobile houses leaving Taxton

- Where do mobile homes go?

* Housing activity must be distributed such that firms and consumersare indifferent between locations

* Introduce second city: Untaxton

- Fix total supply of mobile homes (housing capital)

- mobile houses more at zero costs between cities


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* see book or article

Result:

- Capital owners in region share property tac burden* return to capital decreases by $410

* Each Capital unit bears half the tax

- What about Consumers?

* Housing Rent = return to capital + structure tax + land rent

Taxton Housing Rent = 5000 = 4,000 + 0 + 1,000

Before Change in Land Rent = 3600 + 800 + 1,000

After Change in Land Rent = 3600 + 800 + 600

Untax (initial, before change in land rent)

Total Rent = return to capital + structure tax + land rent

UnTax = 5,000 = 4,000 + 0 + 1,000

Before Change in Land Rent = 3600 + 0 + 1,000

After Change in Land Rent = 3600 + 0 + 1400

- zero sum game w/land owners

- when consumers are mobile, they escape the structure portion of property tax

- total supply of capital variable

* some mobile homes disappear lower fall in return to capital

* some of property tax shifted to consumers

- housing costs: consumers not perfectly mobile

* extreme case: consumers bear some of the land portion of tax

* in between extremes: booth housing rents and land rents will change


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- increase in # of cities in region

* suppose we have 10 cities

effects in of one citys increase in property

spend over 5 times the capital

effect is 1/5 as large

* smaller burden on capital owners

- Rental property owners and home owners

- property owners in taxed city lose

- Untaxed city: lose as capital owners

- as land owner see some gain from increased land rent

- Who actually pays Tax?

* most tax come by landowners

* if consumers are not mobile, they bear some of the costs

BUT:

- This model ignores variation in public services

* Tiebout Model (voting with your feet)

* distribute households based on preference for local public goods

- tax liability determined by consumption of local public goods, not property value

people get what they pay for

- imperfect sorting across metro areas

- large central city single municipality that secures diverse population

Whats happening today in New Orleans and other places TODAY (political/policydecisions)

- limits on property taxes

* 2/3 of states limit tax rate

* most limits between 10 and 20 units (1% -2%)

- Growth rate of rates


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* states limit growth rate

- most in range of 4% - 6%

- some states pay this to inflation

- local voter overrides for limitsGreat Depression

- spike in income share property tax

- citizens demonstrated lower local public good provisions

Modern Tax Revolt in 1998 (prop 13)

1960-1975: relatively high property tax burden

1978 1995: New limits dropped property tax

* decreased property tax revenue, but no expected decline in publicservices

Intergovernmental grants

- provide 2/3 of local public revenue, go to education

- public welfare

, housing, highways, hospitals

Types of Grants

- categorical or conditional grants: spent on specific programs

- lump-sum grant: fixed amount

- matching grant: grant depends on local expenditures

[NOTE ONE BULLET IS MISSING]

Matching grants have a longer stimulative effect

- substitution effect with matching grant, youre increasing the price of . It

gets rid of substitution effect, so that theres less of an incentive to substitute awayfrom that intended category.,

- decrease in opportunity cost causes substitution of special programs fromother goods.

April 1


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No class on Thursday

Next Tuesday: Urban Crime

Today: Inman and Haughvout

The question: When should suburbs help finance their central citys public services?

1) To sustain the Central citys economy

fiscally weak central city (firm will leave the metro area, whichundermines economy of central city AND, as a result, suburbs (example: Detroit trying to do everything suburb drive, but central city suffers resulting in spillovers inthe suburbs)

* high taxes

* low services

2) Spillovers from local public goods

* transportation networks

* education, police, fire dept.

3) Central City Poverty some redistribution

* privilege doesnt state level

4) Economic Spillovers

* central city public services

- polite/fire/electricity/port (air or seas)

5) Consumer externalities

5) Agglomeration economies

*arts, finance/business services, science and tech, healthcare,

Fiscal performance (according to Inman and H)


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- more redistributive policies

- central city government workers more likely to unionize

- large cities more decentralized budgetary structure

inefficiently large projects in individual districts

- Home values, population, and income measures of economy in suburbsand central city

- different date (1980 1990 )

* higher central city poverty lower economic growth for both areas

* Higher central city TAXES

* higher unionization

* weak governance

* proxies for agglomeration

Structured model

suburban residents gains $2-$4/ $1 of intergovernmental transfer

Cather, Glaeser, and Vigdon

- Rise and Declines of the American Ghetto

- How was ghetto formed and how did it develop in the 20th century?

1) segregation indices (SEE GRAH: rise and decline of ghetto p 405)

* index of dissimilarity

- measures the proportion of black population would have torelocate districts to evenly distribute across the city

* Index of isolation

inverse of the probability of running into someone from other groupon the street

2) Theories of Segregation


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- partially explained by migration of blacks (to the South)

(still doesnt explain an overall decline)

- Conclusion: mostly explained by increases in non-black population incities

- Hispanic immigrations

- Gentrification

Effect of anti-discrimination law, especially for lending and realestate practices

- segregation is persistant

* Individual cities

- Cleveland: port of entry

- Altanta: collective action

- Sacremento: integration

- Los Angeles

April 8: Ch 12.crime and economics

Crime:

* large expenditures

* geographic variation

* Major disamenity of urban live

Crime Rate

- victimization for violent crime decreases w/income

- highest in central city, lowest in rural areas (in the middle in suburbs)

Costs of crime

- victims ($91 billion): lost property, medical, opportunity cost of lost time, value,and lives lost

- costs of preventing crime ($39 billion): locks, etc.


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- cost of criminal justice system ($74 billion)

- Opportunity Cost of people in jail ($46 billion

TOTAL: $250 billion is the cost of crime

Rational Criminal

The economics of double parking

suppose: youre going to concert ($44 for tickets). You can:

- will youdouble park, with fine of $36 (50% probability of getting it)?

* depends on willingness to accept risk (and people are usuallyrisk averse)

* people are conditioned to have greater aversion to antisocialactivites

Expected utility framework

-objective: maximize utility

uncertainty: maximizing expected utility

- utility function

w/risk aversion

- U = square root of income (GRAPH is a rounded curve sloping down)

Preventing Crime

- higher probability of punishment

- longer prison terms, more severe punishments

- less loot

- increase legitimate opportunities (for jobs)

- create moral costs

Legal Opportunities

- increase in wage rise in opportunity cost of crime

- increased MC means reduced crime


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- strong economy

* whos beneiftting

* increased employment of low-skill workers

* LFP of men- demographic (fewer young people to commit crime)

- police technique

* more police

* community policy

- Increase in prison population

* incapacitation effect

* deterrence?

- decrease in crack/cocaine sales

How much crime? An optimal level of crime (> 0) is when MC of criminal = MC ofvictim

Role of Prisons

- overall elasticity

- marginal cost of incapacitation = 36 billion

Rehabilitation

- provides criminals with skills

- 2/3 of prisoners participate

- BUT: 2/3 of prisoners relased are rearrested within 3 years

Nille reading

- overall drop in crime

* change in composition (blacks more likely to be arrested, increased incentral city crime, rise in youth crime, rise in drug-related crime)


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- Policy

-incapacitation? Stuff like after-school programs work by distracted kids

- early programs: Head State

April 10 social experiments:

Turney et. al: MTO in Baltimore

Vigdor: Gentrification

- What if we moved poor people out of the central city?

- What economic problems are driven by geography?

* really low human capital

* transportation and special mismatch (jobs are decentralizing)

- THERE ARE FEWER JOBS IN THE CENTRAL CITY THESE DAYS

COMPARED TO 100 Yrs AGO

- need a car to work there

(note: Its not clear that this is geographic (we dont know what will happen if wejust move people)

Social Isolation

promotes work

job information and referrels

community resources

Moving to opportunity study

- Run HUD, launched 1994 1997 and ongoing

Mobility on economic self-sufficiency


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- Baltimore, Chicago, Boston, LA and NY

Three Treatments

1) Experimental Group: received housing voucher that could only be used incensus tracks with poverty rate less than 10%

2) Section 8 (placebo): received housing voucher to be used anywhere

3) Control: received no voucher

Why not just compare experimental to everyone else? Because the people who aresigning up for the study are clearly motivated to participate (and move).

Overall

- no significant effects of exp. Vouchers on income and earnings if adult is head ofhousehold

- the effect on economic self-sufficiency (SR)

Baltimore

Unique: large increases in votes

- lower average earnings

More on the Baltimore Sample

- 99% of households are black

- 97% are female-headed

- higher rates of unemployment (74%)

- low educational attainment (43% have no Hs diploma)

- most received government benefit (80% had cash welfare)

- all living in public housing

Barriers to employment

Human Capital

- low levels


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- little labor market experience

- mental and physical health probems

Social Networks

- work in retail or healthcare- neighbors didnt work in there fields

couldnt provide referrels

Data

- 636 individuals (124 in interior sample)

Quantitative Method

- Estimate intent-to-treat

Compliers

Non-compliers

- all participants received hiring counselors

Qualitative Methods

- No significant rise in earnings or employment

- Rise in probability of job w/health insurance and job lastin more than oneyear

interviews (stratified, compliers)

Qualitative RESULTS

- experimental had to negotiate new environments

- competing with higher skill neighbors

- job search took a lot of time after moving

- Female-headed households

- childcare a problem (lost extended family support)

- children had health problems

- Experimentals worked in health care


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OTHER RESULTS

- many experimental tried to increase human capital

- schooling or credential programs

- exp. Had difficulty initiative social networks- proud to live in these neighborhoods where most people worked

Vigdor : Does Gentrification Harm the Poor

- Repopulation of Central City by affluent

- cheap housing

- rise in demand for worker communities

- central city crime

- Gentrification: process of affluent money to poor neighborhoods and increasingproperty vouchers

- CRITICISM: poor dont benefit because:

* the poor are renters so they are hurt by increase in property value, nothelped

*the poor have nowhere else to go?

* some elements of class warfare

RQ: What effect on poor?

- increase in tax base that may increase the quality of local public goods

- rise in employment opportunities due to rise in demand for services andgoods by rich

there ease the spatial mismatch effects

- might decrease concentration of poverty and its associated ills

Why is this occurring?

-Change in preferences of the rich (why dont they want to live in the innercity/)


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* bad public goods

-later childbearing: lowers demand of child-specific public goods

- two-earner households (less commuting!)

Overview

- No evidence that gentrification increases the probability that low-Socioeconomicstatus households leave housing unit

- Poor households are more likely to exit poverty than relocate

* increase in housing costs w/out enough of an increase in household income

if they move

- What he finds: little change in self-assessed housing unit quality, public servicequality, or neighborhood quality

- evidence of integration

Tuesdays Reading: New Orleans Readings

- New Orleans Index (published by Brookings Institution)

April 17

Problems with New Orleans

infrastructural stuff will follow repopulation, not the other way around.

Flood Protection Communal Action (public goods like levees and pumps)

individual action (construction techniques)

10% of city blocks with 20k households


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- still have less than 15% of pre-Katrina population and neutral elevations of 6feet below see level

Neighborhood Stabilization Diagram

- build momentum in neighborhoods with critical mass of repopulation

Strategies

- In less populated neighborhoods, Cluster New Orleans easier to provideservices if you cluster unpopulated neighborhoods with people and businesses inorder to make it easier to provide mass services (we should try to get new peopleentering city into places that are already populated)

Policies

- enforce based flood elevation guidelines

- individual flood-proofing

* ending slab construction

* Elevated New Orleans

1) Road Home

2) Insurance Companies

Blighted Properties

- strengthen code enforcement

- streamline sale at below market rates

Infrastructure and Utilities

- emergency

- only fix infrastructure in repopulated area

- upgrade (1/3 of system > 100 years old

Transportation

- most problems existed before storm


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- public transit rolling stock damaged (note: why not subsidize cars? Or getthis policy done quicker? Bike paths? Get more skilled workers? RegionalCommuter Rail [which makes more sense]?)

NOTE: many of these projects (like regional transport or mass transportin low-populated areas) are NOT Katrina related!! Why not car subsidies,

Housing

- affordable housing

CONGRESS: PROPOSALS TO REINVIGORATE FHA

- Filling the gaps between reconstruction programs and actual cost of fixinghousing

- 70% of housing stock damaged, 40% severely damaged or destroyed

WHAT ABOUT REINVIGERATE FHA AND INSURANCE PROGRAMS?

Variation in Rebuilding

- Delays in Road Home funding

- in the interim, for affordable nations

- Uncertainty about whether neighbors will return

- Concerns about future flood risk

Problem

* housing decision are individual decisions

* how does the government coordinate this?

Funding

* insurance money, then FEMA, SBA, banks, individual savings

* 2nd

half of 2006 Road Home started

1) Most people found owner-occupied housing

2) most people were actual renters

- higher concentration than in suburbs

- citys complaining that people are only renting, notbuying


25/31

Strategies

- change criteria for Road Home

* small rental repairs

- Provide assistance for home ownership plans* grants for closing costs and favorable interest rates

* grants for blighted homes

1) even if housing wasnt blighted because of Katrina

* inclusionary housing

- relaxing zoning laws

- renter relocation assistance

- characteristics of New Orleans

- duplexes and triplexes

April 22, 2008

WHAT IS IN THE REPORT

Core sectors: Port, tourism, energy, healthcare

Base of Employment

- Agglomeration economics

- Economic development

New business growth

- Healthcare biomedical investment university investment, Medicaidbrings income from low-income patients (Charity Hospital depended on this)

- Entertainment district


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Small Business Growth

- Downtown revitalization

- CorridorsInfrastructure

- Airport

- Underutilized commercial and public (i.e. abandoned) buildings

* tear them down and prevent negative spillovers?

- Workforce training

WHAT IS NOT IN THE REPORT

- zoning

* multi-family homing (apartment buildings) needs to be allowed andmore prevalent

* restrictions on commercial activity

- permitting (lack of transparency needed bribes for Oliver Thomas likeFinlays brother)

* liquor licenses are tough

* building permits

* the second you cross out of city limits, there are tons of businesses

- Taxes (property taxes)

- corruption

OTHER STRATEGIES IN THE REPORT

Healthcare

- biased toward large research hospitals

clinics


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- strategy: The want to:

1) restore neighborhood primary care

- neighborhood clinics

2) regional medical center brings people from around Louisiana- develops medical district (VA is building a hospital in downtown

NOLA)

BUT: Its not clear how much a city this size can support this. Can they keepthem going and continue to get Federal funding for them to operate?

Education

- $800 million (included deferred maintenance)

* FEMA cant fix anything that was broken

* $55 million from FEMA

- Funding for schools

* usually a function of the number of students

* students writing on facilities

- Crucial area

* families returning

* labor supply

- Recovery School District

* New, started in 2005

* mix of conventional and charter schools

- more than 50% are now charter schools

increases choices available to families, students,

economies of scale

- Community Colleges

* workforce development (medium or low-skill training)

Community Centers


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- recreation

- libraries

- adult education

- community policingStructure of Schools

- small school incubators test best practices

- head start

April 24

Public Safety

- more disposed population

- advanced buildings

- smaller police force

Policies

- Neighborhood policing

* more subcenters

* more interaction

* police substitution in school-based community centers

- Resource Effectiveness

* technology

- force multipliers

* surveillance cameras

- technological leapfrogging

- Prosecutions

* crime labs

* HC in Defense Attorneys


29/31

So do you invest in crime-stopping technology, or better court systems?Probably technology

- Certainty vs. Security

- Coordinatre with neighboring Parishes

- Parks, recreation and culture

* cost effectiveness

GENERAL COMMENTS

- Feasibility

* Can we prioritize some of these things?

* Total funding requirements

- Re-population (reaching critical mass)

* education (HH w/kids)

* uncertainty about property investment -- > invest in infrastructure

* need levee protection

* insurance

* jobs

* crime prevention (for middle- and upper-class)

* transportation (an issue, but not a huge one)

- What requires subsidies?

* crime

* jobs

- subsidize property that leads to high-skilled jobs

- spillovers (especially for high-skilled jobs)

* PILOT

- property tax abatement program (requires measurement ofexpectation of these agglomeration economics so if guy buys parkinglot to turn into Office, city should offer the developer some break ontaxes for like 20 years maybe S2 mill)


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CITY REVENUES

- What happens after federal subsidies end* reforming city government

- controlling corruption

- turnover in political offices usually means less chance of corruption

- inspector general office created

- Continued Federal Money

* levees

* VA, Medicare/Medicaid,

- Rationalization of property tax

* readjustment means lower tax rate for non-rich s

* lowered tax burden on poor people

- Intergovernmental Assistance

Duany NOLA like the Caribbean

- cheap housing

- very old housing stock in the city

* problem with renovating: coding makes it prohibitively expensive

Solution: much newer building standards

* most people couldnt afford to rebuild

Solution: grants with little involvement in specific designs

Solution

- standardized sets of housing designs

- houses that can be built in small stages

WAIT: Heres a point against Duany -- Isnt there negative externalities fromconstruction and small spaces at the same time?


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Still, the housing stock needs to be replenished

Econ333 Notes Part 2

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