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Is federalism unfair to urbanites?
Ed Glaeser writes:
Poor people come to cities because urban areas offer economic opportunity, better social services, and the chance to get by without an automobile. Yet the sheer numbers of urban poor make it more costly to provide basic city services, like education and safety, and those costs are borne by the city's more prosperous residents. Taking care of America's poor should be the responsibility of all Americans. When we ask urban residents to pick up the tab for educating the urban poor, then we are imposing an unfair tax on those residents. That tax artificially restricts the growth of our dynamic cities.
It is fair to say that urban dwellers receive higher positive and negative externalities from their neighbors, relative to suburbanites. I'm not sure why the bundle as a whole is unfair, least of all to the wealthier city residents (or why there is so much talk of unfairness to the wealthy in the first place), or for that matter why it is a significant marginal distortion. The net value of the externalities is surely positive for people who live in cities and pay the higher rents. All taxes involve some distortions but it seems like what is essentially a tax on city land does not involve a higher distortion than the average tax, if anything the contrary. What's really the case for lower property taxes and higher federal income taxes, combined with a move against federalism?
If there is any unfairness, maybe it is toward the people can't afford to live in desirable cities but would like to. If we lower the property tax burden in cities, rents will rise and this problem will become worse rather than better. The more general point is that urban land owners, not all residents, benefit disproportionately from good policy changes. Urban improvements have unfair distributional effects by the very nature of city land.
If there is a case for federalizing urban education and welfare, surely it refers to what will help the poor (if indeed that would), not what will help the urban non-poor. And are city residents even a meaningful class of people to which the concept of fairness applies in a significant way? Glaeser is very very smart but frankly I found most of this piece puzzling; perhaps I have misunderstood him.
Posted by Tyler Cowen on March 2, 2008 at 01:43 PM in Economics | Permalink
Comments
"Taking care of America's poor should be the responsibility of all Americans."
More from the disease known as socialism. Does this guy even realize the garbage that he spews? This guy deep down must be craving an authoritarian One World Government. A need for massive wealth redistribution from OECD countries to Africa, developing Asia, etc.
"Taking care of the Earth's poor should be the responsibility of all Earth dwellers."
Posted by: Jay at Mar 2, 2008 3:01:41 PM
I think you did misunderstand him. As I read the piece, it's about the social loss that comes from distorting people's choice of residence by taxing urbanites just because they happen to live around poor people -- and not taxing suburbanites even though they are the ones producing a negative externality (carbon emissions and, apparently, forest fires). As you observe, many people clearly find the whole bundle of urban life to be worth the high rents and taxes they pay to obtain it. But if urban residence generates a positive externality (my human capital appreciates because I learn from you if you live nearby) then we should be loath to provide the exactly incorrect incentives by forcing urbanites to subsidize poor people who just happen to live nearby.
Also, unless I'm missing something, I don't understand your argument that lowering urban property taxes will exacerbate the issue of high rents. At most, property values (and hence rents) could increase to the point where they offset the lower property taxes, but I can't think of any reason they would increase by more than the fall in the taxes. In fact, if we think of property taxes as one input into urban life, when its cost falls wouldn't we expect the total price of the final good (the urban apartment, including taxes) to fall also, even if not by as much as the input fell?
Posted by: Ammianus at Mar 2, 2008 3:09:23 PM
As long as we don't invade Ubania, it's OK.
Posted by: Kieran at Mar 2, 2008 3:25:33 PM
Glaeser's claim is that, on net, suburbanites are imposing negative externalities on urbanites. That claim does extend to "the bundle as a whole." For example, he suggests that urbanites get stuck paying taxes to educate and provide social services to poor people, which suburbanites largely do not pay. He also thinks that we effectively subsidize automobile transportation by undercharging for the use of roads and not properly taxing suburbanites for their negative environmental externalities (e.g., emitting much more pollution that urbanites do).
This seems to be in part a distributional claim. In particular, he says that, as a matter of fairness, all wealthy people in society should be taxed to provide education and social services to the poor. But there is an efficiency element in there as well. If the tax burden of caring for the poor were shared equitably and suburbanites were taxed appropriately for the harm they cause to the environment, then some people who have chosen, at the margin, to live in suburbs would move to cities. (At present, these are people who were lured to the suburbs due to subsidies the government is providing for their lifestyle there.) For instance, some people presumably do not actually value their use of an automobile as much as the environmental harm that it causes. At present, however, they do not have to pay for that harm so they ignore in making their decisions about where to live. If they did have to pay for it, Glaeser says, those folks would move back to cities.
It is probably true that some methods of adjusting property taxes would result in a one-time windfall for landowners. However, the changes that Glaeser refers to presumably would result in efficiency gains as well over the long term. It is difficult to get rid of the land, but property taxes apply to improvements on the land as well, and thus affect decisions at the margin about whether to build improvement on that land. That is, Glaeser presumably thinks that people would build more housing on city land, at the margin, if that construction were going to be taxed at lower rates.
I am confused by your claim that lower property taxes would result in higher rents in cities. At worst, the lower taxes will be completely capitalized into the cost of land and would result in a one-time windfall to landowners, with no reduction in rental prices. However, it seems more likely that, over the long term, lower property tax rates would in effect reduce the cost of constructing and supplying rental housing and would therefore lower rental rates. I can't imagine that tenants would care how much their landlord is paying in property taxes; the demand curve in the rental market should not change in response to lower property taxes. (If anything, the demand curve would decline slightly, if the lower taxes made purchasing a home a more attractive substitute for renting.)
There was also discussion in your post to the effect that incumbent urbanites aren't being treated unfairly by our taxation/transportation/environmental policies, because they wouldn't be living in cities if they were. But one can imagine many classes of people for whom living in a dense area has an enormous surplus relative to living in an suburban area. Young single people in search of a partner, for instance, are willing to pay a lot for the greater dating opportunities available in dense areas relative to less dense areas. For some of these people, the surplus is so great that, even if they are randomly taxed twice as much as their suburban counterparts, they would still choose to live in cities. They would be getting less out of it, but not enough to make them move to the suburbs. For such people, society suffers no efficiency loss because the allocation of resources is not changed by the tax (although the randomly higher taxes might nevertheless be "unfair" to such people). From the economist's perspective, more worrisome are the people who, in response to higher urban taxes, up and move to the suburbs to save money. In such cases, society as a whole is worse off because our tax policies have caused misallocation of resources. If everyone were subject to the same tax, then more people would live in the city (a reiteration of the point above).
In your last paragraph, you suggest that we should only concern ourselves with the welfare of the urban poor, a response to Glaeser's fairness arguments about nonpoor living in cities. I would only note that I believe Glaeser's proposals, at least as contained in this short piece, are neutral with respect to urban poor -- or might well benefit them, indirectly, by eliminating the inefficient harm that suburbanties are causing to the environment. In any event, it seems strange to suggest that we would not take advantage of opportunities to improve the welfare of the nonpoor when this can be done with no harm whatsoever to the interests of the poor.
Posted by: at Mar 2, 2008 3:43:59 PM
The basic problem in Glaeser's article is the word "should." It is the conceit of economists that one can arrive at an answer to "should" by some simple logic without parsing through what Tyler refers to as the "bundle"--the horribly complex set of redistributions of costs and benefits that exist in every city--in order to accurately assess the change in social welfare.
Of course, Glaeser's alternative to talking out of his ass is not a good one either. Any economist who proposes to parse that bundle to recommend a significantly different bundle, as if he could accurately account for the reactions of all those groups whose marginal costs and benefits would shift as a result of the change in policy, then pre-judge the change sufficient to be "fairer," would have to have big kahunas--or more likely a total lack of common sense, or a God complex.
Posted by: M. Hodak at Mar 2, 2008 3:49:37 PM
Here is a thought:
All those liberals who love living in cities, who vote for mini-welfare states, who attack liberty in the name of convenience, who support creating an ever-increasing dependence on big brother, who despise us in "flyover country", TAKE CARE OF THE MESS THAT THEY CREATED!!!
I don't live in a big craphole "multicultural" and divirse and liberal city for many reasons. One of which is that I don't want to pay to support bums and junkies.
Posted by: Smarty at Mar 2, 2008 3:57:20 PM
Ammianus, Tyler's point is quite specific to urban property taxes. A significant portion of these falls directly on urban land rents, with no effect on residential choices. If anything, raising taxes on urban property lowers total costs by mitigating the distortionary effects of real-estate speculation - the problem is that it does so by "wiping out" part of the asset value.
Posted by: guest at Mar 2, 2008 4:17:07 PM
Seems to me that there are two distinct arguments here. The "suburbanites use more carbon and so produce externalities" is solid, and supports a carbon tax. The other one, though, just seems to me to be a complaint that people who decide to live in cities have to pay the extra costs of living in cities, one of which is providing services to some of those whom the city attracts. How is this different from saying, "Cities have more crime, and therefore higher police costs, and we ought to tax the suburban people more to pay them?" Maybe I'm overlooking an externality here.
Posted by: Alan Gunn at Mar 2, 2008 4:22:51 PM
Interesting how apt is Bastiat's "service for service" observation.
The urban dwellers (and some suburban too) get services from the influx of the "poor" who get lower wages generally, but the wages, representing the services of the better off to those "poor" are "supplemented" by services derived as taxes through govt's that serve the poor.
Thus, indirectly, the better off provide some reciprocal services by wages and some through gov't services which the better off pay for as taxes instead of wages. Ain't that the way it works Boss?
If the taxes are an unfair burden, raise the wages (pay that cleaner more) so the "poor" can use less services via gov't; though don't count on the political class to help in that kind of adjustment.
Posted by: R. Richard Schweitzer at Mar 2, 2008 4:36:06 PM
Tyler,
Along with others, I am confused (not convinced) by your argument, "If we lower the property tax burden in cities, rents will rise..."
Perhaps you could do a post on goods or services whose prices rise when taxes are reduced. I cannot think of any examples.
Posted by: Jake at Mar 2, 2008 4:39:02 PM
"Taking care of America's poor should be the RESPONSIBILITY of all Americans."
That view mistakes the office of "responsibility" as one of the forms of obligations.
Responsibility is an obligation (in human interactions) that comes into existence because of a specific relationship or contact (not contRact, which creates the obligation of commitments).
In the deontic sense, of what "ought to be," as the morals of the Social Order may with commonality recognize and accept, an obligation may arise with respect to the less fortunate, the disabled, the incompetent, the deficient and many other ranks within the Order. But, absent some specific relationship or contact those obligations do not equate to "responsibility."
Posted by: R. Richard Schweitzer at Mar 2, 2008 5:03:25 PM
Liberals want me to pay for the choices they make. If you want to live in the city, pay for the associated expenses your self. If you think you don't have enough money because of taxes, get a part-time job or vote for folks who will reduce your tax burden. If you're worried about the poor, take them in - feed and clothe them. Don't try to intellectualize your angst by cherry picking economic theories.
If you major in art and can't find a job, don't ask me to subsidize your career choice. If you want to screw around in high school and drop-out, don't ask me to subsidize your immaturity and short-sightedness....you get the point. Man-up, bro.
Posted by: Mike at Mar 2, 2008 5:19:57 PM
Glaeser (who is generally considered a conservative BTW) argues that on net, people in cities create positive externalities for those outside of cities and those outside of cities create negative externalities on those in cities. If this is true, then he is correct that, by not internalizing these externalities, we are unfairly burdening city dwellers. The word "should" is accurate insofar as Glaesers call for a relatively lower tax burden on city dwellers would get us closer to an economic optimum.
Arguably, the current situation in the US is actually tilted in the wrong direction. Residents in "flyover country" as Smarty above calls it, get large net government subsidies from residents who live in a "big craphole multicultural and divirse and liberal city" (sic). I think the money flows to rural residents in part because liberals and moderates feel an obligation to help their poorer fellow citizens, who are disproportionately in rural (and red) states. However, it sounds like both Glaeser and Smarty would support eliminating the transfers that currently go to rural residents, so perhaps there's some common ground there.
Posted by: A student of economics at Mar 2, 2008 5:28:40 PM
"I'm not sure why the bundle as a whole is unfair, least of all to the wealthier city residents, or for that matter why it is a significant marginal distortion. In any case the net value of the externalities is surely positive for people who choose to live in cities and pay the higher rents."
Glaeser is distinguishing between two groups of people within a metropolitan area: (1) central city residents, and (2) suburban residents. Central city residents are certainly NOT wealthier than suburban residents. Not even close.
http://pubdb3.census.gov/macro/032007/hhinc/new05_000.htm
Suburban residents generally work in the city and live close enough to drive there whenever they want, so they get to enjoy most of the positive externalities that cities provide without paying to support the poor central city residents. A large poor population is unavoidable in central cities, so anyone who enjoys the positive externalities that cities provide should also have to pay for the negative externalities that come with a large poor population. As it stands right now, though, affluent central city residents are bearing most of the costs of supporting the large poor populations in central cities.
Suburban residents get to enjoy all of the positive externalities that cities provide without paying for the negative externalities that are necessary to generate those positive externalities in the first place.
I studied urban economics for a long time, and I think it's now safe to say that the Golden Rule of urban economics is: Ed Glaeser is always right. He's leaps and bounds smarter than every other urban economist, and his research is absolutely impeccable. Arguing with Glaeser about urban economics is futile.
Posted by: TV at Mar 2, 2008 5:35:17 PM
Guys,
Ed Glaeser would be rather surprised by all this liberal-bashing, because he is very clearly a conservative. He even has a regular column in the NY Sun!
It seems to me, though, that cities could unilaterally lower their numbers of poor by reducing the benefits they give to the poor. Poor people respond to incentives, also. If you think your city is too generous to the poor vis-a-vis the suburbs, this seems the simplest solution.
Posted by: cure at Mar 2, 2008 5:37:51 PM
TV, the positive externalities you describe are factored into the rents of urban land, and people who work in the city or use city services are indirectly paying these rents already (by accepting lower wages or higher prices). Tyler's point is correct: policies which are aimed to mitigating the negative externalities of city-living (or increasing its positive externalities) should be paid for by urban property taxes, so that their added value is recaptured.
Posted by: guest at Mar 2, 2008 6:35:26 PM
One thing that I didn't understand - Tyler says that if you lower property taxes, then rents will rise. How is that? If you lower the taxes, then renting becomes more profitable, causing more entrants, and more supply, thereby lowering prices? Could someone explain how this is wrong?
Posted by: hmmm at Mar 2, 2008 7:09:55 PM
hmmm, the supply of urban land is effectively fixed, so the land portion of urban property taxes falls directly on land rent.
In fact, because demand for land tends to rise over time, changes in property taxes may cause even larger variations in the discounted value of future rents. Real estate speculators will anticipate this effect by bidding up current prices, which causes even more problems - see PhD thesis by Mason Gaffney, "Land Speculation as an Obstacle to Ideal Allocation of Land".
Posted by: guest at Mar 2, 2008 7:46:24 PM
Glaeser's argument seems to assume that all suburbs are wealthier than their adjacent cities. A close look at Detroit, Chicago, and LA--three cities I'm familiar with--shows that this is not always true. Some of those suburbs are much more impoverished, and without a good number of wealthy urbanites to pick up the tab, as the main cities have.
Smarty--you're an ass. I grew up in the country, have lived in big cities, and now live in a town of 20,000 that is too big for my taste. So we'd probably choose about the same size place to live in (and I'm also from, and living in, flyover country). But your vitriol toward cities says a lot more about you than it does about cities.
Posted by: James Hanley at Mar 2, 2008 9:41:43 PM
TV:
Glaeser is distinguishing between two groups of people within a metropolitan area
No, I don't think that's what he's doing. But the argument works better that way.
Posted by: Douglas Knight at Mar 2, 2008 9:52:15 PM
I understand the efficiency questions, but they seem to be beside Glaeser's fairness point. Also, in places like Boston, incentive for poor people to live in urban areas is increased by zoning laws in wealthy surrounding towns (e.g. two acre minimum lot sizes), putting them out of reach of all but the very rich and preventing development. I don't see why we should allow these people to avoid the burden of providing for the poor like this. Glaeser has written on the effect of such local zoning laws, and argued for weakening them.
I don't understand Tyler's argument that the existence of some positive externalities argues against mitigating such an unfairness. But Alan Gunn is right on crime -- if city-dwelling generates more crime, the cost of this should be generated by cities.
Posted by: jm at Mar 2, 2008 9:52:19 PM
"TV, the positive externalities you describe are factored into the rents of urban land, and people who work in the city or use city services are indirectly paying these rents already (by accepting lower wages or higher prices). Tyler's point is correct: policies which are aimed to mitigating the negative externalities of city-living (or increasing its positive externalities) should be paid for by urban property taxes, so that their added value is recaptured."
I agree that the positive externalities are factored into the rents of urban land, but that doesn't prove your point. Central city residents also pay those same rents, so those increased rents are borne equally by central city and suburban residents. But the services that large poor populations consume are overwhelmingly funded out of property taxes, and central city residents unquestionably pay higher property taxes. So even after accepting that suburban residents pay for the positive externalities through higher rents of urban land, it still breaks down like this:
Central city residents pay: High rents of urban land + High property taxes
Suburban residents pay: High rents of urban land + Lower property taxes
But both central city and suburban residents enjoy the same positive externalities that cities provide.
There is simply no way to get around the fact that the property taxes of the central city residents pay for the extra public services that the large poor population consumes, while the property taxes of suburban residents do not. That suburban communities free ride on central cities is a fundamental principle of urban economics.
Posted by: TV at Mar 2, 2008 10:01:59 PM
There is a way to help the poor in education: Federal school vouchers. Give vouchers to Federal taxpayers when they file their tax return. One voucher = $5,000. One voucher for each child. We can reform education without the states help. They can use it for their own public schools or they could go to private ones. Who cares as long as we see over improvement in education.
The poor are also subsidized through transportation through below cost fares. State governments usually pick up the capital expenditures for mass transit. In Chicago, seniors ride free.
Posted by: jorod at Mar 2, 2008 11:18:28 PM
Is his central thesis actually true about poor people riding the bus more than rich people? My observation, based on living in cities in the South and West, is that most poor workers have cars and often have fairly long commutes. Busses and trains in LA, Phoenix, and Dallas are rarely full, while the freeways definitely are.
Posted by: Foobarista at Mar 3, 2008 4:03:41 AM
Foobarista -- ride a bus!!! That will answer your question.
No, not the nice one that runs to the suburban community college. Of course you'll find the well-off (or children of the well-off) on that one. Ride one that goes to the central bus terminal. Then you'll see who the majority of bus riders are.
It's true that most laborers have cars in this country, and that's a good thing to remember when talking about carbon taxes or gasoline taxes. It will hit the working poor who use cars to commute the hardest.
Posted by: Bob Knaus at Mar 3, 2008 7:16:17 AM
