NewGeography.com blogs

One of the most enduring myths in public policy is that local government consolidations save money. The idea seems to make sense, and most of the academic studies support the proposition. However, rarely, if ever, does the promised reduction in public expenditures or taxes actually take place.

Residents will vote March 16 on a proposal that would merge the village government of Seneca Falls, New York into the more rural and adjacent town of Seneca Falls. Under state law, this can occur without the consent of the town into which the village would be merged.

Paltry Savings and the Risks: A consultant report suggests savings that can only be characterized as pitiful. Out of a combined budget of $13 million, less than $400,000 would be saved, and even that figure is by no means sure, according to the consultant.

Voters may want to consider the following specific risks that could make achievement of the expected savings and tax reductions impossible:

Proponents expect to receive $500,000 annually in funding from a state program that seeks to encourage municipal consolidations. The state program is slated for cuts. Further, with New York’s serious budget difficulties, such a superfluous program could be a prime candidate for discontinuance. Thus, one of the principal factors expected to lower taxes might not survive in the longer run.

Presently, the village has a police department, while the town does not. The new town government is not likely to be able to get away with providing a higher level of police protection in the former village than in the merged town. One of two outcomes seems likely: (1) The first is that the present police protection (and budget) would be spread throughout the merged town. This would dilute police protection in the former village area. (2) The second is that the higher level of police protection in the village would be spread throughout the merged town. This would mean larger expenditures that could easily erase the already minimal projected savings.

The consultant proposes that a new town hall be built. The costs of this building could substantially erode the projected operating cost savings.

A principal reason that municipal consolidations rarely save money is that the necessary “harmonization” of service levels and employee compensation costs inevitably migrate to the level of the more costly former jurisdiction. The police issue in Seneca Falls is a prime example of the service harmonization cost risk.

Learning from Toronto: Seneca Falls does not have to look far to see how local government consolidation can lead to more spending and higher taxes. Less than 150 miles away as the crow flies, Toronto residents were glowingly told of the lower taxes and expenditures that would result from consolidating six jurisdictions into a “megacity” in the late 1990s. As we and others predicted at the time, things have not worked out. Toronto’s spending has risen strongly under the consolidated government. Despite its much smaller population, the risks are similar in Seneca Falls.

A new study by researchers at the Belfer Center for Science and International Affairs at Harvard University suggests that President Obama’s greenhouse gas (GHG) reduction goal will require gasoline prices of from $7.15 to $8.71 per gallon by 2030. This is not only untrue, but also represents a “roadmap” to economic and environmental folly.

The study begins with the assumption that the transportation sector would need to reduce its GHG emissions by the same 14% percentage as the overall goal for the economy, as proposed by President Obama (Note).

“Across the Board Reductions” are Absurd: The Harvard assumption is flawed from the start. GHG emissions reduction is not about “across the board” reductions of the same percentages applied to economic sectors. Such an approach could result in serious misallocation of resources, as opportunities for less expensive GHG emissions reductions in some sectors are ignored, while more expensive strategies are implemented in other sectors.

The Appropriate Price for GHG Reduction: The study itself assumes that the present GHG price is $30 and that the price will rise to $60 by 2030. Reports by the Intergovernmental Panel on Climate Change and McKinsey/The Conference Board say that sufficient GHG emission reductions can be achieved at below $50 per ton. It is fair to suggest, therefore, that any strategy costing more than the $50-$60 range must be rejected as being too expensive.

The Harvard study notes that GHG

…prices at their projected levels are far too small to create a significant incentive to drive less. Fuel prices above $8/gallon may be needed to significantly reduce U.S. GHG emissions and oil imports.

This should tell us something. Achieving the proposed reduction is GHG emissions from the transportation sector is just too expensive. If the current market price for GHG emissions cannot significantly reduce gasoline usage, then strategies that can be achieved for the market price should be implemented (in other sectors). Such an approach would by no means interfere with the potential to achieve GHG emissions reductions, rather it would facilitate less disruptive achievement.

$7 Per Gallon Gasoline: The Harvard study goes on to suggest that gasoline prices of $7.15 to $8.71 per gallon by 2030 might be necessary to achieve the overall GHG reduction goal in the transportation sector. These higher prices would be the result of significantly higher fuel taxes. The resulting cost of GHG emissions reductions could be more than $500 per ton (compared to the Department of Energy 2030 gasoline price projection). While the Harvard report “poo-poos” the economic impact of doubling gasoline prices, a Reason Foundation report (and previous research at the University of Paris by Remy Prud’homme and Chang Wong Lee) has found a strong relationship between mobility (driving more) and economic growth.

Focusing on Ends, Not Means: No one should believe it will be easy to achieve any eventual GHG emission objective. Success will be greatly enhanced by focusing on “ends” rather than “means.” This means employing the least costly and least disruptive strategies, without regard to how much we drive, where we live, how much power we consume or any other peripheral (and irrelevant) consideration.

At a price of $500 or more, the Harvard report’s price per ton could be nearly 10 times as much as the $60 GHG price assumed in the very same report. Such an increase in the price of gasoline would be both absurd and unnecessary.

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Note: There are multiple proposals for economy wide GHG emissions reductions. Congressional have been for 17% to 20% reductions by 2020.

The Daily Telegraph reports that air pollution is getting worse in Sydney, with one in ten days rating “poor” in 2009. Critics of the ruling Labor state government claim that increasing air pollution and the lack of public transport are the cause. They are half right.

Sydney’s Densification is Intensifying Traffic Congestion: Sydney’s intensifying traffic congestion contributes substantially to rising air pollution.

The increasing traffic congestion is an inevitable consequence of the state government’ s “metropolitan strategy” which is “jamming” high rise residential buildings into suburban detached housing neighborhoods. The mathematics of traffic and densification is that unless each additional resident drives minus kilometers and minus hours, there will be more traffic, even before considering the impacts of intensifying commercial and heavy vehicle traffic.

The road system was not built for higher densities and neither was other infrastructure such as sewers or the water system, as Tony Recsei has noted in his preface to the 6th Annual Demographia International Housing Survey.

The fact is that higher densities are strongly associated with more traffic, which means greater traffic congestion. The additional stop and go traffic produces greater pollution on the roads adjacent to which people and their children live. It also means more greenhouse gas emissions, because fuel consumption increases as traffic congestion intensifies.

The association between higher densities and greater traffic congestion is also indicated by the ICLEI-Local Governments for Sustainability Density-VMT Calculator, based upon Sierra Club research. According to the Calculator, under the urban consolidation (“smart growth”) scenario, residential housing would be 37 housing units per hectare, as opposed to its “business as usual” scenario at a density of 10 housing units per hectare. The density of traffic (vehicle kilometers per square kilometer) under the higher density “urban consolidation” strategy would be 2.5 times as high as under the “business as usual” scenario.

According to federal Bureau of Transport and Regional Economics, Sydney’s total traffic volume is projected to increase nearly 20% over the next decade. Nearly half of the increase will come from commercial and heavy vehicles. With little or no expansion of the urban footprint, there will be nowhere for the new traffic to go except onto the existing already over-crowded roadways.

Stuck in Sydney’s Traffic: Already, the average one-way trip to work in Sydney is longer than in all but one of the 52 metropolitan areas in the United States with more than 1,000,000 population. Only New York takes as long as Sydney, because so many people use public transport, which is inherently slower for nearly all trips.

Of Blind Faith: Public Transport: Public transport serves as an article of faith to which officials cling in the innocent or cynical hope that it can reduce traffic congestion. There is no doubt of the good that public transport can do to get people to the central city (CBD), with its highly concentrated employment. However, Sydney’s CBD oriented system is over-crowded. A succession of state governments have been incapable of providing sufficient service to make the trip comfortable for the less than 20% of Sydney employees who work there. Proposals to centralize more of Sydney’s employment in the CBD could not be more wrong-headed.

Transit is about the CBD, whether in Sydney, Toronto, Portland or Atlanta. The public transport system capable of attracting a significant number of commuters to the smaller concentrated centers like Chatswood, Parramatta, or Norwest (much less the dispersed employment throughout the rest of the metropolitan area) has never been conceived, much less seriously proposed or built.

Why We Regulate Air Pollution: Public health was the very justification for regulating air pollution. Air pollution’s negative impacts are principally local. The consequences are measured reduce the quality of life of people intimately exposed to the more intense air pollution from nearby roads.

Higher densities come with a price. Higher densities are producing greater traffic congestion, higher levels of air pollution and greater public health risks. This is just the beginning.

Photograph: Strathfied, Sydney: Densification of detached housing neighborhood.

As we reported in July of last year, Goldman Sachs and other US bank bailout success stories are reaping big dollar benefits from the “nebulous world of public-private interactions.” Goldman Sachs – somehow always first in line for these things – even got transaction fees for managing the Treasury programs that funded the bailouts.

Now, the senator in my neighboring state of Iowa is once again trying to wake up Congress to the facts. You may recall that Senator Chuck Grassley (D-IA) admitted almost a year ago that he and the other members of Congress were fooled into voting for the bailout because they thought former-Treasury Secretary Paulson actually knew what the hell he was doing when he asked for $750 billion in the fall of 2008. “When it’s all said and done, you realize he didn’t know anything more about it than you did.”

Late last week, the Huffington Post called our attention to a letter that Senator Grassley sent to Goldman Sachs about the fees they will collect on the next bit of federal stimulus – bonds that are used to underwrite the latest jobs bill. Grassley points to a November 27 report from Bloomberg News for some evidence that Goldman may be over-charging local governments by more than 30 percent above what is normally charged for bond underwritings (i.e., handling the paperwork and rounding up some buyers).

In Grassley’s letter, he includes a quote in the article to the effect that the local governments don’t care about the fees since there is a “large subsidy.” However, according to The Financial Times of London – and we agree with their assessment – Goldman and others are able to charge excessive fees because the financial crisis reduced their competition. When banks were required to raise more capital before they could pay back their bailout money, they did – and earned record fees for themselves in the process!

It is eerily similar to the driving forces behind the “subprime crisis” that was repeatedly blamed for the financial crisis. The financial sector gains its profits from fees – issuance fees, trading fees, underwriting fees, etc. – unheeding of the impact on the real economy, taxpayers and the cost to the nation as a whole.

There are many factors and issues that go into winning a political campaign, and the ones swirling about the Texas Republican Primary were numerous. Incumbent governor Rick Perry cruised to an easy victory over sitting U.S. Senator Kay Bailey Hutchison and activist Debra Medina on Tuesday to set up a general election showdown with former Houston mayor Bill White, a Democrat.

It’s worth recalling that last year Perry distinguished himself as the anti-Smart Growth governor, bucking a trend in which political leaders at all levels embrace this command-and-control planning doctrine. In June 2009, Governor Perry vetoed SB 2169 - a bill relating to “the establishment of a smart growth policy work group and the development of a smart growth policy for this state.”

In his veto message, Governor Perry said:

Senate Bill No. 2169 would create a new governmental body that would centralize the decision-making process in Austin for the planning of communities through an interagency work group on “smart growth” policy…. This legislation would promote a one-size-fits-all approach to land use and planning that would not work across a state as large and diverse as Texas.

I’m not sure if this was on many minds as voters headed to the polls, but there does seem to be a strong sentiment among Texans against top-down centralized planning. The recent mayor’s race in Houston grabbed national attention because of the winner’s sexual orientation. But earlier Annise Parker had soundly defeated über-Smart Growth advocate Peter Brown, setting up her run-off with Gene Locke. Brown had made zoning and central planning a centerpiece of his campaign.

Texas has out-performed most other states in terms of economic vitality, housing affordability and other quality of life indicators, and its cities crowd Business Week’s top ten list of metros least touched by the recession.

When it comes to Smart Growth and centralized planning, political leaders at all levels and in all states should embrace the Lone Star attitude: Don’t Mess With Texas!

Thursday a man flew an airplane into the Austin, Texas, IRS Building. The Left claimed he was a “Tea bagger,” their vulgar term for Tea Partiers, apparently because he was anti-government. The Right claimed he was a whacky leftist, apparently because he was critical of Bush. A Muslim group claimed he was a terrorist, apparently because he wasn’t a Muslim.

They all miss the point, and quite frankly, the attempt to make political points out of personal tragedy is pretty disgusting.

Today, there is a report of a Moscow, Ohio, man who bulldozed his home before it was foreclosed. No doubt someone somewhere will try to make political hay out of this man’s misfortune. That will be as misguided as the response to the Texas man’s misfortune.

What these events really do is highlight the human costs of recessions, costs that increase in recession severity and duration. These are the more extreme examples, but the fact is, people’s lives are ruined in recessions. Some working families will suffer a permanent decrease in income. Some of our young people will never recover from a bad start to their working lives. Some families will be destroyed because of financial stress. Some individuals will commit suicide. A few will do things like bulldoze their home or fly into a building.

To ask how big a problem we have is to ask how many are unemployed and how long have they been unemployed. Here are the numbers as of January 2010:

All of these people deserve our sympathy. They also deserve more from our society and our leaders. Most of them are in their current circumstances through no fault of their own. Even worse, our political class appears to be far more interested in election, reelection, rewarding supporters, partisanship, and political purity than they are in providing the environment for job creation. They have also failed to provide a humane safety net, one that provides at least a minimum standard of living, maintains dignity, and provides appropriate incentives.

President Obama has announced a special program of assistance for home owners in the five states that have been hit hardest by the housing crisis. The proposed program is targeted at California, Florida, Arizona, Nevada and Michigan, where house price declines are more than 20% from the peak of the bubble.

The greatest losses occurred in California, Florida, Arizona and Nevada (see note), where peak to trough house price loses exceeded 40% in all 12 metropolitan areas over 1,000,000 population except Jacksonville. These markets accounted for 70% of the gross housing value loss in the nation before the Lehman Brothers collapse. House prices were driven to unprecedented levels of up to four times historic norms by overly prescriptive land use regulations (“growth management” or “smart growth”) that makes land unaffordable.

Average losses were more than $175,000 in the markets of these states, more than 10 times those in traditionally regulated markets such as Atlanta, Dallas-Fort Worth, Houston, Indianapolis, Kansas City and Cincinnati. These intense losses were beyond the ability of the mortgage industry to sustain and it is generally acknowledged that this precipitated the Great Recession.

Smart growth had nothing to do with the Michigan price collapse. There, the strong economic downturn pushed prices down even as the state escaped without a housing bubble.

The President’s program means that the nation is now paying twice for smart growth policies. The first payment was, of course larger, which cascaded into the huge household wealth losses in the Great Recession.

Note: While Las Vegas and Phoenix are sometimes perceived as not having prescriptive land use policies, the Brookings Institution ranks both metropolitan areas as toward the more restrictive end of the regulatory spectrum. These overly prescriptive regulatory environments are exacerbated by the fact that in both metropolitan areas much of the developable suburban land is owned by government, and is being auctioned, though at a rate less than demand. These factors combined to drive auction prices per acre up nearly 500% in Phoenix and nearly 400% in Las Vegas during the housing bubble.

The Virginian Pilot reports that the cost of the Hampton Roads (Virginia Beach-Norfolk metropolitan area) “Tide” light rail line has now escalated to nearly $340 million. This is up nearly one-half from the estimates made when the project was approved by the Federal Transit Administration. According to federal documentation, the line will carry 7,100 daily passengers in 2030. This means that the capital cost alone will amount to an annual subsidy of approximately $6,500 per daily passenger (using Office of Management and Budget discount rates), plus an unknown additional operating subsidy. This is enough to lease every daily commuter a new Ford Taurus for the life of the project (assumes a new car every 5 years and includes future car price inflation).

The light rail line cannot be expected to do much for transportation. Even if the line reaches its projected ridership (many do not) by 2030, it will carry only 0.1% of the travel in the metropolitan area (one out of every 1,000 trips).

Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK), and owner and investor of some very large financial firms including insurance companies, is paying favors backward and forward among the political appointees and politicians that have helped him through the financial crisis. This week, he brought Treasury Secretary Henry “Hank” Paulson to Omaha recently to help tout Paulson’s new book.

He’s also helping out Senator Ben Nelson (D-NE). A year ago, I button-holed Nelson after lunch with the Sarpy County (NE) Chamber of Commerce. He told us in March 2009 that he had discussed the Troubled Asset Relief Program (TARP) with Buffett before voting “yes” on the bailout. Now we are learning that Nelson is discussing other Congressional matters with Buffett – the health insurance bailout.

In October 2009, Bill Moyers investigative reporting gave us a complete outline of just how cozy the insurance industry is with Congress. I said it back then: what they are calling “healthcare reform” is really just “health insurance bailout.” President Barack Obama slipped up in July and called it “health insurance reform” which sent tongues wagging. How soon they forget, really. Seven months later, he’s back to talking about “Health Care Reform” only this time in the context of the possible failure of Congress to pass any legislation.

I doubt it’s necessary to reiterate, but just for the record: Nelson “added a provision (to the legislation) extending federal payment for Nebraska’s new Medicaid enrollees beyond 2017, when the federal share is set to begin to decline” The backlash on the “Kornhusker Kickback” came from a wide array of interests, including. Nebraska Governor Dave Heineman. Heineman appeared on Fox Business setting the record straight: he definitely did not suggest this idea to Nelson and he wanted no special deals for Nebraska.

So, who came galloping to rescue Nelson from the backlash and fallout? None other than Warren Buffett was quoted defending Nelson to the press. And Nelson didn’t let the effort pass unnoticed. Nelson is running television ads in Nebraska quoting Buffett’s comment that “he would have made the same vote” as Nelson on the health insurance bailout. Buffett called Nelson’s vote “courageous”: How much courage did it take for Nelson to vote in favor of legislation that is supported by his largest donor?

Did I mention, again, that Buffett’s BRK holds insurance companies – ten of them according to the 2008 annual report. The holdings include not only property and casualty insurance, but also “reinsurance” (which could include the full spectrum of insurance businesses). Buffett calls this “the core business of Berkshire.” His insurance operations, “an economic powerhouse,” provided $58.5 billion in cash “float” on which they earned $2.8 billion.

Berkshire Hathaway employees and PACS are top contributors to Nelson’s political campaigns. Nelson has a long history with insurance. According the Clean Money Campaign, his pre-politics career was spent as “an insurance executive” and “insurance company lawyer.” His “lifetime campaign contributions from the insurance industry rank him fourth in the Senate,” behind only McCain, Kerry, and Dodd.

Hank Paulson, Warren Buffett, the Financial Crisis Inquiry Commission and now Senator Ben Nelson: part of the problem – not the solution.

Just in time for the winter Olympics, The Economist has rated Vancouver as the world’s most livable city. The Economist rates cities (presumably metropolitan areas or urban areas) “over 30 qualitative and quantitative factors across five broad categories: stability, healthcare, culture and environment, education and infrastructure.” There is no doubt that Vancouver is in a setting that is among the most attractive in the world. It is also clear that the quality of life is good in Vancouver.

Vancouver won another honor in the last month, that of most unaffordable housing market in the six nations surveyed by the Demographia International Housing Affordability Survey (United States, United Kingdom, Canada, Australia, Ireland and New Zealand). In Vancouver, housing costs 9.3 times annual gross household incomes and is rated severely unaffordable. This measure, the Median Multiple, would be 3.0 or less in a properly functioning urban market. The second most expensive major “city” in Canada was Toronto, far behind Vancouver, but still severely unaffordable at a Median Multiple of 5.2.

Meanwhile, Pittsburgh, the ranked highest city in the United States (yes, higher than Portland, Seattle or San Diego) shows that affordability and livability are not incompatible. Pittsburgh has a Median Multiple of 2.6.

Vancouver’s high ranking, however, makes it clear that the cost of housing (and by extension, the cost of living), has little to do with The Economist ratings. As Owen McShane wrote here to commemorate the last release of The Economist ratings, the cities are ranked based upon their attractiveness to expatriate executives. These are not ordinary Canadians. At historic credit underwriting standards, 85% of Canadians households could not qualify for a mortgage on the median priced house in Vancouver.

Vancouver is doubtless among the most livable cities in the world for those for whom money is no object. But for ordinary Canadians, affordability is a prerequisite to livability. This makes Vancouver Canada’s least livable city.