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By Douglas Moran

The Law of Supply and XXXXXX

Uploaded: Jun 10, 2014

Palo Alto's development policy is littered with bad economic analysis. The most patently absurd one is that the way to reduce the infamous Jobs-Housing Imbalance is to allow developers to build much larger commercial projects in exchange for a few housing units. Over the many years, many of us have pointed out that these deals are counterproductive--they increase the Jobs-Housing Imbalance because the number of new jobs being moved into the area by the larger project is far greater than the housing provided.

This simple, obvious observation falls on deaf ears. Some of the policy makers are bureaucrats--although the purported goal is to reduce the Jobs-Housing Imbalance, the metrics are increases in housing units, irrespective of increases in jobs, and thus their incentives are in conflict with the goal.(foot#1) Others are single-issue advocates and other ideologues--their attitude is that having good intentions obviates the need for analysis (a human inclination so strong as to have its own admonition: "The road to Hell is paved with good intentions."(foot#2) ) And then there are some for which Upton Sinclair's quote seems appropriate: "It is difficult to get a man to understand something, when his salary depends on his not understanding it."

My most memorable instance of this occurred in the early 2000s after a forum on affordable housing and development policy which had been dominated by faulty analysis and economic illiteracy. Several of us were trying to talk about this to the then-chair of Palo Alto's Planning and Transportation Commission (who was also an affordable-housing advocate), but she insisted that increasing the number (supply) of housing units would force down the cost of housing in the region, and adamantly rejected the notion that demand had any effect on that pricing.

Price vs. Value
Economic illiteracy in discussion of housing is routinely displayed when price and value are treated as the same. And this distinction has a long history in many other disciplines (literature, engineering...).(foot#3) Housing is discussed as if housing units are fungible.(foot#4) This leads to the claim by housing advocates that if Palo Alto just built more apartments and condos next to the Caltrain tracks and other transit centers, people wouldn't be forced to buy houses in the East Bay. They refuse to consider that those owners consider that 4- or 5-bedroom house to be a much better value than a 2-bedroom apartment or condo, and that the price they pay in terms of longer commute times is more than offset by the lower price to get the value of housing they want.

There is a similar failure in the City's approach to retail, essentially treating all such square footage as fungible. In this approach, yet another high-end restaurant or coffee shop is no different from the stores that provide the daily needs of ordinary families. But I will defer discussion of this until later--it is a big enough topic to deserve its own discussion.

Ignored costs
In most discussions of development policy, costs are considered only for explicit, direct financial transactions. This excludes many factors which have high value to actual people, for example, their personal and family times. I would hate to have to count the number of times I have heard advocates dismiss the cost of a commute by public transit that is 3-4 times as long as by car. To hear them tell it, having an hour added each way to one's commute is an insignificant "inconvenience", and people are simply "selfish" not to do so.

Many of these advocates also seem to have jobs where work can be postponed, and otherwise rescheduled, to fit transit schedules, and they seem clueless that many jobs don't have this flexibility. I have had colleagues who had to resign because they often needed to stay a bit beyond the peak-hours transit schedule, and those few minutes could add an hour or more to their commute, which in turn would cause them to miss dinner with their families. They reluctantly recognized that they were in a lose-lose situation, having to make too big a sacrifice in both their career and family.

Incentives and penalties
A major component of economics involves the effectiveness of incentives, both positive and negative (penalties). Although I am not a professional economist, as an engineer and as a manager, I routinely had to deal with those very issues (for example, good engineering design encourages the user to do the right thing). In discussions of development policy, I have been constantly amazed at how "unsophisticated" they are about such issues, although there has been some improvement recently. For example, there has been an over-reliance on penalties, ignoring the vast experience that people are very good at getting around penalties, especially ones they view as unfair. The recent scandals at the Veterans Administration hospitals are an excellent example: Managers were penalized financially for not meeting level-of-service targets, but were not given the resources to met those targets, so they developed methods to hid their "failures" (Surprise! Surprise! Surprise!). In a local example, the City of Palo Alto allows developers to provide too little parking under the rationalization that a shortage of on-site parking will force people to use public transit, but without asking whether there is viable public transit for those employees. When there isn't, the penalty of using lousy public transit is far larger than parking offsite (in adjoining neighborhoods) and walking a few blocks to work.

Much of the current focus on providing "incentives" involves financial subsidies, in large part because those are easy to measure and administer. What I don't hear is any sophisticated assessment of what the actual problems are, and how effective such subsidies are. Admittedly this can be hard to do. Time and again such assessments have revealed unrecognized impediments to the desired behaviors, and removing those impediments has been much cheaper and more effective than bribing people to put up with them.

Shifting costs is not a savings
The ongoing attempts to convert traffic lanes on El Camino to dedicated bus lanes is a good example of cost-shifting that is potentially counterproductive. The advocates for this have admitted that this lane reduction will force traffic onto the parallel arterials--arterials that are already badly congested. Traffic engineering has long recognized that small changes in traffic on congested roads has an outsized impact on congestion.(foot#5) But the dogma of "Smart Growth", as it is practiced here, is that increasing congestion is desirable because it penalizes people (costs them valuable time) and may cause them to use public transit. Because this is ideology, there is no room to consider whether the gains offset the costs (the gain of some people switching to public transit versus the cost of increased Greenhouse Gases and wasted time from the increased congestion).

What rate of growth?
The advocates of high rates of growth in jobs in Palo Alto routinely claim that there are many companies that want to locate here, and that Palo Alto's continued economic health is crucially dependent on satisfying those desires. However, don't ask for an actual economic explanation--I have, and not gotten one.

And don't ask why it is so utterly important to accommodate companies that wish to locate here, but so utterly unimportant for companies that are here that decide to leave because it has become too expensive. Over the years, I have had too many friends and colleagues in high tech decide that the costs of living here exceeded the very substantial benefits. A common summary statement was "We realized that we could afford a house or a child, but not both."

Similarly, don't ask what happens when such future growth destroys what currently makes Palo Alto a desirable location. Whoops, I forgot what I said in the blog entry introducing this series: Being "smart" avoids all negative consequences of such growth (said with dripping sarcasm).

Invitation to contribute comments
In the City's development policy and approaches, what do you see it doing wrong, or too little of, in terms of economic analysis? Please remember that the key word in this blog's title is "Pragmatist"--this is not a forum for ideology or rants.

Related blog entries (past and planned)
1.(Introduction) Stupid Growth: So-called "Smart Growth" is a cancer on the community

1.Shills and Charlatans of "Smart Growth" (now available)
2. Should Palo Alto really aspire to be more like a Chinese factory city?
3. Public Transit Follies
4.Who Profits, Who Sacrifices?

---- Footnotes ----
1.A cynic would observe that a long-lived, counter-productive metric is not in fact a mistake, but rather evidence of an agenda other than the purported policy.
2.I discussed this in an earlier blog post Palo Alto's Culture War: Analytics vs. Aspirationals (2013 Nov 10)
3.My favorite is from Oscar Wilde: "What is a cynic? A man who knows the price of everything and the value of nothing. And a sentimentalist ... is a man who sees an absurd value in everything, and doesn't know the market place of any single thing."
4.The classic example of fungibility is currency: If I lend you a dollar, I do not expect to be repaid with that exact same bill. More (Wikipedia)
5.Metering lights on freeways is an example of this. Although it is incredibly counter-intuitive, delaying the typical vehicle at the on-ramp results in a reduction of overall travel time.

The Guidelines for comments on this blog are different from those on Town Square Forums. I am attempting to foster more civility and substantive comments by deleting violations of the guidelines.