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Economic Currents

Keep up to date with the latest UHERO news.

Investigating the Effects of Furloughing Public School Teachers on Juvenile Crime in Hawaii

Posted October 1, 2013 | Categories: Hawaii's Economy, Blog

What happens to crime when 180,000 DOE students and all of their teachers are given the day off? When a fiscal crisis led to 17 "Furlough Fridays" during the 2009/2010 school year, we found ourselves in a unique position to find out. While it is tempting to imagine streets being flooded with idle teenagers up to no good, a new UHERO working paper titled "In School and Out of Trouble? Investigating the Effects of Furloughing Public School Teachers on Juvenile Crime in Hawaii" suggests the contrary.

The authors, Randall Akee (an assistant professor at UCLA), Timothy Halliday (an associate professor at UH-Manoa) and Sally Kwak (an economist at the US Congress Joint Committee on Taxation), used juvenile arrest data from the Honolulu Police Department to investigate the effects of this unusual policy on juvenile crime. Using such a policy to test the effects of shortening the school year on crime is an example of what economists call a "natural experiment;" an observational study that allows researchers to ascertain causal relationships without using a randomized trial.

Contrary to what many would have predicted, their results indicate that the furloughs were associated with fewer juvenile assault arrests for assault and drug-related crimes. Over the course of the entire academic year, there were 20 fewer arrests for assault and 15 fewer arrests for drug offenses due to the furloughs. These reductions are larger than effects produced from national studies. It is hard to say exactly why this is but the authors speculate that, since 1 in 5 students in Hawaii are in private schools, the average socioeconomic status of families who do send their children to public schools may be lower than elsewhere which may enhance the ability of school to facilitate rather than prevent crime.

Spatial differences were also identified. Assaults went down more than drug-related crimes in Leeward and Central Oahu, while drug-related crimes were reduced more than assaults in Metro and Windward Oahu. The authors attribute the reduction in crime to two factors. The first is a lack of "concentration" allowing for less opportunity to engage in criminal activity, and the second is possibly increased monitoring by parents that may have happened since parents were told about the furloughs in advance and 13 of the 17 DOE furlough days coincided with furloughs for state employees. The "concentration" effect was more prominent in Leeward and Central Oahu resulting in fewer assaults, while the monitoring effect may have been more prominent in Metropolitan and Windward Oahu where more affluent parents may have been better able to plan ahead to spend the day with their children or to arrange for a paid alternative activity.

It would be flippant to say that school should be canceled as a means of crime prevention, but the overall reduction in crime should encourage decision-makers to think harder about how to minimize crime while school is in session.

---Tim Halliday

READ THE WORKING PAPER


Hawaii's Energy Future

Last week's Asia Pacific Clean Energy Conference has focused the spotlight on Hawaii's energy future. Governor Abercrombie opened the conference with a strong commitment to installing an undersea cable between Oahu and Maui. The Blue Planet foundation unveiled their "Energy Report Card" during a keynote address by Henk Rogers. Meanwhile, recent coverage by NPR discussed switching to natural gas as an alternative to Hawaii's oil dependence. 

The Hawaii Clean Energy Initiative set the vision for the state to move toward renewable and cleaner sources of energy. There are numerous pathways and decision on the best pathway is fraught with debate.

The Governor's comments juxtaposed to strong resistance to the undersea cable suggests that there needs to be on-going discussion of what energy portfolios will likely emerge in separated versus linked islands scenarios - including environmental and economic impacts.

Moreover, there is also concern over the high cost of energy. As many renewable sources are still relatively costly (or difficult to locate) there is also consideration of switching to natural gas as a "bridge fuel." The future price of liquefied natural gas is uncertain and, while it is cleaner burning than oil, there is concern that its full environmental impact is not necessarily an improvement over the status quo.

In addition, environmental groups such as Blue Planet in their "energy report card" bring up concerns about the lack of guiding policy for the transportation sector. Policies that complement transportation as well as electricity have a place in the discussion as well.

UHERO's ongoing research is looking at ways to cost-effectively achieve GHG reduction and meet the state's clean energy goals.

---Makena Coffman


The Unintended Consequences of Affordable Housing Policy

Honolulu City Council Resolution 13-168 would amend the percentages of affordable housing units that developers must provide to receive authorization for housing projects.  Current city policy requires that 10% of a development's units must be affordable for households earning no more than 80% of the HUD median income for Honolulu. Another 10% of units in a development should be affordable for families earning between 80 and 120% of the median income, and 10% for families earning between 120 and 140% of the median income. The resolution proposes that the mix of affordable housing required of developers be reconsidered. The intent is to change the requirements in a way that leads to more affordable housing for those who need it the most.

While requiring developers to set aside a fraction of a project to be sold at below market prices may seem like a reasonable way of dealing with the problem of affordable housing, economic theory and years of experience suggest exactly the opposite. Such requirements, known as inclusionary zoning (IZ), act as a tax on developers with the proceeds used to subsidize housing for gap income households earning between 80 and 140 percent of the median income. But that tax reduces incentives for developers to produce all forms of housing, and will reduce the overall supply of housing units and increase the price of housing.

In 2010, UHERO conducted a comprehensive review of studies that analyzed IZ policies across the United States.1 Approximately 90% of the studies concluded that IZ increases the market price of housing and decreases housing units available in the market. Of the 18 studies that were able to quantify the effect of inclusionary zoning on housing market outcomes, 13 found that IZ policies both increased the market price of housing and decreased housing units available in the market, and three more studies found evidence of at least one of those effects. UHERO’s report concluded that “Inclusionary Zoning policies have failed in other jurisdictions, and are failing on Oahu.” Such policies have not delivered substantial numbers of affordable housing units to households the programs were designed to help.

The undersupply of housing services relative to household formation on Oahu is a chronic problem. While IZ policies are politically appealing, they mistakenly tax housing to encourage more of it! The effect of a tax on the production of any product, housing included, is relatively straightforward. The extra tax imposed by IZ increases the cost to developers and limits the supply of housing provided. Facing the additional cost, developers will build fewer housing units, all else equal. In the worst case scenario, if the expected loss on the affordable units does not allow developers to meet their required rate of return, then projects will never get off the ground. The primary means of insuring the project is viable is to produce more upscale, higher priced homes to offset the loss on the subsidized housing.2 So, the IZ tax not only reduces the overall supply of housing, it also changes the mix of housing by encouraging higher end and more expensive housing developments.

“Low-cost housing is usually produced through a process called filtering where existing housing units drop in cost as their relative quality falls, rather than through construction of new, lower-cost units.” (Feldman, 2002 p. 9) Over time, the existing stock of housing depreciates and declines in quality relative to new amenity rich units. For example, new housing often includes central air-conditioning and energy saving appliances, whereas twenty years ago few housing units would have such amenities. The construction of new housing units also increases the overall supply of housing, which increases the supply of lesser quality units to those with lower incomes as owners of older homes “trade up”. (Feldman 2002, p. 10). Malpezzi and Green (1996, p. 1811) also found that “high-quality new construction is associated with growth in the low-quality stock as well... [T]o the extent that a city makes it easy for any type of housing to be built, it will also enhance the available stock of low-cost housing.” By discouraging construction of market priced housing, IZ reduces filtering and leads to less low-cost housing than without these well-intended policies.

On Oahu IZ policies also miss the cyclical nature of the affordability problem. The figure below shows the maximum affordable mortgage3 for four Honolulu income groups from 1990 to 2012 and median resale prices of single-family homes and condominiums from the Honolulu Board of Realtors.

From 1990 to 1995, at the end of the last Oahu housing cycle, single-family homes remained out of reach of households earning 140% of the HUD median family income (MFI). Yet from 1996 to 2003, households in the 120-140% MFI bracket could afford the median priced home, and all gap income households could afford a median priced condo from 1996 through 2005. From 1992 to 2012, all income groups except the 80% group could afford the median priced condo.

The recent peak in unaffordability occurred in 2007 at the height of the last housing cycle. The declining price of homes through 2009 and the record low mortgage rates since then has once again brought single-family homes within reach of the top gap income group. And, condos are again within reach of all gap income levels. Imposing more costly affordability taxes on developers at this stage of the home building cycle will result in some small increase in the number of new affordable housing units. But, the tax will also accelerate the end of the construction cycle by leading to a more rapid increase in home prices and eventually closing off demand for the higher priced units developers need to build to cover their costs. IZ policies will endanger project viability by squeezing profit margins, especially as other construction costs rise and home prices flatten out. The result is that less housing will be produced than otherwise would be the case.

Reducing or eliminating overly burdensome regulation on development, including inclusionary zoning, will increase affordability of housing for two reasons. First, it will encourage building, increasing the overall stock of housing, which will help hold down the market price of housing. Second, removing IZ will facilitate the natural “filtering” process, with newer units going to higher income households and older depreciating units being increasingly occupied by lower income households. Finally, IZ policy misses the basic fact that affordability problems arise not just due to the high cost of housing. The affordability problem is a dual problem of high prices and low incomes. Just as is done in Federal Housing Assistance programs, affordability could be addressed through housing subsidies that help households purchase or rent housing units.

 ---Carl Bonham

 

Notes

1See Bonham, Burnett, and Kato, “Inclusionary Zoning: Implications for Oahu’s Housing Market”, February 2010.

2Of course, this only works when there is a demand for higher priced units.

3UHERO calculates the Affordable Mortgage as the maximum mortgage a household earning the HUD Median Family Income for Oahu could afford after a 20% down payment and assuming the household spends no more than 30% of its monthly income on the mortgage.

 

References

Bonham, C., Kimberly Burnett, and Andrew Kato. 2012. Inclusionary Zoning: Implications for Oahu’s Housing Market. UHERO Project Report, accessed at http://www.uhero.hawaii.edu/assets/UHEROProjectReport2010-1.pdf.

Feldman, R. 2002. The Affordable Housing Shortage: Considering the Problem, Causes and Solutions. Federal Reserve Bank of Minneapolis. Banking and Policy Working Paper 02-2.

Malpezzi, S. and R. K. Green. 1996. What has Happened to the Bottom of the U.S. Housing Market? Urban Studies. 33(10): 1807-1820.


Decline in Pacific Currencies: Crisis or More Adjustment to Come? : Pacific Beat Interview

Posted September 17, 2013 | Categories: Q&A, Blog
1. The last few months have seen 10-20 percent declines in the exchange rates of many Pacific countries against the US dollar. The decline in the value of Indonesia’s currency has been particularly notable. Why is this happening?

Each country has its own story, but the driving force behind the decline of Indonesia’s currency—the rupiah—stems mostly from anticipated changes in U.S. monetary policy. The US Central Bank—the Federal Reserve System has for the last 4 years been engaged in a huge bond-buying program. This has lowered interest rates in the United States and pushed a lot of liquidity into money markets. Investors, disappointed with the low U.S. interest rates, have moved much of the extra liquidity overseas to emerging markets with higher interest rates.

The surge in short-term investment was one factor that helped emerging economies to boom over the last few years. But investors are now anticipating that the Fed Reserve System will start to wind down its bond-buying program. This has caused interest rates in the U.S. to rise even before the Fed starts to taper its bond-buying program. The rise in U.S. rates has caused investors to unwind their overseas investments in emerging economies, returning their funds home to the safer U.S. market. The movement of funds has led emerging exchange rates to decline against the dollar. This has sparked some fears that Asia-Pacific emerging markets may experience a financial crisis, as firms, individuals, and governments adjust to the lower purchasing power of their currencies.

 

2. Is a financial crisis likely or are these fears overblown?

Let’s look at both sides of this question. For a crisis to be avoided, Pacific central bankers need to make sure that they don’t make big mistakes in trying to shield their economies from crisis. Other circumstances are also important. Rising oil prices or instability in financial markets due to the political crises in the Middle East could spark a flight to the dollar and push emerging market exchange rates down even further, making the central bankers’ jobs more difficult.

But there are many good reasons to believe that Pacific emerging economies such as Indonesia are in better shape than they were in 1998 when the Asian Financial Crisis hit and that they will be more resilient to the exchange rate shock. Consider that exchange rate systems are more flexible, central banks tend to be better managed than they were in the late 1990s, bank regulation in emerging economies has improved, and emerging countries in the Asia-Pacific region have accumulated much bigger stocks of foreign exchange to buffer their currencies and economies against an outflow of foreign money. All of these factors make it less likely that we will see a financial crisis.

 
3. What should the United States be doing to minimize the chance of a crisis?

The Federal Reserve System needs to do a good job of winding down its bond purchases at the right time and in a gradual manner. It needs to communicate well with U.S. and international financial markets even as the leadership of the Federal Reserve System changes hands, from Ben Bernanke to his yet unnamed successor.

The bottom line is that with good leadership at both the Fed and at Pacific central banks, a crisis is unlikely. That said, it is a situation that needs to be monitored carefully. Good leadership can never be taken for granted.

---Professor Sumner La Croix


Ronald Coase, 1910-2013

Posted September 5, 2013 | Categories: Blog

Nobel Laureate Ronald Coase passed away unexpectedly on September 2. Despite his age, Professor Coase was planning a trip to China, following up on his 2012 book, How China Became Capitalist. Coase gave a great interview in 2009 about his contributions regarding the market, the firm, and property rights. He modestly dismisses his 1937 "The Nature of the Firm," central to his Nobel award, as the naive musings of an undergraduate. But as the University of Chicago piece notes (and his fellow Nobelian Oliver Williamson has acknowledged), this paper provided the basic insights undergirding the field of transaction cost economics. And while Coase disparages economic theory, theorists continue to find substantial grist for new models in his more recent remarks about the firm -- an organization that is all about friendships, alliances, antagonisms, and strategies -- subjects that can be illuminated by game theory and the theory of endogenous coalitions.

In an apparent departure from Hayek's spontaneous order, Coase asserts that "markets have to be created" and goes on to discuss the difficulty of designing contracts that are clear and administratively feasible enough that sufficient numbers for a market will use the contract. (Hayek would presumably reply that spontaneous doesn't mean costless.)

In the same interview, Coase talks about his 1940s discovery (from a sample of contracts collected by James Meade) that long-run contracts are too vague to be the basis of transactions and can only be meaningfully interpreted from the perspective of relationships among contracting parties. This anticipated the theories of relational contracting (e.g. by I.R. Macneil, Victor Goldberg and Oliver Williamson). In 1959, Coase recommended to the FCC that electronic transmission rights be auctioned. It took the FCC 35 years to follow his advice, and some years later the government had generated 53 billion dollars in revenue from such auctions and stimulated the development of today’s wireless technology and mobile devices.

Bloomberg News provides a nice tribute, including a link to a 1997 interview with Reason magazine. Given the many versions of the Coase Theorem, Coase's own summary may be instructive: "Whether someone is liable or not liable for damages that he creates, in a regime of zero transaction costs, the result would be the same." "All it says is that the people will use resources in the way that produces the most value. I still think it's an obvious point. You wouldn't think there was a need for a Coase Theorem." As it turns out, however, this version of the Coase Theorem can only be proved with extremely restrictive assumptions, including something like quasi-linear preferences to rule out income effects.

At the famous 1959 dinner at the home of Aaron Director where Coase convinced the University of Chicago faculty of what later became known as the Coase Theorem, he stressed the importance of ex ante competition. This suggests a version of the theorem that can be rigorously proved: As the number of contracting pairs increases, the set of viable equilibrium contracts shrinks to the competitive equilibrium. For example, in an apple-bee economy, the competitive contractual equilibrium is identical to the competitive equilibrium with apple owners paying bee keepers for pollination services. So you don't need Pigouvian subsidies. (The same logic applies to the Pigouvian imperative that taxes are needed to internalize pollution externalities.) The upshot of this "equivalence version" of the Coase Theorem is that given the appropriate restrictions, many institutions (contracts, limited markets with Pigouvian taxes, and universal markets) are capable of achieving the same value-maximizing solution. As Coase himself noted after winning his Nobel award, voluntary contracting is likely to be inappropriate for most industrial pollution because there are typically many victims who would have to come to an agreement about negotiating strategy and dividing up the payments from one or multiple polluters.

Many observers deride any version of the Coase theorem, referring to the mythical Coasean world of zero transaction costs and Coase as a Panglossian. This entirely misses Coase’s central thrust. It is precisely because institutions are equivalent aside from transaction costs that they can only be meaningfully compared with transaction cost economics, specifically according to the tradeoff between how closely an institution approximates the transaction-cost free ideal and how much it economizes on transaction costs. By advocating this comparative institutions approach in his own work and as editor of the Journal of Law and Economics, Coase spawned not only the field of law and economics but the new institutional economics as well.

---Jim Roumasset


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