Monday, December 08, 2008

Nouriel Roubini vs. Andrew Zimbalist: housing construction doesn't increase labor productivity

Nouriel Roubini, Professor of Economics at the Stern School of Business at New York University, is known as a prescient and pessimistic analyst of the national and international economy.

Whether or not his predictions are accurate, his criticism of the housing market makes a solid basic point: building housing is not the solution for economic growth and increasing local tax revenues.

That's another nail in the coffin of the misguided, misleading report produced by sports economist Andrew Zimbalist for Forest City Ratner, claiming, astoundingly, that the Atlantic Yards project would bring $6 billion in new revenues mainly because of an increase in housing, not jobs.

And it's another reason Zimbalist's report--along with other economic claims for Atlantic Yards--deserves serious analysis, rather than, as the New York Times did, giving Zimbalist the last word.

Roubini's warning

Roubini wrote 7/11/08 in the RGEmonitor blog of his consulting firm (free registration needed for full post):
Two years ago in July and August of 2006 this author first presented here his analysis of why the U.S. would experience its worst housing recession of the last 50 years, why home prices would fall at least 20%, why the collapse of mortgages would start with the “subprime” ones (a term that at that time was unknown to 99.9% of the public including most investors) and how this housing bust would lead to a severe banking crisis and a credit crunch that would tip the U.S. economy in a recession by 2007. My timing of the recession call was off by six months – as the recession started at the end of 2007 rather than mid-2007 as then predicted – but all the other predictions turned out to be correct.

At that time this author also predicted that this housing bust and mortgage bust would lead to a bust of the two government sponsored enterprises (GSEs) in the mortgage market, Fannie Mae and Freddie Mac.


Here's the crux:
...The reality is that the U.S. has invested too much – especially in the last eight years – in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth. This financial crisis is a crisis of accumulation of too much debt – by the household sector, the government and the country – to finance the accumulation of the most useless and unproductive form of capital, housing, that provides only housing services to consumers and has zippo effect on the productivity of labor. So enough of subsidizing the accumulation of even bigger MacMansions through the tax system and the GSEs.


The $6 billion lie

I wrote 3/28/06 that Zimbalist's report makes a fundamental methodological error.

In its March 2005 analysis, "Slam Dunk or Air Ball?," the Pratt Institute Center for Community and Environmental Development (PICCED) notes that the FCR-sponsored report, and as well as the Kim-Peebles critique, should not have treated housing as a contributor to economic development, because the new taxes paid by residents could also be counted in other economic development plans, such as job-retention efforts.

The PICCED report states:
Zimbalist concludes [in his first report, in May 2004] that the FCRC project, after covering publicly-borne capital and operating costs, will produce a net benefit to the City and State treasuries of $812.7 million (present value terms). However, by far, the largest source of projected revenues ($896.6 million, or 57.9% of the total of $1.5 billion in present value revenues), is in personal income and sales taxes based on the incomes of the new residents of the housing component. Without these housing-related tax flows, Zimbalist’s estimates show that the balance of the FCRC project is a money-loser to the City and State treasuries, i.e., the only way the FCRC proposal overall makes fiscal sense is by including tax revenues from the housing component.

Major Flaw in Both Studies These two studies share a major methodological flaw in that they both count the positive fiscal effect of the income of the residents who will occupy the 4500-unit residential development. While the two studies make different assumptions about the likely income of new residents, (Zimbalist assumes an average income of $80,000; Kim and Peebles assume and average of $50,000 to $60,000) both give the overall project credit for the income of new residents, and for the local and state tax revenues that such incomes would generate.

This is a very problematic assumption, tantamount to assuming that residents bring their own jobs to the City when they move in to a new housing unit. While residents who are new to the City will add to the City’s labor supply, unless they are self- employed, they do not “create” their own jobs. If the City started to give housing projects “credit” for the creation of jobs held by their residents, a double counting problem would result since the city routinely gives businesses “credit” for expanding employment or relocating jobs to NYC and this then often enters into the fiscal “score-keeping” for economic development projects receiving City (and State) subsidies.

(Emphasis added.)

I asked James Parrott of the Fiscal Policy Institute, who worked on the Pratt report, if there was any precedent for Zimbalist's methodology. He responded, "I don't know of any serious cost-benefit analyses of mixed-used economic development projects that count the taxes of residents. That's why we said it was a methodological flaw."

The Independent Budget Office did not analyze the non-arena portion of the plan, citing "the methodological limitations in estimating the fiscal impacts of mixed-use developments."

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