Capital shallowing: the effect of disinvestment on government functioning

Is a term that I am sad to say that I haven't come across.  (Although I have seen the term "capital deepening" applied to the increased income of neighborhoods as demographics change and the neighborhood becomes more attractive at the scale of the metropolitan residential landscape.)

It has so much explanatory power.

It's used in a Financial Times article about the National Health Service in Britain, how with decreased funding and investment, the amount of capital to support each worker, and each facility, declines in systematic ways that often reduce the ability to provide proper care ("NHS capital investment cuts leave England’s hospitals crumbling").

The article argues that while the facilities are declining and the waitlists lengthening, care is still okay.

In the basement pharmacy at St Mary’s Hospital in London, part of the world-renowned Imperial College Healthcare NHS Trust, senior pharmacist Michele Garwood has placed plastic trays beneath the ceiling in an attempt to protect her stock of medicines from regular flooding. 

Elsewhere, on Albert ward, one of five lavatories has been out of use for three months after a hole opened up in the floor, exposing it to the car park below, and rotted floor joists in patient bays, temporarily taped over, represent a constant trip hazard. 

We “still provide the best care we can” but some patients are so horrified by their surroundings that they discharge themselves, said matron Marta Calvo Hernandez. St Mary’s is one example of how a longstanding lack of capital spending is being felt across the NHS. The service is struggling with an accumulated maintenance backlog estimated to be worth more than £10bn, the highest since records began. 

Stephen Rocks, an economist with the Health Foundation, a research organisation, said there had been “a very sustained under-investment in capital” over the austerity years of the 2010s, which had “left the NHS with insufficient capital investment to deliver the care patients need”.  

Rocks suggested this was part of the reason that a growth in staffing levels in the health service did not seem to have translated into a corresponding increase in activity. “We’ve seen a ‘capital shallowing’, with less capital per worker, and that does have a very direct read across to productivity,” he said. 

As a term, apparently it was coined in development economics, making the point that as countries grow in population, there is less money invested in per capita ("Population Pressures, Saving, and Investment in the Third World: Some Puzzles," Economic Development and Cultural Change, 1988).

I wish I had known this concept earlier, because it explains points I've made in various areas.

First, the impact of neoliberal induced disinvestment in government--the US could "slide" for a long time with denigration and disinvestment in government because in the decades before it overinvested. 

But the failures with FEMA and disaster response after Hurricane Katrina and under Trump with Puerto Rico and Houston are a good example.  But I don't know if the failure of the Army Corps of Engineers and levees was about capital shallowing or just politics, failure to adequately address risk, budget shortfalls, etc.

And the failure of the Trump Administration to properly respond to covid.  And the serious problems of the US public health infrastructure to respond to covid after decades of declining budgets ("COVID-19 and Underinvestment in the Public Health Infrastructure of the United States," Milbank Quarterly, 2020).

Of course, the Conservative Party austerity agenda in the UK for the last ten years has had the same kind of debilitating effect ("Austerity urbanism in England: the 'regressive redistribution' of local government services and the impact on the poor and marginalised," Environment and Planning A, 2017).  With covid, policing, transit, health care as mentioned above, care for the aging, defunding of local government, parks, libraries, etc.

Second, with the tax cutting fervor in growing places like Utah--"let's share the benefits of growth"--when growth imposes more costs, not fewer, and by cutting taxes you have less revenue to invest, or a capital shallowing ("A Robust Economy, State of Utah press release).

A third example would be the impact on local governments of declining budgets.  This has been particularly pronounced in Toronto, where the previous mayor refused to raise taxes beyond the inflation rate, even though costs increased at a greater percentage than inflation, with serious negative impact on the quality of municipal services ("Brutal performance art criticism of Toronto's Mayor, John Tory, and his "austerity" agenda").

It can be difficult to separate the effects of neoliberalism, say with the water quality failures in the UK ("Water companies are playing dirty over sewage. That’s why 20 million of us are taking them to court" Guardian) from capital shallowing--the budget of the UK Department of Environment is only £11.47 million FOR THE ENTIRE COUNTRY--and capital shallowing.  

I think they are mutually reinforcing, especially when it comes to "advanced economies" as opposed to developing economies for which the concept was coined.

The five components of housing value

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This blog entry was updated with a new entry, "The eight components of housing value," in 2016.

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I am sure that there is plenty of research on this, but in terms of the last couple entries, I'd say that there are five separate components of housing value which when combined shape the price of houses in particular places.

This more careful consideration of the components of housing value gets at the issue of figuring out how to calculate the long term value of a house and the capacity for significant price appreciation, and being able to differentiate what shapes the difference in prices of houses that while located in different places, are seemingly very similar.

Or as commenter charlie said, "the difference between value and price."

1.  House value: comprised of the characteristics of the house matched with the household characteristics of buyers.

2.  Neighborhood place value: neighborhood characteristics including public safety, schools, civic assets, access to a neighborhood commercial district, the overall charm and quality of the built environment, neighborhood organization and community building, etc.

3.  Neighborhood location value: proximity to key activity centers and other assets, proximity to Downtown, etc.

4.  Neighborhood mobility value: access to and presence of transportation infrastructure including walking, biking, transit, parking, the road network, car sharing vehicles, etc.

5.  Community place value: the overall characteristics of a city/town/suburb including quality of governance, overall quality of schools, public safety, town centers, cultural and civic assets, community involvement, etc.

Note that the housing market is comprised of a wide variety of segments that have a wide variety of preferences when it comes to assessing places on these characteristics.  That's what leads to what is often called the "sorting effect" where people choose the place that best meets the greatest number of their preferences.

People who want to live in walkable neighborhoods move to walkable places.  People who prefer automobility choose places that are highly accommodating to motor vehicles.

The problems that arise come when people move to places that can't realistically accommodate certain of their preferences, especially on mobility.  E.g., it's difficult to live in the core and expect easy street parking.

Quote of the day: "New apartments are generally more expensive than older ones"

From "Apartment rent hikes magnify high cost of a UW education: A rush of new apartments is causing an uptick in rents in the University District, and University of Washington students fear they’re getting priced out of the market." in the Seattle Times. From the article:

Even now, about a thousand new apartment units are under construction in the neighborhood, designated an “urban center” by the city and planned for denser growth. New apartments are generally more expensive than older ones. ...

Fiona Stefanik, a fifth-year student, also found better options outside the University District — she’ll be sharing a two-bedroom apartment with two roommates in Lake City this fall.

“Even though they’re building a lot more housing, it’s still just really expensive, because there is such a high demand,” she said.

Nothing particularly scintillating about these quotes.

Just that it reiterates that a lot of the discussion about the higher cost of housing (e.g., "Why it's so hard to find a cheap apartment in Washington, DC," Post) ascribing the problem of rising housing costs in DC being due to historic preservation is a misreading of economics.

The issue is more that comparatively speaking, historically, DC has a lot more single family housing than apartments. And the single family houses are small.

The issue is low inventory.

Higher demand in the face of low inventory leads to higher prices.

It truly is the most basic concept in economics.

Adding to inventory today won't provide lower cost housing, unless it is subsized, because the cost of new construction is priced into rental rates for new housing at today's market pricing (it's an illustration of LIFO vs. FIFO in accounting practices for the pricing of products--which is most often seen in how gasoline re-prices in the face of rising prices).

However, over long periods of time, adding housing today will result in lower prices, comparatively speaking, in the distant future.

Taxi medallion prices in New York City hit $1 million

A proposal to create a taxi medallion system in DC has met with resistance in this blog and elsewhere because of the way a medallion system creates barriers to entry and monetizes a government-received licensed for the well-connected. This story from the New York Times, "2 Taxi Medallions Sell for $1 Million Each," demonstrates that a medallion system is more about creating large businesses than it is about focusing on service improvements, especially because the original grantor of the license, the municipal government, gets no royalty from the later re-sale of this asset, all the subsequent value is reaped by the licensee.

From the article:

There are 13,237 medallions in the city; new ones, when issued, are sold at auction. But the medallion pool is rarely expanded, creating a scarcity that helps keep values high. (Many owners have objected to a city proposal that would allow livery cabs to pick up street hails outside busy parts of Manhattan, saying such a plan would lower the value of their medallions.)

Large fleets, which can control hundreds of medallions, often find it easy to secure financing to meet the high prices. Medallion sales can make for big business: the biggest lender, Medallion Financial, is a publicly traded company (ticker symbol: TAXI) and shares its skyscraper on Madison Avenue with the Rockefeller Family Fund.

Corporate medallions, like the two sold on Wednesday, do not need to be driven by their owners and can be leased out 24 hours a day. Individual medallions, which make up about 40 percent of the fleet and must be occasionally driven by the owner, are worth slightly less: the latest sale was for about $700,000.

This piece from the Reuters blog, "Why taxi medallions cost $1 million," explains that the price escalation is driven by the rate of return in the context of interest rates.

From the article:

We’re basically talking about a real income stream, here, of about $75,000 per year. (Let’s assume, for the sake of argument, that the income from a taxi medallion rises at the same rate as inflation.) That’s a real yield of 7.5% on a $1 million investment — which isn’t half bad at today’s interest rates.

Put it this way: how much would a bond paying a real yield of $75,000 a year cost? At the most recent auction, the 29-year TIPS cleared at an interest rate of 0.999%. At a 1% real yield, an income stream of $75,000 a year would cost you $7.5 million.

Now you don’t actually get $75,000 a year if you own a medallion. You have to pay for maintenance, insurance, and workers comp; you also have to pay someone to manage your drivers. But even if you bring the income down to $50,000 a year, that’s still a pleasant 5% yield on your money, and what’s more it’s a yield which behaves much more like a real yield than a nominal yield. Paying $1 million for such a thing doesn’t seem silly to me, especially when there’s a lot of room for capital gains as well.

Sprawl promoting economists choose to ignore key economic principles when it suits them

Optimal
Definition: Best, by whatever criterion decisions are being made; thus yielding the highest level of utility, profit, economic welfare, or whatever objective is being pursued.

(This is from an e-list so it repeats some thinking from an earlier blog entry.)

Sam Staley, the Reason Foundation economist whose work isn't all bad, had a not very good op-ed in the weekend Washington Post calling for market pricing of transit use of the region's subway specifically, but failed to address any of the subsidies provided to automobile use. See "How Metro expansion might make sense."

But the thing about Sam that gets me is that as an economist he ought to be concerned foremost about optimality, which in the case of transportation is mobility throughput (and could also take into consideration the maximization of throughput at the least cost).

Mobility efficiency of various modes, one hour's travel. (From the 1977 study, Central Washington Transportation and Civic Design Study.)


Any basic analysis of mobility can't help but come to the conclusion that automobiles aren't very efficient collectively in terms of moving large numbers of people, especially during short periods of time such as during rush periods.

E.g., on two of DC's major bus routes (X bus lines on H Street-Benning Road, 70s bus lines on Georgia Avenue NW), more than 1/3 of the people moving through the corridor do so on buses--about 300 buses in a 22 hour day, a mix of 40 foot and 60 foot vehicles. The rest move through the respective corridors in about 20,000 to 25,000 motor vehicles (although this includes truck traffic).

Think of the space consumed by the buses vs. the other motor vehicle vehicles, and the number of people transported and it's obvious what type of movement should be prioritized. Of course, this is even more pronounced for underground (or aboveground) rail transit services.

Having been in NYC a couple weekends ago, staying in Astoria, Queens which is something like 5 subway stops to Manhattan, I kept thinking about how NYC would be totally incapable of existing the way it does if it didn't have the subway system--imagine all that movement attempted instead by car?

Obviously, the places where this type of system works, like NYC particularly and DC somewhat, are outliers, but only because they have the right conditions to demonstrate how a mobility system more focused on optimality works. They are called outliers, but they aren't outliers in terms of behavior so much as the land use and transportation development paradigm.

Funny that economists promoting sprawl focus on "choice" and attitude rather than the normal type of economic thinking they employ in their other work.