Build It and They Will Pay

Michael Messner, an investment-fund manager, writes:

More than 150 years ago, America’s greatest landscape architect, Frederick Law Olmsted, created Central Park and changed New York forever. He went on to transform dozens more cities, leaving a priceless legacy of vibrant, beautiful cityscapes. And, in the process, he increased property values.

Olmsted discovered this himself when he tracked the value of land around Central Park and found that the city’s $13 million investment had led to an astounding $209 million increase in just 17 years. The architect recognized what many planners still fail to grasp: Parks and managed green space are vital pieces of urban infrastructure that not only improve the quality of life for millions of people but also drive economic growth….

We don’t have the luxury of vacant land that Olmsted often started with, so we must bulldoze underperforming and underused property, put people to work creating parks on some of the land and “bank” the rest until the economy recovers.

Beginning with Atlanta, Georgia Tech is researching what is needed to accomplish this in 12 major cities. The project is known as Red Fields to Green Fields. Under this plan, some of the abandoned or underutilized property would be acquired by a parks agency or by public-private partnerships, which would then begin demolition, park design and construction, putting people to work immediately. More jobs would come as the improved areas attracted development….

The banking system and the federal government could play an important role in this effort. Rather than backstop bad real estate paper, the Federal Reserve, the Federal Deposit Insurance Corp. and the Treasury Department could help finance the acquisition of excess commercial real estate through a land bank fund. Instead of buying mortgage-backed securities, why couldn’t the Fed buy excess developed real estate to be held as green space through “land-backed securities”? Why couldn’t the FDIC give some of the useless properties it obtains through bank closures to land banks or nonprofit organizations? With the right financing structure, philanthropic entrepreneurs could use leverage to remake America just as some of our bad developers used easy bank financing to help create the excesses. (“Olmsted’s ideas could help solve our real estate mess,” The Washington Post, January 6, 2011)

In other words, why not bestow parks and green spaces on selected urban areas at the expense of every taxpayer in the United States?

What’s wrong with that idea? Plenty. Let’s start with Messner’s financing scheme. The money for a land bank fund has to come from somewhere, and that somewhere, when you get down to it, is taxpayers’ pockets. The Fed’s purchase of “excess” real estate probably would be accomplished by, in effect, printing money, thus burdening taxpayers (and others) with the hidden tax of inflation. Regarding the idea of an FDIC giveaway, it’s evident that Messner thinks that developed properties have no market value just because they’ve been abandoned. But that’s not so, and any market value that they do have is owed to the taxpayers of the United States, for which the FDIC is merely an agent. I don’t know how the Treasury could help to finance the purchase of “excess commercial real estate” (whatever that is) without imposing a tax burden (or its Ricardian equivalent) on Americans. (Perhaps Messner believes that the money in the Treasury is a gift from the Tooth Fairy.) Finally, Messner’s superficially reasonable proposal is bound to be used as justification for efforts to spend tax dollars, at the State and local levels, if not at the federal level.

Let’s turn to the supposed benefits of Messner’s proposal. His essential claim is that the cost of beautification is returned many-fold in the form of higher property values (for the owners of neighboring properties) and vague promises of economic growth and a better quality of life. I’ve blogged elsewhere (here and here) about the fundamental flaw of cost-benefit analysis, as it is applied to government projects. The flaw is this: Most of the benefits don’t accrue to those who bear the costs. So the creation of a park causes a rise in the value of the land around it? So what? If I don’t own some of that land, all I get out of it, except for an occasional visit to the park if it’s close to me, is a higher tax bill.

Messner’s proposal, if adopted, would be a classic case of collusion between “bootleggers and Baptists.” How does that work? The bootleggers (those with a vested financial interest) are the owners of properties near the proposed site of a park or green space. The Baptists (the do-gooders) are the politicians, planners, and others who think it would be nice if the people of city X have access to a new park or green space. (Messner, in this instance, may be a bootlegger and a Baptist.)

In the case of Messner’s scheme the bootleggers and Baptists would be getting richer and feeling better about themselves, while they victimize the vast majority of individuals who would (a) pay for the creation of parks and green spaces but (b) derive little or no benefit from them. There’s an exact analogy with tax-funded venues for professional sports teams. Such venues benefit owners and bring satisfaction to “civic minded” leaders, the small minority of citizens who actually attend games, and the somewhat larger minority of citizens who gain psychic income from having (or retaining) a local team. But, as many studies have shown, tax-funded sports venues don’t create jobs or spur economic growth (for reasons I discuss below).

It may be true, as Messner asserts, that the creation of parks and green spaces would “improve the quality of life for millions.” But it would be true only for those millions who are getting more than their tax-money’s worth of enjoyment from the parks and green spaces that they helped to pay for. Many more millions would not get their tax-money’s worth of enjoyment from those parks and green spaces. Moreover, taking money from me to improve my “quality of life” signifies rank presumption about my values and preferences.

What about economic growth, which Messner also invokes? Well, the creation of parks and green spaces, in addition to requiring land, also requires the use of various types and quantities of labor and capital. If Messner is implying that economic growth would result from the use of unemployed labor and capital, he’s relying on a discredited Keynesian theory. A piece of land is removed from a potentially productive use; the associated labor and capital are devoted to the creation of something (a park or green space) that doesn’t result in greater productive capacity. And as the economy recovers while the land, labor, and capital are diverted to the creation of parks and green spaces, the land, labor, and capital are unavailable for use in the production of consumer goods and productivity-enhancing capital goods. I’m at a loss to understand how the creation of a park or green space contributes more to economic growth than the alternative uses of the same resources by the private sector. It seems to me that the tax-subsidized creation of parks and green spaces can only reduce the rate of economic growth. (Perhaps the productivity of workers is enhanced greatly, and magically, by the knowledge that there is now a part or green space to which they can repair for rest and relaxation. Hah!)

In summary, there’s no free lunch. When tax money is used to raise property values and improve the “quality of life” in one place (or a bunch of places), those higher property values and improved lives are paid for by lower property values and economic deprivations elsewhere — and by reduced economic growth for almost everyone, except the “bootleggers.”