Urban Public Finance Class

I found an interesting class that has course materials posted on Open Courseware, 11.902 Advanced Urban Public Finance: Public Action and Provision of Local Public Goods.

Course Description

In analyzing fiscal issues, conventional public finance approaches focus mainly on taxation and public spending. Policymakers and practitioners rarely explore solutions by examining the fundamental problem: the failure of interested parties to act collectively to internalize the positive externalities generated by public goods. Public finance is merely one of many possible institutional arrangements for assigning the rights and responsibilities to public goods consumption. This system is currently under stress because of the financial crisis. The first part of the class will focus on collective action and its connection with local public finance. The second part will explore alternative institutional arrangements for mediating collective action problems associated with the provision of local public goods.

The objective of the seminar is to broaden the discussion of local public finance by incorporating collective action problems into the discourse. This inclusion aims at exploring alternative institutional arrangements for financing local public services in the face of severe economic downturn. Applications of emerging ideas to the provision of public health, education, and natural resource conservation will be discussed.

Urban Dynamics Review : Part Four

Part Four - Applications to Urban Policy Design

Self-Learning Revival Policies in Urban Dynamics by Nathaniel Mass
The policy response can vary with the dynamically changing parameters of the system. "We will introduce a 'self-learning' revival policy," which is like a compensator in an electrical circuit. In urban dynamics, the rates of slum demolition and the incentives for new enterprises are adjusted each year according to the new parameters of the system.

"This policy is a fairly simple example of an engineering 'integral controller.'...The concepts of system sensitivity developed in this paper apply to a very broad class of systems. Frequently, changing parameter values in a social system can 'shift the mode of operation so as to affect the design of new policies.' A careful search for such influential parameters should accompany any policy design effort. Once an influential parameter has been identified, the analyst should look for ways to make the system insensitive to that parameter."

Control of Urban Growth by Jay W. Forrester
Forrester suggests some policy tools to implement solutions from urban dynamics models.

Money - "The trend toward interpreting urban problems as a financial demand on higher levels of government must be reversed. Higher levels of government can be most effective by exerting pressures for local action, by altering the tax policies that encourage the perpetuation of old buildings in declining urban areas, and by reversing the policies that favor housing over jobs so that residential construction will no longer rise beyond the economic population-supporting capacity of the area."

Tax Laws - "The aging of buildings is an intimate part of the urban decline process. the shifting of taxes from real estate to incomes means that the old buildings and the land they occupy need not be used effectively; then can be allowed to decay with little tax penalty."

Population Density - "Population densities in both residential and commercial zones are allowed to rise in response to the fallacious argument that rising land prices require more intense use...we allow a land-price-population-density spiral to continue until excessive loads are thrown onto transportation, pollution, psychological trauma, and other factors of the urban environment."

Zoning - "Zoning as in the past divided land into blocks that are too large and too homogeneous that deteriorates as a whole into a substandard condition avoided by new construction to become a slum. Too much area is also zoned for residential use compared to industry. The failure to zone so that only forest and agriculture are allowed in rural areas immediately adjacent to urban areas permits urban sprawl to develop and removes the necessity to rebuild and reuse the aging urban areas."

Selected Stresses - "We must cherish and preserve the pressures that go with the chosen style of urban environment."

Realistic Goals - "We must contemplate realistic urban goals that include negative forces powerful enough to limit population and population density."

Control of Urban Growth by Jay W. Forrester
"This was presented as the keynote address to the meeting of the American Public Works Association in Minneapolis, Minnesota, Sept 25, 1972." Forrester makes a case for why technology in the form of more road infrastructure, sewage, and electrical wiring cannot solve the problems in a city without limiting the population density. Also, exponential growth cannot continue forever.

"Growth has continued past the point where suboptimizing is satisfactory. Suboptimizing means the meeting of a local goal without attention to consequences in other parts of the system. During the past period of our industrial growth, the various facets of the technical-social-economic system were sufficiently uncoupled that suboptimizing was a satisfactory procedure for decentralization. Suboptimizing allowed different groups to pursue their own ends independently, with confidence that the total good would thereby improve.

"I see no solution for urban problems until cities begin to exhibit the courage to plan in terms of a maximum population, a maximum number of housing units, a maximum permissible building height, and a maximum number of jobs.

"A city affects its local choice between quantity and quality mostly by how it handles the diffuse versus the compartmentalized components of attractiveness. The objective should be to maximize the diffuse characteristics of the city in order to improve the quality of urban life while controlling the compartmentalized characteristics in order to prevent the expanded population that would defeat the improvement for present residents. The diffuse characteristics, such as public safety and clean air, are shared equally by all...and they apply alike to present residents and those who might move in. The compartmentalized characteristics of a city, like jobs and housing are identified with particular individuals; they can be possessed by present residents but are not necessarily available to others."

Lowell Dynamics: Preliminary Applications of the Theory of Urban Dynamics by Walter W. Schroeder
The Urban dynamics modelers worked with the city of Lowell to discuss the biggest problems and make policy recommendations. There were nine "biggest" problems: unemployment, parking, transportation, taxes, city revenues, education, housing, crime protection, code enforcement, and federal and state controls.

They consider the two leading suggestions by the Lowell planners, which are to demolish the Mill and to impose a service tax plan on currently untaxed property. The analysis showed that demolishing the mill would be expensive, and one alternative would be to convert existing "large plant facilities to several smaller industrial condominiums...small-scale development would make it financially possible for small, young firms to locate in these structures. Since the condominiums would be organized such that none of the units could be demolished without the consent of the other occupants, the threat of forced relocation in the near future would be significantly reduced." The system dynamics analysis discourages the service tax plan. The problem is that more and more money will always be perceived as necessary.

Some really interesting results and policy recommendations had to do with land assessments, taxes, and zoning. One problem is that residential buildings are assessed at a lower value than commercial and industrial buildings so that businesses pay more taxes than the homeowner. This drives the trend towards excess housing.

Similarly, homeowners end up paying higher taxes than renters because of tax rules, and thus the area is trending towards higher-density living. The buildings then deteriorate faster because there is less incentive for the renter or landlord to maintain the facilities.

The authors recommend reducing the stock of substandard housing because "aged housing contributes little to the city's tax base or to its socioeconomic vitality." It would be best if landlords demolished or renovated their old buildings voluntarily. This can be done by limiting tax abatements that the city grants to owners of old buildings. "Should the owner fail to demolish, at least the more rapid buildup of back taxes would warrant the city taking a lien on the property before it loses all of its market value."

They also recommend reducing reliance on federal assistance for subsidized housing. Zoning can also help to create a healthy balance between residential buildings and commercial buildings.

Urban Dynamics Review : Part Three

Part Three - Model Alterations

Structural Changes in Urban Dynamics: Housing Obsolescence and Housing Demand by Nathaniel J. Mass
This explores a reformulation of the rate of housing-obsolescence saying that it should be slowed by an excess of housing in the next lower category of housing quality. However, after running some simulations, Mass shows that the result is the same.

Modeling City-Suburb Interactions by Alan K. Graham
The urban dynamics model assumes that people live and work in the same city, not accounting for commuting. The conclusion is that the additions to the model do not impact the recommendations.

Two Modifications to the Tax Sector of Urban Dynamics by Michael R. Goodman
Forrester's urban dynamics model applied outside funding to new programs in a city. One modification could be that outside funding would only go towards paying down the debt, "a revised financial aid subsidy program." This does result in an improvement in the Tax per capita radio, Tax ratio needed, and the Underemployed to labor net.

Another modification could be to change the tax needs per person such that they "increase with progressively higher local unemployment rates, and conversely." However, there is no difference in the results after this is implemented partly because this is already incorporated into the old model although not explicitly.

A Dynamic Model of Land Pricing and Urban Land Allocation by Nathaniel J. Mass
The Urban Land Market is incorporated into the Urban Dynamics model. This also did not have a significant impact on the results. However, this analysis can help city planners with determining appropriate zoning policy. "Zoning policy would need to be combined with other policy measures designed to control urban population."

Adapting Urban Dynamics to Lowell by Walter W. Schroeder III and John E. Strongman
Here is some analysis about whether the urban dynamics model accurately describes Lowell, Massachusetts. They conclude that it can, and that it can help design policy for urban renewal.

Urban Dynamics Review: Part two

Part two - Conceptual Issues

Aggregation and Definition: The Underemployed, A Case Study by Michael R. Goodman
The underemployed in Forrester's Urban Dynamics model is not the same as defined by census data. We have to be careful about definitions.

Business Structures and Economic Activity in Urban Dynamics by Nathaniel Mass
Some clarifications about business construction. "New-enterprise buildings are constructed predominantly by established firms that are expanding their production capacity and employment levels" not start-up ventures. Actually, young firms are usually in declining-industry structures. "New enterprise structure may be either newly constructed or newly renovated, as long as...employment densities in the building are comparatively high, and the building's tax contribution to the city is large because of its high assessed value."

Turnover in a building happens for several reasons. One is that "changing technology imposes changing requirements for headroom, floor weight capacity, power, and lighting, and work-flow patterns. Turnover rate also depends on...the business climate within the community, taxes, labor, and manager availability, and the socioeconomic character of the urban area...High business turnover rates promote rapid obsolescence of industrial structures because new owners often use the space less efficiently, employee density decreases, and the building becomes more technologically obsolescent."

Dynamic Migration Models by Michael W. Laird
This contrasts the systems dynamics model for migration with the conventional model for migration, which is the gravity model. The main difference is the calculations for attractiveness that are dynamic. The gravity model implies that migration depends only on the sizes of the populations and the distance between places. It mentions the work of I. S. Lowry, who includes an attractiveness factor, but it is not dynamics, although he notes the feedback nature of attractiveness.

Issues of Empirical Support for the Migration Formulations in Urban Dynamics by Michael R. Goodman and Peter M. Senge
This article is interesting because it discusses some difficulties in measuring correlation in real empirical data, making it difficult to verify the causal links in system dynamics models. It discusses four issues.

1. Limitations on inferences which can be drawn from statistical techniques in the face of the restricted time span and range of existing migration data
2. Problems in interpreting parameter estimates derived from cross-sectional data analysis
3. Difficulties in estimating nonlinear relationships containing significant time delays
4. Problems in drawing statistical inferences regarding the error process of a continuous dynamic system.

Metropolitan Population growth, Land Area, and the Urban Dynamics Model by Wilbert Wils
Wils compares the urban dynamics model with actual data of population growth in Massachusetts where "vigorous expansion initially occurs in the central city, but growth later moves outward to the periphery of the city where population densities are lower." This result almost seems like common sense. One distinction from other theories, though, is that in the urban dynamics model, urban decay in the central city precedes expansion rather being caused by expansion.

Urban Dynamics and Its Critics by Louis Edward Alfeld
This is mainly a defense of urban dynamics. Most critics focus on the specific recommendations without addressing fixes to the model with most criticism directed at how the recommendations are bad for the poor and how there is not enough empirical data.

Understanding Urban Dynamics: An Analysis of Garn's Interpretation by Alan K. Graham
This is a response to analysis and criticisms of Harvey Garn of the Urban Institute. Garn was concerned that the urban dynamics recommendations might just be keeping the poor out, make the city better but the nation worse, and that the model neglects the impact of the city-suburb interaction.

Urban Dynamics: Book Review

I finished reading a book on Urban Dynamics, which is a system dynamics model of cities originally by Forrester.

Readings in Urban Dynamics : Volume I
edited by Nathaniel Mass, 1974

Even though I didn't read Forrester's original paper, these readings fill me in about the most important aspects of the model and also resulting controversies. I'm going to summarize most of the articles.

Part One - Overview
Managing Our Cities - Can We Do Better? by John F. Collins
John F. Collins was the former mayor of Boston and afterward became a consulting and visiting professor at MIT, so it's interesting to hear his perspective. His main points are that the problems of poverty, inadequate housing, crime, unemployment, and overcrowded transportation systems in cities do not simply lack money. It is impossible to build a "perfect city" because of the "attractiveness principle" in Urban Dynamics. Basically, a city that is universally more attractive compared to its environment attracts people who move in and overload the city's amenities. Cities therefor need to cater improvements towards its residents and seek to be distinct from other cities so that it's not attractive to everyone. Cities at the time (I don't know about today) were becoming more alike. Instead cities could specialize and become resort cities, manufacturing cities, educational, or educational cities, etc.

System Analysis as a Tool for Urban Planning by Jay W. Forrester
Managerial, urban, and economic systems are nonlinear complex systems. Forrester summarizes the Urban Dynamics model he came up with.

"Nine levels are groups into three subsystems. The industrial sector contains commercial buildings in three categories distinguished primarily by age. Across the center are residential buildings in three economic categories of population. Across the bottom are three economic categories of population...The age of a building tends to determine the character of its occupants. A new commercial building is occupied by a healthy, successful commercial organization that uses relatively more managers and skilled workers than unskilled workers. As the building ages, it tends to house a progressively less successful enterprise with lower employment skills. In addition to the changing employment mix as the industrial building ages, there is a tendency for total employment per unit of floor space to decline. On the other hand, as residential buildings age, there is a tendency for occupancy to increase as well as to shift to a lower economic category of population. One then perceives a condition in which the aging of buildings in an urban area simultaneously reduces the opportunities for employment and increases the population. The average income of the community and standard of living decline."

new enterprise - mature business - declining enterprise
premium housing - worker housing - underemployed housing
managerial professional - labor - underemployed

Forrester recommends reducing slum housing by about 5%/year and putting in incentives for new enterprise. According to his models, in the long run, this will produce a reduction in the underemployed to job ratio and the tax ratio needed.

Understanding Urban Dynamics by Gerald O. Barney
Barney clarifies some subtleties in the model. "The urban system is an example of a 'complex system' - a system whose behavior is dominated by multiple-loop, nonlinear feedback processes."

Forrester's solutions have two criteria : must be lasting (decades) and must increase upward mobility of underemployed.

Forrester's proposal of demolishing slum housing just seems like making a place richer by reducing the number of poor people. In a sense that is the solution because the problem is that there is too high a percentage of underemployed and not enough wage earners to generate tax revenues needed for the city to provide amenities to the residents. However, his solution ultimately benefits the underemployed because attracting new enterprises and jobs increases the number of underemployed that the city can support, and it also improves upward mobility so the quality of life for the city's underemployed is improved.

"In actual practice, [current urban programs] generally have a similar and characteristic development pattern: an initial period of slight improvement and generation of hope, followed within a few years by readjustments within the urban system that result in a loss of gained ground. The net result has been increased concentrations of underemployed, continually decaying conditions, and growing hostility of the underemployed toward the 'System' and toward the 'Establishment' that they think controls the 'System.' Actually...the failure of our urban programs is due not to the control of the establishment, but rather to a collection of feedback processes that are at work within the system and are almost beyond the influence of the establishment."

"Urban renewal (as practiced in the fifties) and the relocation of underemployed in low-rent suburban housing have destroyed communities and transplanted the underemployed to new locations where they are needed and wanted no more than they were before the relocation."

A Systems Approach to Urban Revival by Louis Edward Alfeld and Dennis L. Meadows
They mention the that many people have been migrating to California, and now it is becoming a less attractive place to move to. It's interesting that they said this in the 74 since I'm pretty sure in-migration has continued and still continues although now they really have a massive budget and water crisis.

"Schools and other city services become overloaded, available job opportunities decrease, recreational facilities become crowded, travel becomes difficult, and natural beauty is continually despoiled by an expanding population."

This article then goes into a little bit more technical detail about the urban dynamics model and solution. It depicts the feedback loops with in-migration and housing availability, feedback loops with job availability and migration, and feedback loops with revenue needs, migration, and housing construction.