Reason Foundation - Authors > Edward Stringham

The Catastrophe of What Passes for Alcohol Policy Analysis

info@reason.org (Edward Stringham) — Tue, 12 May 2009 17:06:00 EDT

Is alcohol a good like other economic goods, or is alcohol a "catastrophe" that should be heavily taxed?

Nothing to Toast in California's Proposed 'Dime a Drink' Tax

info@reason.org (Edward Stringham) — Mon, 20 Apr 2009 17:57:00 EDT

Orange County Register

California's taxes just aren't high enough yet. So Assemblyman Jim Beall Jr., D-San Jose, has introduced a bill that would raise alcohol taxes by a dime a drink. The government figures it can raise $1.2 billion a year by taxing every drink you choose to have.

In a press release, Mr. Beall explained why you need to pay more taxes: "The alcohol industry creates devastating problems – traffic accidents, alcoholism – and walks away with money stuffed in its pockets while the public – including nondrinkers – are left to pay billions for the mess."

And you thought that glass of wine with your dinner wasn't hurting anybody.

Mr. Beall is parroting the Marin Institute's deceptive and inaccurate claim that alcohol "costs" California taxpayers $38 billion a year and that high taxes will somehow reduce high-risk alcohol consumption. Let's look at a few ways the folks at Marin allege alcohol is costing you money.

They contend drinking costs the state "$25.3 billion in lost productivity and reduced earnings."

That claim, simply, is false. My 2006 Reason Foundation study found that drinkers earn 10 percent to 14 percent more money than nondrinkers. Men who drink socially, visiting a bar at least once a month, bring home an additional 7 percent in pay.

A 2005 study sponsored by the National Institute for Alcoholism and Alcohol Abuse similarly found that drinking actually increased the returns to both education and work experience. And a 2001 study, "The Impact of Problem Drinking on Employment," found that even "problem drinking is not negatively related to labor supply."

The Marin Institute says another $8 billion in annual costs to taxpayers stem from alcohol-related crime. Research indicates about one-third of violent crimes involve alcohol. The explicit assumption in blaming these crimes on alcohol is that the offenses would not have occurred without it. There is no proof of that. Just as there is no guarantee that criminals committing violent crimes would be upstanding, law-abiding citizens if they refrained from drinking.

The overwhelming majority of people who consume alcohol do so responsibly. At some point, personal responsibility has to enter the equation and the choices people make have to receive the blame. But alcohol is such a great scapegoat. When former Congressman Mark Foley was caught in a scandal with an underage page, he blamed alcohol and went to rehab. After Mel Gibson went on an anti-Semitic rant and comic Michael Richards had a racist tirade, they blamed booze and entered rehab centers, too.

The Marin Institute's motives for pushing higher alcohol taxes are clear. Its stated mission is to make "communities free of the alcohol industry's negative influence." And on its Web site frets that "67 percent of adults 21 years of age and older in the United States reported drinking alcohol in the past 30 days."

Funny, I thought adults consuming alcohol was perfectly legal.

Mr. Beall and Marin's whole strategy of taxing people sober (with the long-term goal of eventually going back to prohibition) is fatally flawed. Consider the group of people they say they are most openly targeting: alcohol abusers and criminals. Research indicates that the heaviest drinkers do not curb their drinking in response to higher prices, unlike light-to-moderate drinkers, for whom there can be positive health benefits. This should not surprise anyone. If alcohol abusers are truly addicted, will an extra "dime a drink" stop them? Will a career criminal decide to not get drunk before his next crime spree because of a 10-cent-per-drink tax? Of course not.

What higher taxes do, however, is infringe upon the rights of the millions of Californians who legally enjoy a margarita with a Mexican dinner, a beer with pizza or a glass of wine in the evening. Millions of moderate drinkers are enjoying themselves responsibly. Is that really a reason to tax them?

Edward Stringham, Ph.D., is an adjunct scholar at Reason Foundation and professor at Trinity College. This column first appeared in the Orange County Register. Stringham's study on alcohol and earnings is here.

No Booze? You May Lose

info@reason.org (Bethany L. Peters) info@reason.org (Edward Stringham) — Fri, 01 Sep 2006 00:00:00 EDT

Executive Summary

A number of theorists assume that drinking has harmful economic effects, but data show that drinking and earnings are positively correlated. We hypothesize that drinking leads to higher earnings by increasing social capital. If drinkers have larger social networks, their earnings should increase. Examining the General Social Survey, we find that self-reported drinkers earn 10-14 percent more than abstainers, which replicates results from other data sets. We then attempt to differentiate between social and nonsocial drinking by comparing the earnings of those who frequent bars at least once per month and those who do not. We find that males who frequent bars at least once per month earn an additional 7 percent on top of the 10 percent drinkers’ premium. These results suggest that social drinking leads to increased social capital.

Universal Preschool Benefits Miscalculated and Overstated

info@reason.org (Chris Cardiff) info@reason.org (Edward Stringham) — Tue, 06 Jun 2006 00:00:00 EDT

On June 6th, California voters will decide whether to enact Proposition 82, the Preschool for All initiative. The $2.3 billion annual cost of the program will be added to the $3 billion California already spends on preschool programs. Most of the $2.3 billion will go to middle- and high-income families who are already paying for preschool in the private market. Less than 10% of the funds will go to low-income families.

Over the last decade, the California Legislature has been unable to justify the additional spending for universal preschool. So what is the new justification for bypassing normal legislative procedures in order to enormously expand spending?

An economic rationale for universal preschool was provided by a widely heralded cost-benefit analysis performed by the RAND Corporation in 2005. The RAND study concluded with the headline-grabbing claim that taxpayers could get "$2 to $4 of benefits for every dollar spent" on preschool.

But universal preschool won't produce anywhere near that return for taxpayers. That's because, in RAND's own words, their projections are "sensitive to assumptions" about the benefits, and our investigation shows that RAND's assumptions are widely off base.

The RAND study arrives at its optimistic conclusion by significantly overstating the benefits of such a program and ignoring enormous costs. We looked at their analysis in depth in our new study - An Assessment of Rand Corporation's Analysis and Proposals for California - and found that the RAND report has a number of problems.

Even if we take their numbers at face value, it is quite easy to show that if we alter any one of their unrealistic assumptions, universal preschool generates net losses from 25 to 30 cents on every dollar. Most telling is that we did not have to go far to find these assumptions — the RAND study documented these alternatives themselves but chose not to use them when making their forecast.

First, the RAND study estimates benefits for California based on selectively chosen studies from cities in other states that do not resemble California in the slightest. They base estimates on small-scale pilot programs aimed at low-income, high-risk populations and they assume the results will scale to all California preschoolers. Other studies have shown that these programs had little measurable long-term benefits but the advocates of this new bureaucratic program simply ignore these facts.

Second, RAND and advocates of universal preschool assume that children from low-income families currently attending government-run preschools will receive, at a minimum, twice the benefits they currently get from preschool. That is, by transferring from their current government-run preschool to a new, universal government-run preschool, these children will be much more successful in life.

Does it make any sense to expand a system that in many ways is already failing low-income families in both the K-12 arena and in preschool? And is it at all believable to expect the new government-run system to be, at a minimum, twice as effective as the existing one? Who has ever heard of a new government program replacing an old one that achieves results of this magnitude?

Third, RAND's benefits argument assumes that children of middle- and upper-income families who already attend private preschool will receive net benefits by transferring to government run universal preschools. Imagine a proposal that plans to put all private restaurants out of business and replace them with government-run cafeterias. Would anyone believe that consumers who were forced out of those private restaurants would be better off once they were closed?

The rosy arguments attempting to justify tax increases and a massive bureaucratic program rely on heroic and unbelievable assumptions belied by the real-world evidence.

The fatal flaws in the arguments for universal preschool suggest we will lose money for every dollar spent on universal preschool and end up with another massive government program that hurts taxpayers, parents, and children.

Christopher Cardiff and Edward Stringham are economics professors at San Jose State University and are the authors of the study An Assessment of Rand Corporation's Analysis and Proposals for California. Reason Foundation's other universal preschool research and commentary is here.

Affordable Housing in Monterrey County

Sun, 01 Aug 2004 00:00:00 EDT

Executive Summary

Monterey County is in the process of updating its General Plan. The old proposed General Plan Update (GPU) had a number of problems and was voted down by the Board of Supervisors in May 2004. Now that Monterey County has an opportunity to draft a new General Plan Update, it can learn from the mistakes in previous work.

This report analyzes the old proposed General Plan Update and the Economic Impact Analysis (EIA) conducted by Applied Development Economics, Inc. We find that the economic analysis for the county is based on false premises and faulty economic logic. The future General Plan Update should seek to avoid the mistakes in the old proposed GPU and the EIA.

The old proposed GPU included numerous regulations that would have severely affected the livelihood of Monterey citizens. Among the documents’ stated goals were the reduction of residential development and the promotion of affordable housing. Unfortunately, these goals are contradictory. By mandating large minimum lot sizes and requiring developers to provide a certain amount of money-losing “affordable housing” units, the county would only reduce the available supply of housing. This would lead to price increases, quite the opposite of more affordable housing.

In addition, the GPU and the EIA made unrealistic assumptions about the cost of additional services and infrastructure required by new development, particularly in rural areas. Such rural areas currently do not receive full government services. Thus, including the cost of full government services in rural development impact projections is disingenuous. Those projects that require additional services in rural areas should instead be encouraged to ensure that developers provide the necessary infrastructure in their new developments or to form homeowners’ associations or other voluntary cooperative organizations to adequately address the homeowners’ needs.

The preservation of agricultural land is also a major issue. While supporters of the old proposed GPU and the EIA claim that the policies they advocate will aid farmers, the truth is that restrictive land-use regulations will only reduce the value of the farmer’s chief asset: his land. Scientific and technological advances have increased agricultural productivity. Farmers should have the flexibility to use their property as they see fit and the ability to make their own land-use decisions to improve their well-being. The old proposed GPU attempted to micromanage the economy of Monterey, and it would have led to dire consequences. In every case, the old GPU and EIA call for additional land-use regulations that would have only led to greater economic hardship and a diminished quality of life for Monterey County residents. The new General Plan Update should seek to avoid these mistakes.

Huge Hidden Tax on Homes

info@reason.org (Benjamin Powell) info@reason.org (Edward Stringham) — Wed, 30 Jun 2004 00:00:00 EDT

Orange County Register

The median sale price of a home in Orange County hit $543,000 in May, according to Data-Quick, a real-estate information service. Now imagine finding out you paid a hidden tax of $66,000 as part of the purchase price of your new home.

Most buyers would regard this as unfair, yet that is exactly what is already happening in a number of communities in Orange County and Los Angeles. The hidden tax is called "inclusionary zoning" — and a number of cities such as Brea, Laguna Beach, San Clemente and San Juan Capistrano have already implemented it.

Inclusionary zoning is a price control that requires homebuilders to sell a portion of new homes in a development at below-market prices. A typical ordinance caps the maximum home value for 10 to 20 percent of a development so that it is "affordable" to families with low to moderate incomes.

It sounds harmless enough, but proponents of these programs mislead the public when they say there is no cost to these ordinances. Someone must pay for the subsidized units. That someone is you, when you buy a home.

When a subsidy to each "affordable unit" is required for permission to build, the subsidy acts as a tax on the remaining market-rate homes. This tax can be quite large. In some cities such as San Juan Capistrano and Laguna Beach, our research show inclusionary zoning drives up housing prices by more than $100,000 for each market-rate home.

Builders pass on this tax to land- owners and market-rate homebuyers. If they cannot pass it on, they simply stop building and move to other jurisdictions. Exactly how the tax is split between landowners and homebuyers varies depending on market conditions. Our new Reason Foundation report estimates that the inclusionary tax adds $33,000 to $66,000 to the price of a new home in the median Orange County and Los Angeles jurisdiction.

Allowing new home production to keep up with demand is the key to keeping housing affordable for everyone. Unfortunately, inclusionary zoning does the opposite. When landowners and builders are forced to absorb part of the tax, it lowers the incentive to build new homes. In the eight Southern California cities with data available, we found that in the seven years after passing an inclusionary ordinance, new housing production decreased by 61 percent. That amounts to 17,296 fewer homes in those eight cities. Yet during that time inclusionary zoning in those eight cities led to only 770 "affordable" units.

Homebuyers and taxpayers have to question whether a paltry 770 units are worth the cost when it means some 17,296 fewer homes. By discouraging production of 17,296 homes in those eight cities, an estimated $11 billion worth of housing was essentially destroyed.

A housing production decrease of this magnitude forces buyers to bid up the price of both new homes and old. Housing becomes less affordable. Some might consider these costs worth it if the ordinances produced a significant number of "affordable units." Unfortunately, they do not.

The average jurisdiction with inclusionary zoning produces only 34 "affordable" units per year. Are the few homes produced really worth this enormous cost?

A number of Southern California cities, including Los Angeles, are considering imposing affordable housing mandates. Voters and their representatives would do well to study the track record of the existing Southern California ordinances before they move forward. They will find that inclusionary zoning acts as a tax, raises the price of most homes, produces few units and actually makes most housing less affordable.

Benjamin Powell, Ph.D. and Edward Stringham, Ph.D. are professors of economics at San Jose State University.

Do Affordable Housing Mandates Work? Evidence from Los Angeles County and Orange County

info@reason.org (Benjamin Powell) info@reason.org (Edward Stringham) — Tue, 01 Jun 2004 00:00:00 EDT

Executive Summary

California and many urban areas nationwide face a housing affordability crisis. New housing production has chronically failed to meet housing needs, causing housing prices to escalate. Faced with demands to “do something” about the housing affordability crisis, many local governments have turned to “inclusionary zoning” ordinances in which they mandate that developers sell a certain percentage of the homes they build at below-market prices to make them affordable for people with lower incomes.

The number of cities with affordable housing mandates has grown rapidly, to about 10 percent of cities over 100,000 population as of the mid-90s, and many advocacy groups predict the trend will accelerate in the next five years. California was an early leader in the adoption of inclusionary zoning, and its use there has grown rapidly. Between 1990 and 2003, the number of California communities with inclusionary zoning more than tripled—from 29 to 107 communities—meaning about 20 percent of California communities now have inclusionary zoning.

Inclusionary zoning attempts to deal with high housing costs by imposing price controls on a percentage of new homes. During the past 20 years, a number of publications have debated the merits of inclusionary zoning programs. Nevertheless, as a recent report observed, “These debates, though fierce, remain largely theoretical due to the lack of empirical research.”

Our recent report, Housing Supply and Affordability: Do Affordable Housing Mandates Work?, filled the empirical research void. We measured the actual performance of these ordinances in the San Francisco Bay Area. This study follows up on our previous study by examining data from communities in Los Angeles County and Orange County to evaluate the effects of inclusionary zoning and examine whether it is an effective public policy response to high housing prices. In Los Angeles and Orange Counties, 13 cities have an affordable housing mandate. These communities vary in size and density with different income levels and demographics, so they provide a good sample to tell us how inclusionary zoning is working in Southern California.

These are our findings:

Inclusionary Zoning Produces Few Units

Since its inception, inclusionary zoning has resulted in few affordable units. The 13 Los Angeles and Orange County cities with inclusionary zoning have produced only 6,379 affordable units, with 70 percent of those units being produced in Irvine. After passing an ordinance, the median city produces less than eight affordable units per year. Inclusionary zoning cannot meet the area’s affordable housing needs.

Inclusionary Zoning Has High Costs

Inclusionary zoning imposes large burdens on the housing market. For example, if a home could be sold for $500,000 dollars but must be sold for $200,000, the revenue from the sale is $300,000 less. In half the Los Angeles County and Orange County jurisdictions this cost associated with selling each inclusionary unit exceeds $575,000. In current prices the cost of inclusionary zoning in the average jurisdiction is $298 million, bringing the total cost for all inclusionary units in Los Angeles and Orange County to date to $3.9 billion.

Inclusionary Zoning Makes Market-priced Homes More Expensive

Who bears the costs of inclusionary zoning? The effective tax of inclusionary zoning will be borne by some combination of market-rate homebuyers, landowners, and builders. How much of the burden is borne by market-rate buyers versus landowners and builders is determined by each group’s relative responsiveness to price changes.

We estimate that inclusionary zoning causes the price of new homes in the median city to increase by $33,000 to $66,000. In high market-rate cities such as San Juan Capistrano and Laguna Beach we estimate that inclusionary zoning adds more than $100,000 to the price of each new home.

Inclusionary Zoning Restricts the Supply of New Homes

Inclusionary zoning drives away builders, makes landowners supply less land for residential use, and leads to less housing for homebuyers—the very problem it was instituted to address.

We find that new housing production drastically decreases the year after cities adopt inclusionary zoning. For all 13 cities average production of housing fell the year following the adoption of inclusionary zoning. In the eight cities with data for seven years prior and seven years following inclusionary zoning, 17,296 fewer homes were produced during the seven years after the adoption of inclusionary zoning. In those cities 770 “affordable” units were produced. One must question whether 770 units are worth the cost in terms of 17,296 fewer homes. By discouraging production of 17,296 homes in those eight cities, $11 billion worth of housing was essentially destroyed.

Inclusionary Zoning Costs Government Revenue

Price controls on new development lower assessed values, thereby costing state and local governments lost tax revenue each year. Because inclusionary zoning restricts resale values for a number of years, the loss in annual tax revenue can become substantial. The total present value of lost government revenue due to Los Angeles and Orange County inclusionary zoning ordinances is upwards of $752 million.

Price Controls Do Not Address the Cause of the Affordability Problem

Price controls fail to get to the root of the affordable housing problem. Indeed, by causing fewer homes to be built they actually make things worse. The real problem is government restrictions on supply.

Supply has not kept up with demand due to these artificial restrictions. One recent study found that 90 percent of the difference between physical construction costs and the market price of new homes can be attributed to land use regulation.

The solution is to allow more construction. When the supply of homes increases, existing homeowners often upgrade to the newly constructed homes. This frees up their prior homes for other families with lower income. Inclusionary zoning restricts this upgrade process by slowing or eliminating new construction. With fewer new homes available, middle- and upper-income families bid up the price of the existing stock of homes, thus making housing less affordable for everyone.

Conclusion

Inclusionary zoning has failed to produce a significant number of affordable homes due to the incentives created by the price controls. Even the few inclusionary zoning units produced have cost builders, homeowners, and governments greatly. By restricting the supply of new homes and driving up the price of both newly constructed market-rate homes and the existing stock of homes, inclusionary zoning makes housing less affordable.

Inclusionary zoning ordinances will continue to make housing less affordable by restricting the supply of new homes. If more affordable housing is the goal, governments should pursue policies that encourage the production of new housing. Ending the price controls of inclusionary zoning would be a good start.

Housing Supply and Affordability

info@reason.org (Benjamin Powell) info@reason.org (Edward Stringham) — Thu, 01 Apr 2004 00:00:00 EST

Executive Summary

This study attempts to fill the research void. In this paper we use data from communities in the San Francisco Bay Area region to evaluate the effects of inclusionary zoning and examine whether it is an effective public policy response to high housing prices. We chose the Bay Area because inclusionary zoning is particularly prevalent there; today more than 50 jurisdictions in the region have inclusionary zoning. These communities have various sizes and densities with different income levels and demographics, so they provide a good sample to tell us how inclusionary zoning is probably working nationwide.

These are our findings:

Inclusionary Zoning Produces Few Units

Since its inception, inclusionary zoning has resulted in few affordable units. The 50 Bay Area cities with inclusionary zoning have produced fewer than 7,000 affordable units. The average since 1973 is only 228 units per year. After passing an ordinance, the average city produces fewer than 15 affordable units per year.

Inclusionary zoning cannot meet the area’s affordable housing needs. At current rates, inclusionary zoning will only produce 4 percent of the Association of Bay Area Governments’ estimated affordable housing need. This means inclusionary zoning will require 100 years to meet the current five-year housing need.

Inclusionary Zoning Has High Costs

Inclusionary zoning imposes large burdens on the housing market. For example, if a home could be sold for $500,000 dollars but must be sold for $200,000, the revenue from the sale is $300,000 less. In half the Bay Area jurisdictions this cost associated with selling each inclusionary unit exceeds $346,000. In one fourth of the jurisdictions the cost is greater than $500,000 per unit, and the cost of inclusionary zoning in the average jurisdiction is $45 million, bringing the total cost for all inclusionary units in the Bay Area to date to $2.2 billion.

Inclusionary Zoning Makes Market-priced Homes More Expensive

We estimate that inclusionary zoning causes the price of new homes in the median1 city to increase by $22,000 to $44,000. In high market-rate cities such as Cupertino, Los Altos, Palo Alto, Portola Valley, and Tiburon we estimate that inclusionary zoning adds more than $100,000 to the price of each new home.

Inclusionary Zoning Restricts the Supply of New Homes

Inclusionary zoning drives away builders, makes landowners supply less land for residential use, and leads to less housing for homebuyers—the very problem it was instituted to address.

In the 45 cities where data is available, we find that new housing production drastically decreases the year after cities adopt inclusionary zoning. The average city produced 214 units the year before inclusionary zoning but only 147 units the year after. Thus, new construction decreases by 31 percent the year following the adoption of inclusionary zoning.

In the 33 cities with data for seven years prior and seven years following inclusionary zoning, 10,662 fewer homes were produced during the seven years after the adoption of inclusionary zoning. By artificially lowering the value of homes in those 33 cities, $6.5 billion worth of housing was essentially destroyed.

Considering that over 30 years inclusionary zoning has only yielded 6,836 affordable units, one must question whether those units are worth the cost in terms of fewer and higher-priced homes.

Inclusionary Zoning Costs Government Revenue

Price controls on new development lower assessed values, thereby costing state and local governments lost tax revenue each year. Because inclusionary zoning restricts resale values for a number of years, the loss in annual tax revenue can become substantial. The total present value of lost government revenue due to Bay Area inclusionary zoning ordinances is upwards of $553 million.

Price Controls Do Not Address the Cause of the Affordability Problem

Price controls fail to get to the root of the affordable housing problem. Indeed by causing fewer homes to be built they actually make things worse. The real problem is government restrictions on supply. From 1990 through 2000, the Bay Area added nearly 550,000 jobs but only about 200,000 new homes. The California Department of Finance recommends 1.5 new jobs per new home—the Bay Area produced only 55 percent of the suggested amount of housing.

Supply has not kept up with demand due to artificial restrictions. One recent study found that 90 percent of the difference between physical construction costs and the market price of new homes can be attributed to land use regulation.

Conclusion

Inclusionary ordinances will continue to make housing less affordable by restricting the supply of new homes. If more affordable housing is the goal, governments should pursue policies that encourage the production of new housing. Ending the price controls of inclusionary zoning would be a good start.