All things considered, it has been an incredibly strong market for residential real estate sales in 2020. The spring started strong but was shut down along with everything else in March when the virus leapt the oceans and appeared in great numbers on the US coasts. Home sales were considered an essential service, but the apprehension of allowing strangers into sellers’ homes for showings slowed down the process.
This data from Northstar MLS shows the dip in April and then the take off of activity starting in June.
Issues that seemed to be on buyers minds when they came through open houses were 1. room for home offices 2. new flexibility in distance to job location 3. downsizing out of larger homes to avoid maintenance concerns. This broad range of interests led to almost all types of properties being snatched up, often in competitive bidding. Which has led to a sharp decline in properties available for sale.
In almost all markets, except the downtown Minneapolis condo market which is up 21.3%.
I think there is little dispute that Covid has dampened the amenities that a downtown can offer. The lack of night life and restaurants, the lack of need to be blocks from work or near light rail for a quick trip to the airport. By displacing the relative value that residents place on these features versus a whole host of other variables that go into a home purchase decision (including square footage, proximity to family and so on), more owners are exiting the downtown community than joining it.
Nailing down the market prices on each of these amenities one-by-one would take data that is not readily available. Data sets for the performance of public sector goods would have to be statistically spun out to reveal levels of significance. An analysis of prices of these and other amenities which overlap through a variety locations would provide an opportunity for index setting. Due to the extraordinary living conditions in 2020, there is an opportunity to obtain counter factual data for many core neighborhood utilities. It is a unique opportunity.
My son is an engineering student, but for his liberal arts requirement he is taking a course on Imperialism. The course work tells the tale of western European economies growing so that they ventured past their countries boundaries to extract resources from Africa and Indo China and the Caribbean. The model describes a dominant group taking hold of a subservient group to help themselves to resources for commercial gains. Extraction isn’t just for the history books. Consider this fictitious story.
Let’s say there is a fairly large association for a trade group. It has a sizable staff and a fair number of members volunteers. There is also a multi-decade volunteer–let’s call him/her Jo Johnson– who through time and understanding has proven agile in eliminating dissenting voices and bullying staff. There are also dues, and committees, and boards, and political action.
The associational group has clout in a community due to its size and ability to organize. It also has some resources to pledge toward those seeking local office. Jo Johnson’s influence at the association serves to direct funds to candidates who, in turn, respond with business referrals. This action of using a group resource and trading for a private commercial gain describes a process of internalizing a public asset into a private, fungible transaction.
Now some may say–this shouldn’t be so! There are ethics to think about.
But– this judgement, this evaluation of the trades in play, is best evaluated by members of the group–not outsiders. Some members maybe thrilled that Jo Johnson is able to devote countless hours wage-free to the association, and thus, any extracting done is small compensation. The members of the group may feel the clout of the group is maximized in this very fashion, giving each member the best possible slice of the overall pie.
It is really all about transparency. If members knowingly make the decision to defer to Jo, then all is right in the world. If decisions have been made for them because Jo Johnson has become so skilled at shaking loose the opposition by throwing up all sorts of meeting delays and rescheduling (it is a volunteer activity after all), and has the power to develop allegiances by promising titles like a board position (a dusty old king of sorts selling titles), then the peasants should revolt.
The process of extracting value from a group and in doing so moving a resource from a public sphere to a private transaction occurs all the time, in many different scenarios. It is a trade. Whether a trade is in equilibrium requires, not moral judgement, but transparency and an ability to evaluate the options at hand.
Given this is my 55th post I’d like recap the home-economics model. As explained on the About page, this site addresses the mechanics of value creation in the pursuit of pubic goods. In order to show these features, I must persuade you to shrug off a few established notions. The first is that the nature of goods is not public, nor club, common, or private (the purpose of the What is Public-What is Private posts). All goods can be employed in either the public or the private sphere. The second is that there is no such thing as market failure.
To start at the beginning, all of economic life is restricted by the resources this crusty old orb offers us along with what we can make of them with our time and talents. Limited resources applies both to goods employed in a private environment as well as those contributed toward community needs. Within these confines there are two types of activity creating a public sphere and a private sphere. One looks inward, behaving with a public (non-exclusionary) nature and the other activity looks beyond the group behaving in predatory fashion. This private sphere is well studied.
Let’s work backwards on some posts. Yesterday’s topic–Money and Safety— centered around the city’s approval process to fund more police force hours. Consider the groups. The defunders would argue that city money for police has resulted in providing safety for the racial majority (Gr 1) of the citizens (Gr 3) yet is failing to do the same for the minority groups (Gr 2). In light of this objection these city council members refuse to fund the police.
As an aside, this claim does not hold true. For the past five months the political climate in the city has severely limited the police’s capacity to maintain peace. The result has been a tragic loss of life primarily in Gr 2. This a new set of data contained in Gr 3 shows that it is group Gr2 which reaps greater (despite severe flaws) benefits than Gr 1. In addition to loss of life, Gr 2 has also disproportionately experienced a loss to businesses, where it is estimated 200 businesses burned or were damaged during the riots. The businesses suffered an externality from (lack of) services from the public sphere.
Consider the post A table set for adversaries. The outdoors women and men (Gr 1) are often at odds with urban arts people (Gr 2) over issues like gun control which increases the cost to own firearms without a clear benefit in reduction in crime, and funding for cultural events which requires subsidies to be viable, and outstate regulation of the environment which cuts jobs. Although Gr 1 and Gr 2 are often competing for resources they hold together in conjunction with all Minnesotans (Gr 3), by showing where Gr 1 and Gr 2 had a common interest, a funding stream was extracted from two very different associational groups.
Fire Station 2 speaks to the structure of firefighters (Gr 1) who devote their time and expertise at a reduced rate to protect the lives of property of their community (Gr 2). They get paid a below average hourly rate, which is a private transaction. The firefighters’ extra wage potential is community (Gr 2) work. Their services are made available to everyone (Gr 2) which makes this a public service.
Having established the need to look for groups, and identify whether the groups are engaging public or private economic activity, I’ll be posting more on externalities and internalizing. Both of these terms describe the appearance of positive or negative effects which show up in one sphere from a transaction in the other (Ex. private corporation pollutes the water causing a negative expense to a public good owned by the surrounding community). Then we can get to the fall of market failure.
Alex Tabarrok recognized the passing of WV Judge Richard Neely on his blog site today. He credits the judge’s candor with getting his first paper published in 2003 in a good journal. His paper, written with Eric Helland, argued:
We argue that partisan elected judges have an incentive to redistribute wealth from out‐of‐state defendants (nonvoters) to in‐state plaintiffs (voters). We first test the hypothesis by using cross‐state data. We find a significant partisan effect after controlling for differences in injuries, state incomes, poverty levels, selection effects, and other factors. One difference that appears difficult to control for is that each state has its own tort law. In cases involving citizens of different states, federal judges decide disputes by using state law. Using these diversity‐of‐citizenship cases, we conclude that differences in awards are caused by differences in electoral systems, not by differences in state law.
But it is the judge’s very own words that confirm his economic motivation in his rulings.
As long as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiffs, I shall continue to do so. Not only is my sleep enhanced when I give someone’s else money away, but so is my job security, because the in-state plaintiffs, their families, and their friends will reelect me. (Neely 1988, p. 4).
So what does this have to do with a post I recently wrote about Embrace, a women’s shelter in Wisconsin? The shelter’s director set up a GoFundMe page after she alienated local police by prominently advertising BLM signs around the facility. The goal was to replace $25K in funding that was pulled by the county. As of this morning the kitty is over $100K with a stated goal of $112K. I’m not sure how she picked that number, if there has been some sort of marketing strategy, to keep ratcheting up the goal as long as donors respond.
What I want people to see is the structure of the groups and the motivations for the economic activity between them. (It’s all about the group) In both cases there is a greater federal group. In both cases there is a smaller group; for judge Neely it was comprised of the citizens of WV, for the shelter it is the community which is within their service area. Both the judge and the director are extracting money from the larger group. One is unabashedly leveraging the law for the benefit of his constituents.
I question whether the other is providing full disclosure about the economic transaction that is still underway. Is there an assumption on the part of the greater public that their dollars are supporting an organization which serves a public effected by the concerns of BLM (whereas only a fifteenth of one percent of the population in this county is African American)? Or does the greater group understand they are funding a director who simply shares a similar ideology but has no power to actively contribute to the welfare of BLM?
In order to detect deceit or inefficiencies one must delineate the groups. One must also acknowledge the public nature of the motivations which drives the activity within the group–that anyone within the group receives access to the benefit. The judge, for example, rules in this way for all his constituents who found themselves in a similar conflict. That the services of the shelter are open to anyone within its service area.
Neither the judge nor the director evaluate whether the taking of resources from the greater group harm or diminishes services in some way to other members of the greater group. Their pursuit for funds is fulfilled under the nature of a private transaction, no different than how a corporation pursues funds for their services. This mode of competitive behavior happened recently when states bid against each other for PPE’s in the early days of the covid-19 crisis. Although they work as agents for a public, their obligation for such is only to the inner group.
Judge Neely was one of those confident individuals who scoffed at the traditional method of holding group norms behind a cloak of anonymity. For this we can be thankful, as his words confirm this social economic group structure and the motivation that drives its behavior.
I’ve been working my way through a list which claims that economic goods fall into four categories– private, club, common and purely public– in order to debunk a misconception on how we sort economic activity. Web oriented services such as Wikipedia, NetFlix and website design hold a variety of placements in the groupings. I think it is safe to say that all three of these goods are private, since, according to a UN report more than half the world’s population is without internet service. Any good provided via the web is private to only the wealthy half of the world.
A resorting mindset is needed in order to tackle vision centered around corporate responsibilities to stakeholders, such as those described in a recent article on the American Purpose by Robert Madsenand Curtis J. Milhaupt: The Expansion of Corporate Responsibility.
Increasingly, advocates of reform argue that businesses should be concerned about their “stakeholders”—not just shareholders but also workers, suppliers, customers, and society at large. The new movement, which is often termed “ESG” (Environmental, Social and Governance issues), is not limited to progressives and liberals, but has made substantial inroads in the commercial and financial community as well. After decades of espousing shareholder capitalism, for instance, in 2019 the Business Roundtable declared a “fundamental commitment to all of our stakeholders” in order to “better reflect the way corporations can and should operate today.”
Stakeholders capitalism, “ESG” or benefit corporations are all a grappling to give this movement a name. What is it that corporations, which are intentionally private organizations, accomplish towards larger societal goals? Madsen and Milhaupt point out that corporate America has a history of such ventures, though most of us do not need convincing that capitalism works favorably upon social concerns. Even the most fervently socially-minded agree.
Yet the authors go onto express trepidation over who sets the agenda and whether expectations can be met.
Although hopes are high for what corporations and institutional investors can achieve through greater emphasis on stakeholder needs as opposed to narrower shareholder benefit, few of the ESG reformists have bothered to define what the movement’s precise goals should be. This matters because in the absence of a concrete agenda people tend to assume more than is possible, and the inexorable failure to meet those expectations generates dissatisfaction and the possibility of political backlash.
Here’s the thing– there is an entire marketplace of social concerns out there to choose from. No matter what the corporate entity decides to take on, the important step is to collect the data and account for it.
*Decide to devote its social ambitions to rectify labor inequity? Account for the extra training and support and follow the employees long-term gains.
*Decide to devote their legal staff to ironing out the thorny wrinkles in cross-country trade and all the implications of contract defaults? Account for time logged while on the company dollar, and the losses taken when the contracts fall through. Track how establishing standards allowed smaller firms to enter the market with confidence.
*Decide to use the idle time of their tradespeople and send them to a financially strapped public schools to tighten up all those leaky faucets? Account for the hours spent and estimate the savings in city water running down the drain.
The opportunities are everywhere and the beauty of the system is not to be hampered by a particular agenda, but to attack the issues which are most readily facilitated by the business and the people who make it up. To find the passion which galvanizes the employees to give of their time and expertise.
But-this is important- we can’t know how it all shakes out until it shows up in a tabulation somewhere. The trick is that the mechanics are different for social activities versus the mechanics of for profit transactions. That doesn’t mean they can’t be held to account. Already things like ‘good will’ show up on balance sheets. Think of the possibility of two colors of ink on the net income statement; one for profit and one public profit. The former total is by far the lion’s share, as by definition corporations exist to produce financial gain. Yet knowing the later, being able to track, tally, and compare it, will be empowering.
Tracking will also plays into Milton Friedman’s emphasis on transparency. Through open disclosure, reports identify the social goals tackled and the benefits of eventual outcomes. It also provides signals where possible excesses, corruptions and silly virtue signaling are occurring, if not out and out fraud.
The task at hand is to identify what counts as work towards a public objective. And see how assets are used, stored and accounted for. To identify this concept of capacity and give it a number. Where do the tradeoffs get revealed so individuals will make choices with their time and energy? How could they be engaged by benefiting from a personal social objective while participating with fellow employees? The angles are multifold.
So I say– do not hold expectations in check. Run with them, write them down and see how they all add up.
If you could count intentions, package them up and gift them, the residents who had their homes rebuilt by Brad Pitt’s Make It Right Foundation, following the devastation unleashed by Hurricane Katrina, would be wealthy. Instead, the 109 property owners of the Lower Ninth Ward of New Orleans are taking legal action against the Hollywood superstar for “unfair trade practices, deception, fraud and negligence.”
Just a little earlier this month, another home in the development was demolished. As Federal courts pull apart the issues, it will be interesting to see how judges view the dynamics and assign responsibility. On the one hand you have the wealthy part-time philanthropist, full-time mega-movie-star, versus a group of mortgage paying homeowners, but then throw in architects with a penchant for environmental activism, builders, suppliers and the crime scene quickly gets muddied. The setting has changed from what Oprah.com describes here in 2010:
Leggett-Barnes and her family are some of the first homeowners in what will become a 150-house community constructed by the nonprofit Make It Right foundation, established by Brad Pitt in 2007 to build environmentally sound residences for low- and middle-income families. “We’re cracking the code on affordable green homes,” says Pitt, who envisions the Lower Ninth neighborhood as “a ‘proof-of-concept’ for low-income green building nationally, maybe even worldwide.”
The plan started with everyone on the same page. The recently homeless needed to return to plots of land, which for some, had been in their families for a couple of generations. Brad Pitt pledged 5 million dollars to take the edge off costs and provide the seed money for what ends up being a 27 million dollar project (that’s $247K per house). But then a new public objective starts to emerge, one driven by an environmental passion. Oprah.com notes:
A Make It Right house is eco-friendly from top to bottom, using at least 70 percent less energy than a conventional house of the same size. “We don’t just want to make homes ‘less bad’ for the environment,” Pitt says. “We want them instead to have an environmental benefit.” Thanks to their ventilation systems and solar technology, Make It Right houses emulate trees, purifying the air rather than polluting it and harnessing the sun’s rays to produce more energy than they consume. The homes are available exclusively to people who lived in the Lower Ninth before Katrina, and Make It Right guides families through the financing process.
It wouldn’t be the first time two objectives were tackled simultaneously: Help families rebuild their homes and make the structures energy efficient. Both admirable. But don’t miss that last sentence, ‘help them through the financing process.’ And just like that we’re off the philanthropy playing field and into the private market game. In this venue the owners are expecting to purchase from a developer, not an actor-philanthropist-activist. They sign for a mortgage. The most common number for the debt was around $150K, bringing the final cost per house to somewhere around $397K.
Just for comparison here is a listing for a new construction home in New Orleans posted on Realtor.com today.
Even at $397K (not including lot cost) one might say the extra money was well spent on energy conservation measures and intended health benefits. One might say that, if the properties hadn’t started deteriorating within a few short years.
By 2015, as most construction concluded, the project had cost almost $27 million. But complaints about the construction and materials used in the homes had already emerged.
These transactions had a philanthropic and environmental and private market component to them. The additional inflow of funds to cover the environmental objectives came in, but the new owners of these properties do not appear to have engaged as critical consumers for the core product. They didn’t check into the materials or the mechanicals or the plans. Just talk to a builder rep if you question whether consumers who build with them hover (daily) to ensure they are receiving what was written up in their purchase agreement. Perhaps due to the power of stardom, or the actual dollars being spent on their behalf, the home-buyers seem to have stepped aside and allowed others to do their bidding. Until as the New Orleans Advocate reports:
In September 2018, homeowners Jennifer Decuir and Lloyd Francis sued Make It Right for what they alleged was deficient construction that caused mold, poor air quality, structural failures, electrical malfunctions, plumbing mishaps, rotting wood and faulty heating, ventilation and cooling.
The dynamics of philanthropy allows for an individual (or group) with extra funds to choose a public need and steer their resources accordingly. The recipients are asked only to consider reciprocating at some future date, should they find themselves in a similar situation. If the courts place the blame on Brad Pitt will that inhibit the flow of goods and services from the wealthy to those in need for fear of liability? Were the end consumers not responsible in a buyer-beware type of way to check out what they were buying? From what the articles (USA Today, NPR), they had owned and maintained homes in the past.
There’s plenty of blame to go around. The architect John C Williams collected $4 million in fees. There were permits and inspectors and building codes. And maybe some blame should end up at the lenders’ door for not questioning the innovative, but untested systems, going into the project. In the end they are on the hook for the paper if a homeowner walks and abandons their property. But mostly, in the for-profit market, the relationship between the developer-builder and the home buyers establish the acceptable combination of durability, green components and price.
The problem wasn’t a lack of intentions. The problem was that the philanthropist-activists bypassed the marketplace and all the small interactions that make it up. The fatal flaw was the thought that with enough money, and passion, all the feedback and tussles between consumers, and inspectors, and building code committees, and brokers, and city planners, and developers, and real estate agents, and electricians,…that all those players interacting in a market setting, just doesn’t matter.
The market continues to shuffled through the consumer choices when judging the environmental impact of products. Standards are set by producers of furnaces and A/C units; power companies offer home energy audits and neighbor consumption comparison; neighbors talk to each other; contractors share incentives; all in the effort to advance a public goal of energy savings. But at each step that goal must be incorporated into the overall integrity of the purchase at hand, or homes will fall apart just like those in the Lower Ninth Ward.
Praise for Brad Pitt remains high, and the contention remains that his intentions were and are completely genuine. It looks, however, as if he will pay dearly for moving toward an ambition without vetting it through the market system. This story shows us that it is not enough to imagine a better world, and poof! It will happen. Progress takes the engagement of all players, giving feedback through action and pricing. Progress depends on markets.
For those who follow the blog you know that I’ve been harping on the distinction between public and private, club and common goods, here, here and here. In my view goods are not sorted in this manner. A hammer is a hammer. If it is used to fix my deck it is in service to me privately, if it is used build a Habitat for Humanity house it is providing a public service to house the unsheltered.
The reason it is necessary to resort this understanding is because it is how we can see corruption. Corruption is not just up to politicians. A system can be corrupt and individuals, small groups and so on. When a set of rules are put into play, but then through cloaking and shading people (or groups of people) pursue other objectives, there is corruption.
Take the case of Embrace, a domestic violence shelter, that’s been in the news. The local police in Barron’s County Wisconsin objected to the posting of BLM posters around their building. And felt this posting calling out police violence, discredited their service. As a result public funding for the shelter was revoked. Here are the Huffington Post, Wisconsin Public Radio and the Washington Post articles.
To end violence, inspire hope and provide unwavering support to all people affected by domestic and sexual violence by engaging our community in safety, equality and partnership.
Now remember domestic violence persists when the normal social catches fail. When there are no close family members to pull their daughter, son or elderly parent out of an abusive situation. When there are no neighbors who notice excessive bruising and quietly offer the victim a way out. Domestic violence requires a formal force intervention because no other means of social exchange has worked or been available. And from what I understand, these types of calls are frequent and precarious for the police.
Given the necessity of the police to intervene in order to get the abused to their doorstep, you would think the shelter would consider this public agency as a core part of their workplan. As to why the shelter declined to remove their signs, Katie Bement the shelter’s executive director told the Huff Post:
“We were approaching it from an accessibility standpoint,” she told HuffPost over Zoom on Thursday. “We needed to show that we’re safe for those communities of color.”
Yet Barron county’s black population is .14% (a fifteenth of 1 percent) of all residents. I’m not sure how many of those 62 people would be drive by the shelter first before making a call for help or finding them on-line. I don’t have the statistics from police response rates or the shelter’s service records, but I suspect the demographics of those receiving aid lines up with the 97%.
As much as the shelter would like to merge the work they do in Barron County with the objectives of BLM the demographics seems to deny them this reality. The group they provide services to are overwhelmingly, if not completely unaffected by the concerns of BLM. In fact the two missions are at odds with one another as the later has diminished the abilities of police to provide security nationwide. Which is undoubtedly why the county pulled funding.
Now back to corruption.
Within a day of the Huffington post article being run, a GoFundMe page was set up for the shelter. Before dinnertime they had surpassed their $25K goal. As of this morning (screen shot included) the page is reporting a kitty of over $69K. Would the shelter have been able to raise this funding without the BLM story behind it? By accepting these donations has the shelter’s mission changed?
If you publish one set of objectives yet acquire funding for another, it seems that you are at odds with your group. It’s not that groups can’t change their rules or objectives, its just that you have to be clear about them so people know what they how their resources are being invested.
In a recent post, which challenged whether national defense is a public good, I suggested that sunlight was a public resource. Then I got to thinking about height restrictions in new construction, and in particular about a luxury high-rise development that was squashed by neighboring residents. A few years ago plans were underway for two residential towers on the west side of Southdale Center which is in an up-scale suburb of the Twin Cities. When over 200 folks filed into the city council chambers, there were more opposed than in favor.
But dozens of residents spoke against the towers, listing issues with everything from its height to the shadows it would cast.
So you see sunlight can be privatized. The owners of the 50’s built one-level homes to the west argued that the new apartments would steal their sunlight. The two towers would privately claim the warm beams, leaving them in the shadows. In economic terms, the new high rise would externalize shade.
There is a cost to shade. If you sell condos you know that southern exposures are more desirable than northern (though thankfully some feel a south view is a tad too warm). Being that there is more demand for this exposure these condo garner a higher price than those pointed north.
Here’s my original post challenging the breakdown of goods into public, private, club and common. Today I’m challenging the idea that fireworks are a public good. One would think that no-one could be excluded from seeing the fireworks. At least, once you already assume that you really mean no-one who is already close enough in the first place, can’t be excluded. An assumption which in itself, makes it a private good when you live one county over.
Realizing it has this private good, say the city lures people to move to their downtown by advertising an amazing fireworks display on the Fourth of July, shot from a bridge over the Mississippi. By fall the new residents have moved into a beautiful condo overlooking the stone arch bridge which spans the mighty river. By the following summer, however, a new condo building has been built which blocks their view.
Mr. and Mrs. NewRes show up at City Hall hotter than a hornets nest and demand compensation for being denied their access to a public good. After all it was the city that approved the permit that allowed the building to steal their view of the fireworks.
Here’s where I say be careful to identify your public, be careful to know your groups. The fireworks are public to those who show-up in a public space within sight of them. And you say I am splitting hairs. But am I?
When we tell families their children have access to a uniform public education for grades K-12, are we offering fireworks that can’t be seen by everyone? We all know that there are different levels of school performance all across the districts. At least a portion of that performance can be attributed to work done in the neighborhoods which support the learners and the educators in ways that are not supported elsewhere. So when the state says all learners will be provided ‘the same’ public good, is the state committing to make-up for the difference in the neighborhood support? Because that would tally quite a hefty tab.