Free market may control land use, but imperfectly

by Hart Hodges

I read with interest the op-ed piece by Randal O'Toole. I have been familiar with his work for many years and have much respect for his ability as an economist. However, I was very disappointed by the many contradictions in this article and the overly simplistic view of certain problems.

He challenges the Metro 2040 Plan and expresses his concerns related to urban growth. In particular, O'Toole suggests that the Metro 2040 Plan, in addition to other problems, will in crease highway congestion, pollution and property taxes.

As an alternative to the Metro 2040 plan, O'Toole states that we should "make sure people pay the full costs of their activities, whether driving or building new homes. He goes on to say that, "If we do this, we can protect open space and minimize congestion and other growth problems without raising taxes or forcing people to turn their neighborhoods into high-density developments."

Equitable results ignored

This appeal for market incentives ignores issues such as market failures, imperfect information and equity. That is, market incentives serve to increase the well-being of society's members when they provide the correct incentives, when markets are complete and when people of all income levels have the ability to pay the costs. But markets are not complete in all cases, information is not perfect, there are equity issues often lost in the search for economic efficiency and society has needs not recognized by private markets.

For example, a market system would not provide amenities such as Forest Park or the Arboretum. Economics simply does not offer a panacea to today's problems, and it is not a substitute for planning.

O'Toole suggests that free-market strategies can provide for growth while at the same time preserving open space, low taxes and everything wonderful. This view is simplistic.

True costs unknown

While it may be a good idea for everyone to "pay the full cost of their activities," the devil, as they say, is in the details. The truth is, no one knows the full cost of many actions. For example, the full cost of driving a car includes the costs imposed on others in the form of increased congestion, decreased air quality, noise and so forth. The full cost of building a home includes the increased probability that the new demand on public services will cause shortages in the future, will result in delays in other customers receiving service and will make the cost of infrastructure expansion necessary sooner rather than later. These costs are extremely difficult to measure, if they can be measured at all. And it is precisely because of these difficulties that a certain amount of planning and regulations exists.

Arguments inconsistent

O'Toole is simply too vague with his advice and expresses concerns that are internally inconsistent. His graph about sprawl highlights his concern about the rate of land development relative to population growth. Yet he voices concern about how the Metro 2040 Plan will promote higher density in certain areas. Isn't increased density the alternative to sprawl?

O'Toole also states that the 2040 Plan will quadruple the number of miles of congested roads and lead to increased pollution from automobiles. At the same time, he criticizes the plan in so far as it calls for the conversion of 13,000 acres of farm land inside the urban growth boundary.

Unfortunately, the economics of these issues are complex and take time to develop. In addition, there are other (noneconomic) issues pertaining to sociology, engineering, law, and, well, everything else.

In this setting there is no value to simplistic rhetoric about economics, nor is there any value to a list of criticisms, some of which are internally inconsistent. The challenge is to offer economic analyses and advice in a manner that is useful to politicians and planners. The value comes in improving the process and making Portland the best possible place to live.

If O'Toole wants to present the idea of "paying for our actions," then he should pick a meaningful context. Perhaps the time is right for a discussion on how to deal with equity and enforcement issues related to congestion pricing. If we get better at implementing market strategies in certain areas, then maybe the idea can be expanded to other areas and other services.

For now, we do not know enough to consider market strategies and price signals as the guidelines for how we should live our lives.

Hart Hodges of Northeast Portland is a professor of economics at the University of Puget Sound in Tacoma.

Randal O'Toole's Response

First, Hodges accuses me of being "vague" and "overly simplistic." Second, he criticizes my "appeal for market incentives" because it "ignores market failures, imperfect information, and equity."

The purpose of my original article was to alert Portland-area residents of the many unsound features in the Metro 2040 Plan. In this I was very specific and detailed. I repeatedly quoted Metro's own documents to show that the plan will increase population density, congestion, pollution, and taxes, and require the development of prime farm lands.

Hodges ignores all of these points to concentrate on markets, which weren't even mentioned in my article. I am as aware as Hodges of problems with market failure, imperfect information, and equity. The question is, what will solve these problems best: the improved use of market incentives or more big government planning?

Hodges thesis, as stated in his closing paragraph, is that "we do not know enough to consider market strategies and price signals as the guidelines for how we should live our lives." Since Hodges apparently supports the Metro 2040 planning process, he is clearly suggesting that we should rely on government to run our lives for us. This is the conclusion that I reject.

Anyone who thinks we don't know enough about markets and pricing obviously hasn't been in an American supermarket lately. Many of these supermarkets successfully sell tens or hundreds of thousands of different products, and all of their customers use product prices as one of the major guidelines for what to buy and what to leave on the shelves. Price signals, not government planning, is what keeps the grocery shelves full and the produce, dairy, and meat stands supplied with fresh goods.

By comparison, in the late 1980s, the average grocery store in the Soviet Union had less than a dozen products on its shelves. Why? Because the Soviet Union planned their supermarkets the way Metro is planning Portland's future.

Hodges thinks that, because markets aren't perfect, we also need planning. But everywhere in the world that planning has been used as a substitute for markets, it has failed.

Hodges claims my article is "inconsistent" because my graph about sprawl suggests I am concerned about land development, yet I oppose higher densities. In fact, my article clearly states that the graph about sprawl is a response to planners' claims that "land-use planning is needed to protect open space." The graph shows that open space has been disappearing far faster (relative to population growth) under Oregon's land-use planning system than in many other states that have no planning.

My own feeling is that sprawl is the least of our worries. Despite Oregon's rapid population growth, less than 1.8 percent of the state is developed--the rest is open space. While loss of open space is always a worry, we have to consider the tradeoffs: Are you willing to suffer four times the congestion, increased pollution, higher housing and grocery costs, and higher taxes, all for a plan that promises--but has so far failed--to save open space?

In 1973, planners asked Oregonians to give up some of their freedoms, promising that if they did the planners would turn Oregon into a paradise. Instead, Oregon is worse than ever. So now planners want us to give up even more freedom. It is time to think about another alternative.

Contrary to Hodges, I do have a specific alternative to the 2040 Plan--but I couldn't fit both that alternative and my criticism of the 2040 plan into a 750-word article. Readers who want to read my alternative can do so here on the web.

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