Posts about Economics

Plus, even though for regular members, Capital Bikeshare is primarily about getting between point A and point B quickly, it's also a great way to show visitors the city. You can ride around for hours from neighborhood to neighborhood, and just have to remember to dock the bike and take another one out every 30 minutes.

What's annoying about that, however, is that while as an annual member I can just dock my bike, wait a couple of minutes, and take another one with my key, the visitor has to dip his or her credit card, get a new code, and type the code into a dock. (I could give the visitor the key and do this myself, I suppose, but it's still a pain.) The daily key could dispense with this chore.

Michael Perkins and Rob Pitingolo shared another suggestion on Twitter: a key that gives individual, one-way rides for a lower price, like $2. Michael wrote, "Sometimes I'm with my wife who doesn't have a key." She might want to come along for a single trip, but "right now it's $7, which is pretty steep."

Rob said, "I'm in the same boat. Wife doesn't have a key but would pay $2 per ride. $7/day is too high. Example: last mile from Union Station. $2 for that is fair, $7 too high. Currently $7 only option."

Michael added, "A weekend with activities planned would include our two kids, so no bikeshare possible. However, last mile for getting from church to shopping while kids are in CCD, etc. is more likely need."

On the other hand, CaBi might be reluctant to offer this for fear that too many people would switch from annual memberships. I don't know if I ride 35 times a year any more. I started bicycling a lot more once CaBi launched and provided an easy option, but then started riding my own bike instead.

A $75 membership is not that costly for unlimited access to a great service, and there's value in having members who know they can grab a bike whenever they want instead of people always weighing whether to spend a couple bucks or not. A $2 per trip option might mean CaBi would lose a lot of occasional annual members.

On the other hand, non-members won't ride at all if there's no good way to pay for a ride and they don't want to drop $7 for a whole daily membership. What about a spare key that offers $2 rides, but only in tandem with an annual member? You can only use it on a dock just after the linked annual member takes out a bike; otherwise, it's a $7 daily pass. Or do you have other ideas?

Demand. Prices and rents are particularly high in parts of the region that have attributes and neighborhood amenities that are in demand. Increasing the supply of these types of neighborhoods would help alleviate price pressures. When the supply of something goes up (and demand stays the same), prices fall.

While we can't move existing neighborhoods closer to job centers, we can facilitate development around transit, encourage amenity-diverse development, and incentivize high-quality construction. Places like the Rosslyn-Ballston corridor—where demand and rents are very high—could serve as a model for the types of neighborhoods most in demand (although each locality will want to place its own flavor on these desirable places to live).

Whereas in the past we built single-family houses on suburban lots, future demand will be for more urban and smaller units, close to jobs, shopping, recreation, and other amenities. If local governments and developers are aware of this new demand, and set up the appropriate framework to achieve that type of development, the overall supply will increase and price pressures will not be as extreme. Their ability to do so will in large part depend on solving the next four issues.

Planning, zoning, and application processes. Counties and cities in the Washington area need to get ahead of the demand by preparing master plans and sector or neighborhood plans that allow mixed uses, higher densities, and transit infrastructure in certain areas where jobs and housing will concentrate. Once the right plans are in place, it is much easier for developers to tailor their development plans in the desired direction and also easier (in terms of time and money) to get plans approved.

Local governments also need to review and revise their zoning ordinances to provide more flexibility, allow mixed uses where they were previously prohibited, and encourage the development of more affordable housing. Montgomery and DC are currently reviewing their zoning ordinances, and it is likely that these two jurisdictions will be able to make the right types of adjustments to support more appropriate levels of housing development which will encourage housing affordability.

Developers recognize that their projects need to pay for some public infrastructure and community amenities. Done right, these contributions enhance their projects' chances for market success. The problem has been the complexity of development approval processes, and their lack of transparency and predictability. Developers would prefer to know up front what they need to contribute (whether it is a fixed dollar amount per unit or per square foot) rather than to think they have reached agreement only to find a new reviewing agency has additional requests.

When plans, zoning, and development applications align, it reduces costs and timeframes for development. This provides some margin to reduce housing prices.

Neighborhood opposition. Fear of change is natural and understandable. The demand for more urban lifestyles is increasing. Yet we are trying to undo more than 30 years of sprawl and suburban living—which many people have enjoyed and want to perpetuate.

One solution is to defuse the fear of the unknown. Our suburban housing stock will continue to be available to people who prefer that lifestyle. But there are places in the metropolitan area that are well suited to a more urban form of development, and those places are the ones where more and higher density housing close to transit and jobs can be built. Each jurisdiction should clearly identify those places in master plans, legalize them through zoning changes, and educate residents about them.

To educate people, leaders and developers need to share information about successful projects, defuse fears of traffic impacts by making data on traffic counts widely available, and document environmental and lifestyle benefits of this new (though old) form of development. Financial and economic data exist too, but tend to be less persuasive to current residents. Education, information, and understanding won't happen overnight, but it is important to have an ongoing conversation.

State and federal regulations. Reducing the impact of state and federal transportation and environmental regulations on the cost of housing production is a bit more difficult, and seems out of reach of the local jurisdictions.

Perhaps the best way to do this is to elect representatives to state houses and the US Congress who are conscious of the impact of regulations on the cost of providing new housing units. This will require the local population gaining an understanding of the relationship between regulation and housing affordability. It is time for advocates of housing affordability to transcend the local government level and be heard at higher levels of government.

Regional coordination. The region's political fragmentation makes coordinated action difficult, but regional coordination and cooperation are necessary to ensure the continued high quality of life in the metro area. Furthermore, regional coordination needs to include all groups that have a stake in the economic vitality and housing availability in the region—local governments, affordable housing advocates, and businesses.

Groups like the Metropolitan Washington Council of Governments that convene local leaders to discuss regional issues are critically important to keeping these policy concerns in the public eye. However, the problem cannot be solved by discussion alone: regional coordination on housing issues requires true commitment in the form of money and leadership.

The Washington DC metro area would benefit from the creation of a regional housing trust fund¹, a source of dedicated funding not tied to a particular jurisdiction and contributed to from both the public and private sectors. The fund's resources could be used to subsidize construction of affordable housing in the locations around the region where there is the greatest need.

Although the District of Columbia and the states of Maryland and Virginia also have housing trust funds (with different funding mechanisms—some dedicated, some not—and supported activities), the Washington DC region needs a regional trust fund because the people living and working here are all interrelated and support the economic health and well-being of the region. A regional housing trust fund would be different—and perhaps more challenging to establish—from those mentioned above because we live in a region with three states. Challenging, but not impossible.

Our region's trust fund should also be supported by both the public sector (e.g. local governments) and the private sector.² The business community has a tremendous stake in the availability of housing in the region.

We must meet the challenge

There are no easy answers here, but there is a set of approaches that could individually and together ease the housing affordability crisis and to ensure that we produce enough housing to support our region's economic vitality and sustain our quality of life.

Just as we need DC, Maryland, and Virginia to work together, and the region's component counties and independent cities, we also need the public and private sectors to collaborate on regional housing needs. Regional leadership, setting housing affordability as a priority over other priorities, and education of existing residents are all prerequisites to solving the problem. If we don't put these solutions to work soon, our region runs the risk of diminished economic prospects in the future.

Imagine for a moment that each month the District somehow came into a lot of of gasoline, and set up a "residential gasoline program" where any resident could buy as much gas as they wanted for 10¢ a gallon, first come, first served.

What would happen? We'd all buy as much gasoline as we could, even if we didn't really need it. The supply would run out very quickly, and we'd start fighting over it. We'd start having to ration it. Special groups would argue that they're more deserving of gasoline than others.

Worst of all, we'd be inclined to prevent new people from moving to the District, because they'd be competing with us for our sweet deal on 10-cent-a-gallon gasoline. All of these unnecessary conflicts and complications and undesirable side effects. Why? Because the government is selling something valuable at a small fraction of its true market cost.

That's where we are today with residential parking. We don't have enough to go around, but we haven't faced up to that reality. The reason we're not having DC Council meetings about milk or about gasoline is that the demand for those things is moderated by price. And that's what needs to happen with residential parking.

The current system doesn't work

The RPP system is broken. I see 5 big problems with residential parking in the District today:

1. There are more residential permits than residential spaces available in many neighborhoods. As a result, for example, in Dupont, where I used to live, everyone wastes time and fossil fuels driving around and around looking for a spot.

2. Zones are huge and the boundaries drawn without regard to demand for parking. Very different neighborhoods like AU Park and Cleveland Park and Woodley Park are all arbitrarily lumped into the same parking zone. You have intrazone commuting, and people from AU Park can drive to my street, 2 blocks from the Cleveland Park metro, and park there all day, as if it were their neighborhood.

3. The cost is the same everywhere, whether you live in a very low-density suburban-style neighborhood like Edgewood or Chevy Chase or a high-density urban neighborhood like Adams Morgan or Logan Circle.

4. The 2-hour exception is arbitrary and useless in most real-world situations. It's more time than you need to pick up a prescription at CVS, but not enough time for dinner and a movie.

5. The system deals awkwardly or not at all with visitors like babysitters, houseguests, churchgoers, and others who have legitimate reasons to park in residential neighborhoods.

The solution is not to add complexity

How do we address these problems? The answer isn't to add more layers of regulatory complexity. The current system is already a tangled mess that only a lawyer could love. We don't need more special exceptions, special zones, carve-outs, or special categories of drivers. We don't need more rationing or hourly limits or weekly schedules. We don't need more indecipherable parking signage.

This doesn't need to be complicated. Let's start with two basic principles:

1. Storing my personal vehicle on public land provides me a personal benefit, and is not a public good. I'm not doing the people of DC a favor by parking on the street—to the contrary. So when I park on public land, I should bear the cost of that privilege, at approximately market rates, rather than paying a rate that's artificially low because it's subsidized by all DC taxpayers.
2. The value of parking varies according to demand, which varies according to location. Prices should be set zone by zone. But in order for residential parking zones to make sense, zones should be small and/or homogeneous enough to capture differences in demand from place to place.

What would this look like in practice?

Each small zone might have a base rate, based on demand. Everything else could then flow from that base rate: You'd have hourly rates and daily rates. Residential parking permits are essentially a yearly pass in the microzone of my choice, keyed to that zone's base price.

If I occasionally need space for visitors, I could buy books of day passes at a reduced rate. If I live in Chevy Chase and I want to drive to Metro in Cleveland Park and park on the street every day, then I could pay for daytime-only parking in that microzone. Babysitters or contractors could buy daytime passes as well. And so on.

In some parts of the city, residential parking may be so abundant that market value of parking is close to zero. There, the current token rate of $35 per year would continue to apply. In areas with high demand, the cost would be higher.

This may all sound like it would be complicated to implement, enforce, and comply with; but the technology exists to make this easy and is getting ever cheaper.

With this proposed approach, the only thing you ever have to consider is price. You park wherever you want, whenever you want, for as long as you want - as long as you're willing to pay what it's worth. Just like you can drink as much milk as you want, as long as you pay for it. Simple.

Does market pricing mean parking is just for rich people?

The District should do everything it can to reduce poverty and income inequality. But the District doesn't have across-the-board subsidies for clothes or furniture or gas or lots of other good and useful things.

Should the DC government subsidize parking? Perhaps, but certainly not for me and my comfortable neighbors in Ward 3. And even for low-income residents, we're not convinced that that subsidies for parking would be a particularly effective way to reduce poverty.

Surely there are more fundamental needs that we should be meeting first. We don't have enough affordable housing for people in DC, so it seems strange to argue that affordable housing for cars should be a priority.

At any rate, it's the current system that is profoundly regressive. About a third of DC households don't have a car at all. The existing parking subsidy takes money from all taxpayers, whether they drive or not, and effectively redistributes it to car owners in proportion to the number of cars they own. That's not fair and
it's not right.

Accurate pricing + better incentives = improved quality of life for everyone

I'm not "anti-car." My family owns a minivan and drives it and depends on it. But the current RPP system actively incentivizes more car ownership and more driving. Those incentives need to be reversed. Two personal cases in point:

1. My own family gets by on one car. We've often thought about buying a second car. So far we haven't, for a variety of reasons. But the cost of storing the car has never been a consideration in that decision. Why would it, when we can store the car on public land for practically nothing?
2. On my block, almost every house has a garage designed to house a car. Not a single one of those garages, including my own, ever has a car in it. We all keep our cars on the street, and use our garages for bikes and tools and junk. Why shouldn't we, when we can store our cars on public land for practically nothing?

More accurate pricing for residential parking would encourage individuals to find alternatives to owning a car; it would encourage families to own only as many cars as they need; and it would encourage people who have off-street parking to use it. All of this would result in fewer cars parked on the street, so that when
you do need to park, you can.

Imagine a city where every single block has a parking spot or two available, so when you do need to park you can always find a space, anywhere, any time of day or day of the week. Parking karma for everyone. That sounds like a fantasy, but it doesn't have to be. Because of market pricing, every gas station has gas, and every grocery store has milk and bread, and so on. We take this for granted, but we shouldn't.

With more accurate pricing, we can get there with parking as well. And in the process we can eliminate the underlying cause of so much of the neighborhood conflict and rancor we have over growth and development, and make DC a happier and more attractive and more livable place.

That in mind, Schleicher's questions are worth discussing.

Supply and demand

Schleicher argues that DC's height limit is restricting the supply of available buildings, which is making it impossible to meet the demand for office space in the city. He says,

But if Height Act proponents think limits on supply do not increase prices, why not? Is it some distinction between housing and offices and other markets? If so, what is your model of how office and housing markets work?

Obviously there is a connection between supply and demand. But is the height limit really limiting DC's supply?

There is currently around 100 million square feet of office space in downtown DC, which makes it the 3rd largest downtown in America after New York and Chicago. Despite no skyscrapers, downtown DC currently has a greater supply of office space than downtown San Francisco, Boston, Philadelphia, or Los Angeles.

More importantly, DC's supply of potential building space is not anywhere close to being maxed out under current regulations. The height limit is not currently restricting supply in the vast majority of DC. It is only restricting supply within the area roughly bounded by Massachusetts Avenue and the National Mall.

It's true that DC's historic rowhouse neighborhoods are largely off-limits to significant densification, but large sections of central DC are nonetheless available. Even with the height limit, there is room for at least double downtown's current square footage in underbuilt areas of NoMa, Southwest, and along the Anacostia and Potomac waterfronts. Without touching DC's height limit or its historic rowhouse neighborhoods, there is room for decades of additional growth within a radius of 2 miles of the Capitol.

There would be even more room available for infill if the decision were ever made to redevelop Roosevelt Island, Bolling Air Force Base, or National Airport. Doing so would surely be controversial, but should at least be discussed in an honest assessment of options.

So it is simply not true that the height limit is restricting building supply in DC overall.

It is, however, true that the supply of buildable space is being limited in that geographically small downtown area. This brings up Schleicher's next questions.

Where and how to grow

Schleicher asks a few questions:

Why do you think development should be spread out? What effect do you think limiting heights has on agglomeration, including the depth of local markets and information spillovers? Do you believe in a single optimal city form? And why do you think DC captures it? Or are height limitations somehow a particularly good fit for a national capital?

Opponents of the height limit like to ask why DC's existing limit is so special. If the height limit happened to be 20 stories instead of what it is, would supporters still claim it's the perfect regulation?

Opponents need to answer the opposite question.

"Downtown DC" used to only mean a few blocks near Pennsylvania Avenue. Now it means a larger area, spanning from New Hampshire Avenue on the west to Union Station on the east. Since downtown is the only area being functionally limited by the height act, what about the current extents of downtown DC make it the perfect geography?

Downtown grew from that area around Pennsylvania Avenue to its current extents because of the height limit. Since that growth happened, buildings at 19th and Eye Streets are not generally considered to be much more poorly located than buildings at 12th and G. In the future, if the height limit is kept, downtown will again grow to encompass NoMa, Southwest, and the waterfronts, and they will not be considered any more out of the way than the West End is considered today.

If it was OK for downtown to expand to include the West End, why isn't further expansion OK too? What's so magical about today's definition of downtown, which is different from the definition a few decades ago and will surely be different again in the future?

Theoretically it would be possible to cluster all the office space in downtown DC in no more than a dozen super-tall skyscrapers covering only a couple of blocks. And some day in the future we might even be able to fit all of it in one single thousand-story building, covering only a single square block. Would that be ideal?

If maximum agglomeration were desirable, it follows that we'd want a much smaller downtown than we have today.

Granted, that thousand-story example is reductio ad absurdum, but the point is simply that there's nothing magical about the current definition of downtown DC, so any argument that's based on solving the problem of restricted supply within that current definition is necessarily flawed.

So the question is not "how can we fit more office space in the area currently defined as downtown?" Rather, it's "where do we want future office space?"

If we want to have more space specifically at, say, Farragut Square, then we can raise the height limit around Farragut Square without eliminating it completely for all of downtown. I'm OK with that.

But we also have to recognize that there are many benefits to spreading development around a little bit. We don't want sprawl, of course, but the region is better off for having vital mixed-use neighborhood uptowns like Bethesda and Clarendon spread near the core.

If all the office space is clustered in a small office ghetto downtown, that deprives the surrounding neighborhoods of key mixed use elements. Not only daytime office workers, but also office-reliant retail and support services that are necessary for any successful mixed-use district.

The desirability of mixed use neighborhoods is one of the most basic premises of contemporary urbanism, and it's why many people who care about good cities want to spread some office space around outside of downtown districts. Unless we're prepared to force everyone to live within walking distance of downtown, we need healthy neighborhood uptowns that are mixed-use.

Economists seem to have a difficult time grasping this point. It's probably true that it's economically more efficient to cluster offices more than we're currently doing (though surely not to that single thousand-story building extent). But the economic models being employed so far in this debate don't take into account livability or good urbanism. The benefits of spreading some office development to uptown districts aren't captured if all you're thinking about is property values at 12th and G.

And it's not just the uptowns that reap the livability benefits of the height limit. Downtown DC does too.

With the exception of New York, no large city in the US has fewer surface parking lots in its downtown than Washington.

Because of the height limit, it is less economical here to let properties lay fallow than in any of our peer cities. This means there are no gaps in the urban fabric, which improves downtown's walkability.

But again, the near-certain likelihood that gaps in the urban fabric would develop without a height limit is not something that's captured in the economic models.

Questions for opponents

Schleicher's questions deserved discussion, but height limit opponents need to answer some questions themselves. The economists who seem to be largely driving the movement to repeal have so far focused on a narrow set of arguments, and ignored or attempted to marginalize any broader issues. That's not a recipe that will result in buy-in from anybody who doesn't already agree.

Some questions that height limit opponents more fervent than myself need to answer:

1. What about the current extents of downtown DC make you think it is the perfect geography in which to cluster office development?

2. Do you accept that there are reasons some people like the height limit which cannot be captured in traditional cost-benefit models?

3. Instead of repealing the height limit, would you accept modifying it to permit taller buildings only at specific and limited locations? If so, how might you go about determining those locations?

Cross-posted at BeyondDC.

What did the commission want to accomplish? Linton said in the news release,

We expect multiple riders to be using taxi services. The additional fare provides a fair compensation to drivers. It will also offer an incentive to deal with the increased congestion around the ballpark that could otherwise depress service, as well as assure service in other parts of the city.

At first blush, these reasons seem nonsensical and contradictory. The commission wants to encourage drivers to operate around the ballpark, so they have a surcharge to create an incentive for drivers to head to the ballpark. But then, they want drivers to not all cluster around the ballpark, so they have a surcharge for drivers to go elsewhere. Don't these just cancel each other out?

Commenters online seem to feel the same way. On the City Paper post, commenter "One City!" wrote, "I love this city so much. Whenever you think we've reached the height of absurdity, the DCTC is there to show you we still have room to grow." RedLineHero said on the Washington Post site, "What the H-E-double-hockey-stick kind of harebrained idea is that? a surcharge during the playoffs? You have GOT to be kidding me. Good on Mayor Gray for shooting that down."

Uber "surge pricing" gets more drivers on the road

This surcharge is actually a lot like popular car service Uber's "surge pricing." If demand gets high, Uber increases its fares, first to 1¼ normal, then 1½, and so on. Anyone who books a car gets a notification about the higher pricing before the car is dispatched. All of the extra money goes to the drivers.

At the recent hearing, Uber CEO Travis Kalanick defended the practice. He said that the primary reason is to increase supply. They don't want riders unable to book their cars. At busy times, by raising the price and giving drivers the money, he said, it encourages more of their drivers to get out on the road and serve customers.

By that logic, the surcharge makes some sense. Many drivers work at different times of day. A bonus for working at this likely busy time could actually encourage drivers to switch their schedules around if they can, and be available during games. Some could go to Nats Park and serve fares there, but since the surge price applies all around the city, it will also encourage drivers to serve other neighborhoods.

DCTC's explanations don't hold water

If this was the DCTC's thinking, they certainly didn't make it clear. Will Sommer at the City Paper wrote, "Taxi Cab Commission spokesman Neville Waters says the extra charge has two functions: ensuring that the city's cab drivers don't just swarm Nationals Park, and making trips more profitable for drivers who are stuck in stadium traffic." He quoted Waters saying that without the surcharge, drivers would only drive to the ballpark and nowhere else.

These reasons don't match the policy. If DCTC is worried drivers will only drive to the ballpark, why would a surcharge that applies in all neighborhoods have any effect? It doesn't make trips around the ballpark more or less appealing compared to others.

As for the second argument, compensating drivers for traffic is why the rates include both time and distance. The playoff games probably won't cause traffic jams any worse than other events in DC, and the commission doesn't authorize surcharges every time there's a motorcade. If the DCTC believes that large traffic jams cause drivers to unfairly lose money, then they should raise the per-minute idling rate instead of using surcharges.

However, if the DCTC actually just wants to get more cabs on the road, this surcharge isn't a bad way to do that. It would just help a lot for them to actually articulate the economic reasons.

Wakehead commented at the Post, "How about they have more taxis work for the Nats games? Or is the target service model 'lines and surcharges'?" A rational answer to this could be, "Actually, the surcharge does get more taxis to work the games; it's lines OR surcharges, not lines AND surcharges, and we chose surcharges over lines."

We don't know what was going on inside the Taxi Commission's heads, but they are behaving as though they have some vague and general sense of the economic levers they have at their disposal, but aren't able to actually discuss it in clear terms.

The same dynamic played out at the recent taxi hearing, when people like Kalanick seemed to be speaking one economics-based language, and Linton and members of the DC Council a different law-based language. Ultimately, they agreed with one another, but it took hours (and some taxi drivers who didn't speak in economics) to break through the language barrier.

DCTC might actually want to consider trying a surcharge at a future event, like the Inauguration, but explaining it better. Trying a surcharge could also help them gauge how much supply it adds; Uber is able to monitor their supply and demand in real time and adjust prices accordingly, but the Taxicab Commission can't do that.

If the commission does come to recognize that it's using demand-based pricing, perhaps that will also make it less hostile to practices like Uber's "surge pricing" and other innovative pricing arrangements from mobile apps and sedan services.

Update: Uber DC manager Rachel Holt wrote in with some helpful information from their surge experience:

From what Uber has seen, during big games demand during the game is usually extremely low. Most people in DC are watching the games—whether at the stadium, or in bars, or at home, etc. By mandating the additional charges during the game, itself they are just further depressing demand (probably more than the amount of the increase), thus making drivers worse off during this period.

When a household spends 30% or more of its income on housing costs, housing researchers typically identify it as "housing cost burdened." In 2010, about half of all renters in the DC region fell in this category, and 83% of renters with household incomes below $50,000 were burdened. Nearly one-third of the region's homeowners spend more than 30% of their incomes on their mortgages.

On top of that, many so-called "drive to qualify" households, or those households that were only able to find affordable housing far away from where they were looking, have very high transportation costs. According to the National Association of Realtors Affordability Index, the Washington region ranks as the 5th least affordable major metro area overall, with only San Francisco, Los Angeles, New York, and Boston less affordable than our region.

Several factors have contributed to declines in affordability in the Washington area. Some are due to changing preferences of those that seek housing, or demand-side factors:

Population growth. The Washington region added 2.4 million people over the four decades between 1970 and 2010. Over the same period, household sizes were shrinking and more people were living alone which accelerated housing demand.

High-income households. These households created demand for larger and more expensive housing and builders rushed to meet demand. While overall household income growth has been relatively modest over the four decades between 1970 and 2010, a sizable share of the region's workers earned very high wages.

The growth of the high-wage professional and business services sector began in earnest in the 1980s when federal procurement spending increased and the government contracting workforce expanded. Many of these jobs were high-wage jobs in engineering, computer programming, program management, and other fields that suddenly became the fastest-growing sectors in the region's economy.

The workers in these fields benefited from high and rising salaries and demanded larger homes, more owner-occupied homes, and more expensive housing. Builders were happy to meet this growing demand, and as a result, the region saw fewer rental units and fewer smaller houses built over time.

Homeownership incentives. During the recent housing boom, easy mortgage financing and public policies that encouraged homeownership put upward pressure on home prices and fueled demand for higher-priced homes.

Speculation. Speculative demand by investors artificially boosted prices at the same time. Although values and prices dropped temporarily, Washington's economy and job growth proved stronger than those in much of the country, and home prices rebounded, particularly in areas close to the core.

Demographics. Changes in demographics and lifestyles have increased demand and prices in DC, areas inside the Beltway, and areas along Metrorail lines.

Overall, this demand for homeownership has diminished the supply of rental housing. In 1970, the region's housing stock was split about 50/50 between rental and owner housing. Over the next four decades the development of for-sale housing far outpaced the supply of rental housing.

The rental housing that was built was often targeted at the higher income households, and involved redevelopment of affordable rental housing. Lower income households, who are more likely to rent than own, faced a declining stock of housing with rents they could afford.

Developers and landlords have also responded to the changing conditions in the market. These supply-side factors include:

Land. The amount of land available for residential development is fixed and has grown scarce. Within the geographic boundaries of the Washington metropolitan area, there is only so much land on which to build. Even though the construction of I-495, I-66, and Metrorail have made it easier for housing to be built in the farther out suburbs, land itself remains a constraint on residential development.

New higher-end condos. As builders sought to meet the demands of higher income households given the land constraints, cheaper homes in the suburbs gave way to luxury homes and modest rental buildings were shunned in favor of amenity-rich condos.

Condo conversions. Older and more affordable rental apartments have been converted to condominiums to meet the demand for homeownership.

Zoning. Land is also constrained by local regulations that determine the types and sizes of housing that can be constructed under different zoning and land use categories. Lot size and coverage regulations require that large homes with large yards be built in some areas. Height and density restrictions can prohibit the construction of higher-density, multi-family residential development.

Other regulations. Local government regulations affect the time required to construct new housing, delaying the availability of new units to meet growing demand.

Even as the housing bubble burst and regions across the country experienced dramatic drops in home prices, the Washington region is staring down the affordability issue once again.

Housing affordability is particularly a problem in inner-ring suburbs and the downtown core where land is expensive and scarce. The most desirable locations are those near transit stations or hubs, yet those infill locations are where development is most difficult and time consuming, and where resulting housing will be most expensive.

While there has been an uptick in residential construction, it has been primarily high-rent multi-family development in the District of Columbia and close-in suburbs. Single-family and townhouse construction seemed to slow to a halt and is only now beginning to pick up.

Over the last few years, thousands of workers have flocked to the Washington region to take advantage of its healthy economy. As a result of this recent demand, rental vacancies have been low and rents have been high. In some jurisdictions, home prices are back to the peak seen at the height of the housing boom.

Next in the series: How much housing will the Washington region need over the next 20 years?

To be sure, there would be a tradeoff in lost revenue from the lucrative 1-day passes for the additional ridership encouraged by all-you-can-ride weekend memberships. With approximately 100,000, 24-hour memberships sold in the past year at $7 each, over $230K in annual revenue would be put in doubt by the offering of a weekend-only membership. This is assuming approximately 1/3rd of all 24-hour members are local. Moreover, it doesn't even consider the higher-than-average trip lengths, resulting in usage fees, taken by 24-hour members (looks like CaBi can afford it, though).

But there would also be customer service benefits from diverting many casual users from having to interact with the kiosk. One observation by survey collectors from the intercept survey, which is at odds with these survey responses, was their experience with the kiosks. While people reported an OK experience figuring out the kiosk (77% "easy" or "somewhat easy"), we observed a fair bit of confusion, slow processing, some queuing, and a lot of time consumed with having to navigate the screen processes.

Of course, total ridership does dip on the weekends. Incentivizing locals to maximize weekend use of the bikes could grow ridership in a way that does not stress the system at peak times. Additionally, a fee-for-peak ride, at worst, yields some additional revenue for taking rides at the most disruptive times. If service outages (full/empty docks) continue in peak commuting hours, perhaps a variant of this pricing model should be considered for all memberships going forward?

I can see some pros and cons to this approach. This could push more riders toward buying plans that best fit their preferences and possibly drive more weekend use. Or, would it end up discouraging weekday use?

There's a lot of power in simply making something free. It psychologically pushes people to consume more of it while even a small charge has the opposite effect. This is why Metro should encourage more unlimited passes since it has plenty of unused off-peak capacity, as well as why parking in high-demand areas should not be free since overuse leads to more circling and traffic.

Anyone who buys an unlimited Capital Bikeshare membership suddenly has an amazing power: they can grab a bicycle in scores of locations with no guilt at all. That's a powerful incentive to bike more, become more confident riding in the city, and ultimately start riding a personal bike instead for many trips.

Capital Bikeshare's goal is not merely to match up supply and demand. It also achieves far broader goals of helping people become comfortable bicycling. Would this system boost that effect or hinder it?

Any system of off-peak rides won't precisely fit with the excess capacity. Some areas don't experience much dockblocking. In the middle of the day, even on weekdays, the system isn't that busy. This pricing system could discourage rides in those areas where we'd most want to foster new riders and more usage.

On the other hand, there are segments of the public who might not be customers under the current pricing systems. I actually might not renew my Capital Bikeshare annual membership the next time it comes up for renewal. I've only used it on 2 separate days in the last 8 months. That's not because it was not useful, but because I became accustomed enough to riding my own bike that I almost always use it instead. I don't have to walk a few blocks on each end when I use my own bike. (A station near Archives would cut down on that extra walk quite a lot!)

I could pay $7 for a day pass in the occasional situation I need a one-way trip, but that's a lot for a short trip, and it's time-consuming to use the kiosks. Also, now that it's in Alexandria, where I periodically go, it might become extra useful for trips between Metro and North Old Town. Buck's plan might better meet my needs. Or maybe without it I'll just pay the $75, though I'm more willing to spend money on bicycle programs than the average person.

What do you think? Is this a good idea or a bad one?

But the fundamental issue here is that IZ is an extremely cumbersome way to try to help people. Instead of giving one family a $120,000 discount on a condo and giving another family a $130,000 discount on a condo the city could just hold a lottery. Look at the list of DCPS students eligible for free school lunches, select two of them randomly, and cut each family a check for $125,000.

There'd be little need for paperwork, no need for loans, and the families could decide for themselves how they want to use their bounty. If the city wants to obscure the cost of the lottery, they could simply say that developers of market rate housing projects need to stage the lotteries.

It's true that unlike IZ, my "give lots of money to people in need" initiative would not ensure the existence of economically diverse neighborhoods. But a question people have to ask themselves is what's the purpose of these policies. Are they supposed to help low-income families or are they supposed to make upscale yuppies feel better about their neighborhood?

I think the giveaway is that the lucky inhabitants of these "affordable" units aren't allowed to sell the units at market prices. Imagine a low-income family faced with high medical bills. Luckily for the family, it actually owns an apartment that's pretty expensive. But perversely, no matter how badly they need the money they're not allowed to sell the apartment to raise it.

The encumbered sale is perfectly reasonable

Yglesias' last argument is the simplest to address. Certainly a family owning an IZ unit could sell the apartment. They simply have to sell it at a discount to the current market price, just as they bought it at a discount. That's not really that strange.

We can draw an analogy to a small company. Say you have a business idea but you need to buy some equipment. You could borrow money from the bank, or you could get investors and sell them part of the company. Let's say someone agrees to invest $250,000 in your company for 50% of the equity. Your company is now worth $500,000 and you own half.

You and your employees do a good job and the market opportunity turns out to be a good one, and your company grows in value to $1 million. Your share is worth $500,000. Say you need money for the medical costs in Yglesias' example. You can sell some or all of your share. But you couldn't say that it's not fair you can't sell the whole company for a million; you only own half.

An IZ unit is like a little company where the city owns a share. You get to control the unit itself—the city has no voting stock—but if you sell, you can only sell your share, to someone else who can come in and assume the same business arrangement you had.

There's nothing intrinsically wrong with this, other than that it's not the way housing has traditionally worked. But the condominium (and before that, the co-op) was unheard-of for a long time, as well, and then it existed, because it met a particular need.

Anyone who doesn't like this kind of arrangement doesn't have to buy such a unit, just as the company owner could borrow money, or put in his or her own money, or try to make the business work with less capital, if they don't want to give an investor such a big share.

Why not give people cash instead of housing?

Yglesias' first point basically asks, instead of subsidizing housing, why not just give some poorer people some cash, and then they can buy housing on the open market?

This is a fairly common economist response to a government program giving something away. If having a free market is generally better than not, then rather than giving people some good, why not give them money and let them make the choice? Maybe they can actually consume less of the good, and this creates an incentive to do that.

This is the argument for a parking cash-out. Rather than giving a bunch of office workers free parking, why not give them money equal to the cost of renting that parking in a garage? Given the money, the office workers have an incentive to take transit or carpool instead, and keep some of the money. The cash option doesn't cost the employer any more, and transportation gets more efficient.

On the other hand, we don't do this with, say, food stamps. The government has a certain interest in making sure people buy food instead of buying booze or drugs and going hungry. Moreover, food is a basic necessity and the food stamp money doesn't go so far that people will end up overconsuming food (unless it's overconsuming junk food, which is excessively cheap thanks to corn subsidies).

The main difference between IZ and the "give them cash" principle is that "give them cash" requires the government to come up with some money, which it might not make back in taxes. IZ takes the cost of some affordable housing out of the producer surplus for the developer. The developer is making some profit on each unit. The bonus density adds additional units and thus additional profit, but IZ restricts those so that much of the profit goes to the homeowner rather than the developer.

As long as the amount the buyer pays for the affordable unit exceeds the incremental construction cost and taxes, the developer will still make money on these additional units, all of which they wouldn't have been able to otherwise build.

The building industry negotiated on the original IZ law to reach levels that didn't wipe out all their producer surplus and turn affordable units into a net cost. They probably pushed for more than necessary, so that some producer surplus remains, giving them some buffer and giving us confidence that the law isn't excessive.

Unlike cash, IZ protects affordable units in perpetuity

Yglesias suggests alternatively having the developer run a lottery to give out the difference between the market-rate and affordable unit. This would take the money out of the producer surplus, and have the same effect as IZ... at first. But unlike cash, this unit has restrictions on sale—that "investor" who owns some of your "company."

If I give you $25, it's yours. If I invest $25 in your company, such as by buying some stock in a public offering, you still get the $25 to spend today and can use it toward equipment or hiring or office rent, but I got something of value back in return.

The net result of this policy is that someone gets to live in some housing while shelling out fewer dollars, but the city also keeps some of the value of the transaction for itself in the form of this equity. That serves the social goal of maintaining a stock of affordable housing over time as well. In the end, IZ creates affordable housing but at lower cost to society than by other means.

Some affordable housing organizations don't like this system. They prefer to have a juris­dic­tion create affordable housing, lottery it off to needy families, and then let those families resell in the future at market rates. When the family sells, they have to pay back the subsidy, but they keep most of the appreciation.

The problem with this system is that it doesn't preserve the affordable housing in the long run. People who receive units can flip them after a number of years and pocket at least a large percentage of the difference. Meanwhile, the unit stops being affordable for the next person. In this way, it actually is more like the lottery in Yglesias' hypothetical, or to extend our analogy, it's like financing the company with a loan instead.

Under that kind of system, you create affordable units, but they quickly evaporate out of the city's stock of affordable units. IZ creates a pool of these units that stick around, keeping at least some inventory of less expensive housing for the future.

IZ is a way to get extra density

Inclusionary Zoning is a program that Yglesias and other economically-minded urbanists should actually be very excited about. Yglesias wrote a whole book on how restrictions on supply are holding our cities back. These restrictions stem mainly from resident opposition to added density.

IZ builds political support to do what might otherwise be impossible: allow more density under zoning. The political calculus might not favor such a change on its own. Just upzoning a property gives extra value to the property owner, creating a producer surplus, but little benefit to residents beyond the vague promise of more "eyes on the street" and more shops and restaurants.

But there is some political power behind doing more to create more affordable housing, and a group of people who stand to benefit from such a policy. Add that to the equation, and it becomes possible.

In other words, even if IZ is imperfect, it might be the most politically feasible way to achieve higher density.

Yes, IZ is somewhat imperfect

There are indeed some challenges with IZ. Like any program, has some transaction costs, which the "give them cash" hypothetical alternative largely avoids. There have been some obstacles to getting mortgages for IZ condo units, though this problem is actually easily solved: other jurisdictions simply agree to let the affordability policy expire if the property goes into foreclosure. The city agrees to give up its "call option" in this case to get lenders to buy in.

Some IZ units may be going to people who are just temporarily low income, like recent college graduates who have every ability to soon earn much more than the area median income. Appropriately tuning the law could probably address most of these abuses, and while it does increase administration costs, it shouldn't be a deal-breaker.

IZ also has only limited impact. DC is only creating a small number of IZ units so far, largely because Mayor Fenty delayed the program for years while many new buildings gained permits without IZ. Those buildings are just now being built.

Also, the federal height limit constrains the amount of bonus density that DC can grant. IZ can only let developers build more when local zoning is more restrictive than the height limit, which is the case for most of the District but not in the densest areas with the most growth. Other jurisdictions can grant far more in incentives, as in the White Flint plan.

Is there a free market solution to housing affordability?

It would be much more satisfying to devise an economic system that creates housing choices at all points on the income spectrum inherently, by market forces, rather than through government mandate. I simply don't believe that removing all zoning caps would do this, however.

Buildings cost a lot to construct, and taller buildings cost more per unit than smaller ones because they require more expensive materials. Lenders only want to fund the projects with the highest return, and capital is scarce, especially now. There is enough demand near the top of the income spectrum to consume all of the units that could get financing.

As it is, developers tell me that there is considerable development, already approved, that is just not happening yet because of financing constraints. If things aren't getting built which have no zoning barriers, then removing zoning barriers won't solve all problems.

It's still worthwhile to push to reduce barriers for the long term, and there are plenty of examples where zonng rules or historic preservation limits do indeed take away needed housing opportunities.

But in the meantime, there is indeed value in creating mixed-income communities. It's far more than just a way to "make upscale yuppies feel better about their neighborhood." In a future part, I'll discuss the many advantages to mixed-income neighborhoods, for both wealthier and poorer residents.