What Happens Next in 6 Minutes with Larry Bernstein
What Happens Next in 6 Minutes
Rebuilding Los Angeles
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Rebuilding Los Angeles

Speaker: Ed Glaeser

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Ed Glaeser

Subject: Rebuilding Los Angeles
Bio
: Professor of Economics at Harvard
Reading: Triumph of the City
is here

Transcript:

Larry Bernstein:

Welcome to What Happens Next. My name is Larry Bernstein. What Happens Next is a podcast which covers economics, politics, and culture.

Today’s topic is Rebuilding Los Angeles.

Our speaker is Ed Glaeser who is a Professor of Economics at Harvard and the author of Triumph of the City. I want to learn from Ed what the key issues are for rebuilding of the Pacific Palisades. How long will it take to for the victims of the fires to move in? What the implications are for permitting and zoning, and should the residents opt for a major redesign of the entire city by increasing density.

Ed can you please begin with six minutes of opening remarks.

Ed Glaeser:

The fires that rage through Los Angeles are unquestionably an enormous tragedy and cost. But Los Angeles will come back. During COVID, I had an opportunity to publish a paper titled Urban Resilience, which was my attempt to grapple with the literature on city durability and the types of shocks that cities can survive.

The landmark papers by Don Davis and David Weinstein at Columbia University wrote about the bombs that rained down on Japan during World War II. They found that roughly 20 years after the war, cities had recovered to their pre-war trajectory. There is a comparable finding from the Civil War on Sherman's March. Purely physical destruction does not appear to leave cities permanently scarred.

The growth of the American Sunbelt has been one of the most amazing phenomena of the past 150 years. There is no variable that better predicts metropolitan growth since 1900 than January temperature. LA has both nice winters and nice summers. It is one of the world's great economic agglomerations. It's enormously productive. It has highly restricted its housing supply, which means the prices are extremely high. All these things suggest that there is going to be demand for post-fire Los Angeles.

Larry Bernstein:

The Pacific Palisades was destroyed. 12 to 20,000 structures were taken to the ground, but in the scheme of things, is it material?

Ed Glaeser:

Well, 12,000 homes are a lot of homes, but it is not a lot relative to an annual flow of 1 million units. That is 1%. It is a loss, but it is not huge. These units are expensive relative to the norm. It is a lot of value, but the value is really in the land being able to have a house in the Palisades.

Larry Bernstein:

I lived in Tokyo in 1998, and Tokyo was destroyed by American firebombing during the Second World War, but it was not uniform. There were some pockets of buildings that survived, and it makes for an odd-looking city where you see juxtaposed new and old office buildings and residential. Many cities were built in an older period, and you say, “it's too bad we didn't have a fresh start.” Well now we do. We have a fresh start. We can build whatever city we want. Now there are existing rights of landowners, but you can use eminent domain, you can rethink about how you put out the streets.

Can an American city effectively do that? How should we think about rebuilding from the ground up after a national disaster?

Ed Glaeser:

Rick Hornbeck has a great paper on rebuilding Boston after the Great Fire where he shows the extra value that developers could start from scratch and build new. In Los Angeles, we are going to be highly constrained by the zoning rules, the conservation rules, and conservationists have every opportunity to use the courts to sue. California's courts have been overly aggressive most importantly in the famous Friends of Mammoth case, which requires an environmental impact statement for all major housing projects.

There are going to be a lot of constraints doing something that is bold. You could build a lot of high-end apartment buildings that could house a lot of people with great views.

You could do a lot with that space to alleviate the housing shortage in Los Angeles. I am skeptical because of the property rights of the existing owners. Eminent domain, it is going to be a difficult for the government to do politically. Legally it is well within their rights. But if you somehow rather made all that go away, boy, every urbanist eye should light up to being imagining a denser, more affordable, more dynamic Los Angeles.

Larry Bernstein:

Restrictive zoning is to protect the existing owners who do not want new buildings built in their neighborhoods. But here there are no buildings. It is hard to change everything on a dime just because the facts change on the ground.

Ed Glaeser:

We have seen little in state and local governments of bold imagination that you suggested. But you are right, you could imagine getting to a deal. There is enough value there to get to something that adds 50,000 units that compensates the existing owners. It is a question of how much extra value you could unlock by upping the density considerably.

Larry Bernstein:

Explain the desire not to have density? Is it too much traffic? Why have we got into this unhealthy equilibrium?

Ed Glaeser:

Part of it is density and part of it is change. It is I bought this neighborhood the way that it is, and I do not want it to be different. As an economist, we would call them unpriced externalities, the fact that when people come to Los Angeles, they use the highways more. The more that you have smart congestion pricing on the roads, the less that becomes a problem. And public-private partnerships which charge fees for roads which they have in Southern California, those are useful things to get our roads to be used more efficiently.

Larry Bernstein:

Next topic is the insurance markets. Fire insurance actuarial expenses was high. They did not want to pay it, and so they set up a public structure to offer insurance at a discounted price. Ex post, it looks like they do not have the capitalization to make payoffs. I read an article recently that in the policy was the ability to go to the other policyholders and have them pay for this.

You could have paid a private insurance company the high price, but if you said, no, I want to do this as a mutual. Most times when we talk about state sponsored flood insurance, all members of that community will pay, but here we are talking about only those members who bought insurance and not those that did not. How will this affect the insurance market if we're going to go start saying you thought you had a fixed amount of insurance costs, but in fact its variable based upon claims.

Ed Glaeser:

I did work for Eddie Lazear when he was Chairman of the Council of Economic Advisors knocking down the proposal for federally sponsored flood insurance. The Council of Economic Advisors in every administration explains why federally sponsored flood insurance does not deter people from living in flood-prone areas and people who live outside the flood plain subsidize those that do.

The same arguments are true of fires. There is fairness and incentive problems. Part of me says I want to mandate everyone to pay some price that is a reasonable thing to do. The libertarian part of me is not crazy about that, but if the government's going to be on the hook for covering them anyway, I want them to bear the cost of this.

Larry Bernstein:

Next topic, insurance markets have macro effects. When Chicago burned in 1871, the major insurance companies had to pay a couple hundred million dollars.

They had a portfolio of bonds and when they went to sell, the market fell considerably because there was not sufficient liquidity. In LA let's say the insurance claims are $10 to $15 billion. This is a trivial effect on the fixed income markets and of no importance. What does it tell you about the relative scale of the Chicago fire? What does it say about the development of the US markets and that insurance companies play such a small role in the overall nature of the financial markets?

Ed Glaeser:

It's amazing for you to take us back to 1871. This is a period in which finance is just beginning. You have these nascent small number of railroad companies that were dominant in stock markets. America had their civil war debt, but the country was not borrowing a huge amount. A relatively modest Chicago event caused big waves throughout this tiny microfinance industry. Today, the financial dislocation caused by sales of Treasury bonds after a disaster is a small deal.

There is a difference between construction and finance. Construction does have frictions that make it difficult to move builders that are currently in Texas to California. Finance moves globally in milliseconds and the financial industry is globally connected. The construction industry is not.

Larry Bernstein:

The Palisades is going to be a mess for a long time. I live in Miami Beach and every house on my block is getting knocked down and that causes chaos. It's loud. The whole street is full of the trades and that's what the Pacific Palisades is going to be like for the foreseeable future,

These are high-end trades people. They are not just slapping up some kitchen, they are putting up something spectacular. And the result is that people aren't going to be able to move in. And when you talk about frictions, imagine a 10 and a 12-year-old going to school and the junior high burned down. We got to move.

Ed Glaeser:

One of my current obsessions is the decline in productivity in American construction over the past 50 years. There's a nice paper by Austan Goolsbee and Chad Syverson, and what's amazing is if you look at the 120-year history of construction productivity between 1910 to 1945 it's flat, between 1945 and 1970 it soars, and between 1970 and today, it's gone back to the past.

Levitt laid down the houses on the street and all the carpenters would go up and down, and then all the plumbers would go up and down. It was all seamlessly integrated. Levitt then moved into modular housing in the 1960s, which offers even more capacity. That has largely been shut down by local land use controls, which mean that it has got to be an idiosyncratic plan to be approved by the community and it makes it hard to get mass production to work.

Levitt was building a house every 16 minutes. It is like Kaiser churning out the Liberty ships in a couple of days. It is amazing. You could build those houses and make them nice. Now what you could not make them is idiosyncratic. They would have to have a common set of bones. We can make the facades differently, a Tudor, a colonial that is easy.

Maybe there is some ability to have some simple customization, but we are basically going to mass produce the whole thing. But we can do it to a nice level. It would be the same house indoors as your neighbors.

At the high level, the tolerance for that may be limited. It is not that it is impossible to figure out how to do the rebuilding of the Palisades in a sane, efficient, fast manner. America has walked away from mass production for 50 years and consequently it is going to be a mess.

If you converted it all to apartment buildings and you went down the Bernstein/Glaeser vision of putting 50,000 units where there were 12,000 units and consolidated construction. People do tolerate the uniformity in luxury condos and apartment buildings. But if we have 12,000 owners each doing their own idiosyncratic property and rebuilding it, boy that is going to be a nightmare.

Larry Bernstein:

And the permitting process will be delayed for decades.

Ed Glaeser:

Absolutely.

To come to the grand bargain that we have just suggested of adding a ton of extra units, could you opt out of this if you want but your alternative is you're going to have to go through the whole permitting process and it may be a decade before you get another home. And we are going to do this in a way in which 36 months max, you're going to have a 3000 square foot apartment to live in and you're going to get an extra $2 million out of this.

Larry Bernstein:

I bought a house in Miami Beach, and I went to get property and casualty insurance and the price came in at triple what I was paying previously in Illinois for the same amount of insurance. The broker said, “there's been a lot of fraud in Miami insurance and therefore you got to pay triple.” And I said, I am not going to commit fraud, so I cannot buy the insurance. If you have a system where you have fraudsters and non-fraudsters and you are left with basically only fraudsters, then the price of insurance in that market must be incredibly high.

As prices start to go up dramatically, people that choose to not get insurance will be those that will take action to prevent fire. And those fully insured there's kindling and a propane tank on the roof.

Ed Glaeser:

I teach these models in my undergraduate intermediate micro class with math at Harvard, and I illustrate moral hazard in insurance with a picture of a house on fire where I have got my propane tank on the roof. People who are insured have less incentives to protect your house. Typically, insurance companies do a reasonable job of dealing with that with deductibles. If I stand to lose a hundred thousand dollars, I am going to make an effort to stop it from burning down, even if the total value of my house is a million dollars.

I worry most about the fact that if I do not have fire insurance, then I can count on the state bailing me out. There is no question that in canonical analysis of insurance markets, both the moral hazard problem, the propane tank on the roof and the adverse selection problem, frauds, and non-fraudsters both apply and maybe the market breaks down to only contain fraudsters. Both of those things are important in insurance markets.

Larry Bernstein:

A metal roof with an overhang eliminates the flying ember problem. That said, if my neighbor's house is burning out of control, the risk of a fire not from the roof but from the yard burning. This relationship with your neighbor is important. If everyone got metal roofs that would prevent it. But if some people get metal roofs and others do not, then you are not as better off if everyone does it. How do you think about the collective action problem?

Ed Glaeser:

I am critical of building regulations in the United States about things like minimum lot sizes or mandating free parking. But there is some building regulation that are perfectly sensible. The first building regulation that I know of in the United States occurred in Boston in 1630 where they banned thatched roofs. Thatched roofs are a disaster. Those things go up like an inferno. Banning thatch roofs in dense urban areas makes sense and regulations on building that are tightly tied to fire is coherent and sensible. Certainly, when you are rebuilding those 12,000 homes, you want to stop this from happening the next time.

The trickiest thing is what do you do with the old houses? We can impose the rules on the new houses straightforwardly. Are we going to require the old houses to retrofit maybe some combination of carrot and stick where we offer a subsidy to retrofit? It's a question of what the politics will bear, but certainly there's a lot to be gained from housing that burns less frequently.

Larry Bernstein:

If I could reduce your ideas, it would be this. If you destroy human capital that is going to be a problem. If you destroy a building that is not. A building can be rebuilt, but I cannot remake the person. And what we saw in Pacific Palisades was the destruction of thousands of structures but very few deaths. And we should look at it as a blessing and not as a problem. We are going to rebuild. Los Angeles is a robust city that is going to do fine. And if it means some kids cannot go to Palisades High School, they will have to go to Beverly Hills High School, so be it. Tell us about how we should reflect on catastrophes because they are going to happen.

Ed Glaeser:

We must always be compassionate for those people who are harmed, whose lives are dislocated. We also must be pragmatic in our approach to them not to overreact in coming up with some extreme regulatory response to this. We need to be pragmatic and to reimagine the Palisades as a startling opportunity. There are certainly unbelievable good things that could happen there.

It is especially true in infrastructure where there's enormous scope for us to be more sensible about how we build, where we build when it comes to fires. Stephanie Kesselman has a great paper on how zoning in California increases the wildfires that exist by pushing people out towards the exurban areas. So, the more that we can be smart about the way that we regulate things, smart about our infrastructure investment, the more that we can enable Los Angeles to come back better than it was before.

Larry Bernstein:

Thanks to Ed for joining us.

If you missed our previous podcast the topic was Presumed Guilty. Our first speaker was Scott Turow who is the author of the newly released court room thriller Presumed Guilty and the best-selling novel Presumed Innocent that was recently made into a TV series. Scott discussed why juries are biased against the defendant, how race influences the legal defense strategy, and what it costs today to defend a murder case.

We are also heard from Darren Schwartz our recently promoted What Happens Next Culture Critic who reviewed Turow’s latest work.

I would like to make a plug for our next podcast with Vicki Collison who will give us a firsthand account of what it was like to fight the fires in the Palisades. Our second speaker will be Gerald Posner who will discuss the public policy failures for fire mitigation in LA. You can find our previous episodes and transcripts on our website www.whathappensnextin6minutes.com. Please follow us on Apple Podcasts or Spotify. Thank you for joining us today, goodbye.

Check out our previous episode, Presumed Guilty, here.

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