Small Companies and Economic Development

Cities have a vital role to play in economic development – especially in forming and growing start-ups. It’s work that’s often misunderstood or overlooked – but it’s potential to change the fortunes of a city should not be overlooked – especially as the ability to do business globally is rewriting companies investment and business strategies – often to the detriment of cities employment base.

The solution is encouraging entrepreneurship and companies that define the products and own the relationship with the customer. It’s also a big step from courting existing businesses with tax incentives and the promise of cheap labour.

Cities need to understand that by setting the right conditions they can increase company formation without spending much. Those conditions:
– tools to help people connect
– mechanisms to turn information into knowledge
In a nutshell databases and discussion that leverages the self interest of potential entrepreneurs to move form concept to company – and from company.

Increasingly it will in turning idea in companies that can define and connect with the market that will define a cities economic prospects – as it’s in this knowledge that value resides – not in the manufacture of the product.

Understanding Slippery Slopes - How little changed become big

Came across a fascinating article “In Defense of the Slippery Slope” which outlines how apparently good decisions can have undesired bad consequences – ie how the initial decision becomes a slippery slope. (read the whole article here http://www.law.ucla.edu/volokh/slipperymag.pdf)

The author proposes the following mechanisms:

- When the initial decision changes the economics for implementing the undesirable outcome. This can happen by making it cheaper to do the undesirable thing (and therefore making it easier to achieve financially and politically) because it also removes that portion of the objectors who objected on cost alone
- When it changes enforceability of the undesirable consequence by changing the economics and ease of enforcement
- When the initial decision might lead to a change in attitude that would make the undesirable consequence more likely
- When applied to a law as the is/ought rule applies which posits that people attribute rational, pragmatic and moral attributes to laws that may not have those basis in fact. The fact that it is law may build support for more sweeping versions of the policy.
- When the proposal changes the balance of power among political groups – either by giving voice, money or both to a group that didn’t have it before.

The author argues that both law and politics are heavily influenced by precedent and that watching for these mechanisms helps determine whether a proposal really is the first part of a slippery slope or not.

Economics of Block Busting

I've been thinking about block busting - or the putting out of scale building in the middle of blocks.

The issue is that less sophisticated owners near a project end up supporting it because they believe that a building larger than the zoning allows increases the potential that someone will want to buy their property for top dollar to build something similar.

That ignores the laws of economics. First block busting buildings put a lot more of the unit type the zoning allows on the market at the same time. In the short term those additional units decrease the likelihood that additional builders will be build because it removes the economic incentive for any new builder (because of the number of units that must be absorbed - unless the market is red hot). In effect an above zoning building "steals" the value from surrounding lots for it's self.

Above zoning buildings have other effects as well. If the additional units sit on the market for a long time, as can happen at the end of a boom, when builders move into less expensive areas to help land reduce costs an above zoning building can depress an area for years. Builders look at the building as an example of the what they can expect from the area - no profit. The above zoning building also diminishes the options that adjacent owners have in selling their property because it creates uncertainty in the minds of potential buyers. Are they buying in an area of known development parameters (ie the zoning) or is the above zoning building the actual pattern. Unless the potential owner is interested in redeveloping the property, or buying it as an investment, the risk is typically to great and they look elsewhere.

It's my opinion that spot exceptions and overly broad zoning previsions (ie a myriad of commercial uses in residential areas) also depressed areas - often for years. Many of these terms were put in the zoning, or the exceptions supported, because people thought that broader possibilities for land use increased potential value - rather than the actual effect of decreased it.

I did a study of house selling prices once in an area with identical housing stock and two zones - one 100% residential and one residential with commercial uses. There was a substantial difference in sale value between the 100% residential side and the residential + commercial side. This difference in value was in part due to levels of maintenance as people will invest in their properties if they are secure that that investment will not be lost due to changes in land use allowed on the abutting properties. The side with all lot of commercial uses inherently had more risk - and therefore less investment.

Block busting and zoning are shaped - and shape the economics of an area.