Wednesday, December 01, 2010

Five ways regulators think wrong (+ the impact on land use/zoning)

The Wall Street Journal had a fascinating article recently on "Studying the Biases of Bureaucrats" - essentially applying behavioral economics to examine how government bureaucrats systematically make mistakes in their judgement.  The key excerpt (my highlights):

..."in the mainstream economic literature there is a near complete absence of concern that regulatory design might suffer from lack of competence." Public servants are human, too.
Mr. Tasic identifies five mistakes that government regulators often make: action bias, motivated reasoning, the focusing illusion, the affect heuristic and illusions of competence.
In the last case, psychologists have shown that we systematically overestimate how much we understand about the causes and mechanisms of things we half understand. The Swedish health economist Hans Rosling once gave students a list of five pairs of countries and asked which nation in each pair had the higher infant-mortality rate. The students got 1.8 right out of 5. Mr. Rosling noted that if he gave the test to chimpanzees they would get 2.5 right. So his students' problem was not ignorance, but that they knew with confidence things that were false.
The issue of action bias is better known in England as the "dangerous dogs act," after a previous government, confronted with a couple of cases in which dogs injured or killed people, felt the need to bring in a major piece of clumsy and bureaucratic legislation that worked poorly. Undoubtedly the rash of legislation following the current financial crisis will include some equivalents of dangerous dogs acts. It takes unusual courage for a regulator to stand up and say "something must not be done," lest "something" makes the problem worse.
Motivated reasoning means that we tend to believe what it is convenient for us to believe. If you run an organization called, say, the Asteroid Retargeting Group for Humanity (ARGH) and you are worried about potential cuts to your budget, we should not be surprised to find you overreacting to every space rock that passes by. Regulators rarely argue for deregulation.
The focusing illusion partly stems from the fact that people tend to see the benefits of a policy but not the hidden costs. As French theorist Frédéric Bastiat argued, it's a fallacy to think that breaking a window creates work, because while the glazier's gain of work is visible, the tailor's loss of work caused by the window-owner's loss of money—and consequent decision to delay purchase of a coat—is not. Recent history is full of government interventions with this characteristic.
"Affect heuristic'" is a fancy name for a pretty obvious concept, namely that we discount the drawbacks of things we are emotionally in favor of. For example, the Deepwater Horizon oil spill certainly killed about 1,300 birds, maybe a few more. Wind turbines in America kill between 75,000 and 275,000 birds every year, generally of rarer species, such as eagles. Yet wind companies receive neither the enforcement, nor the opprobrium, that oil companies do.

Now try to imagine these five biases in the minds of overreaching urban planners and zoning board regulators arbitrarily determining land use.  No wonder so many cities are so messed up with housing, office, and retail supply and demand so out of whack (see the recent housing bubble).  Houston is very lucky we never implemented such a system, which is nearly impossible to dismantle once created (in fact, I know of no such city that has ever eliminated zoning after implementing it).  The payoff can be seen in this ending quote in Continental magazine's recent article on Houston as a cultural capital (alternate pdf link):
To Zenfilm's Wells, the city's free-for-all nature, affordability, and enormous diversity have all been key to its thriving, creative energy. "Right now I have several thousand feet of studio space that I pay less than a dollar a square foot for," he says. "Houston's no-zoning landscape allows entrepreneurs to start businesses in their living room. By the same token, because of the cost of living, it's a lot more manageable for artists to find a place to live and work, to find a following, to find a community as an artist. That's why we have such a blooming cultural community, which is a wonderful vehicle to hitch our star to."
Houston - and Texas - are lucky we don't have the level of regulation found in other cities and states, but it doesn't mean we're immune to the side effects of these biases.  If you're a regulator, please keep a list of these handy to check your thinking.  If you're in the media, keep them in mind as you cover all levels of government.  And the rest of us citizens need to consider them as we watch the sausage-making legislative and regulatory process, and point them out when we see them (also consider them the next time you're screaming for a government solution to a problem).  Some laws and regulations are obviously a good thing, we just need to check them against our natural human biases.

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At 8:16 PM, December 01, 2010, Blogger Alon Levy said...

Houston is a free-for-all, as long as you obey the parking minimums and setbacks, and are willing to accept the extra regulations coming from not deed-restricting your property to single-family residential.

The WSJ piece is one giant case of bias. All of the effects it talks about are real, and yet it leaves out equally or even more important ones, such as regulatory capture, homeowner NIMBYism, lobbies, and us-and-them politics.

At 11:36 PM, December 01, 2010, Blogger Peter Wang said...

All of those biases are operative for people who plan transportation infrastructure, too! And deciding where or where not to put a piece of transportation infrastructure powefully affects land use... in the absence of zoning, transportation planning ends up being our version of zoning.

At 1:47 PM, December 05, 2010, Anonymous awp said...

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
— Friedrich von Hayek


It is unclear what you are trying to argue.

We shouldn't let the perfect become the enemy of the good (not that I think there should be absolutely no regulations). What city doesn't have all of the same bad regulations that Houston has. What city doesn't go on to add more. Houston is the city closest to having an free market for development. I do agree with you that most people overstate the case though.

The effects that you add are also problems associated with regulation, and I don't see how they make the piece biased. Big developers like regulation that allows them to increase their profits due to lower competition. NIMBYism only works when politically connected agents are able to co-opt the regulatory system(see Southhampton vs. third ward/midtown). Lobbies exist to influence the regulators. Us and them politics often comes into being because regulators often are able to give to us only by taking from them.

At 6:43 PM, December 05, 2010, Blogger Alon Levy said...

AWP: I don't think any East Coast city has rules saying developers can build less infrastructure if they deed-restrict everything to single-family. In addition, the zoning codes create large areas where parking minimums and setbacks are reduced or waived.

Houston's only innovation in terms of urban planning is that it doesn't have Euclidean zoning. That's good in and of itself, but there are other important restrictions that must be waived in a vibrant city.

At 11:42 PM, December 12, 2010, Anonymous Anonymous said...

Houston has no zoning? So that means I can open up a chicken slaughterhouse in a residential neighborhood?

At 5:07 AM, December 13, 2010, Anonymous Anonymous said...

Does this mean that I can put my chicken slaughterhouse in a residential neighborhood in Houston?

At 9:28 AM, December 13, 2010, Blogger Tory Gattis said...

Almost certainly not. Most residential neighborhoods are deed restricted. Those that aren't are still covered by nuisance regulations - inc. smells and noise. And economics naturally keeps it out: residential land is much more expensive than land in the industrial sections of town.


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