Tuesday, November 17, 2009

Julia R. Ewan Property development potential

The Julia R. Ewan property is situated neatly within the Fairway subdivision near downtown Lexington.  The school was put up for auction by Fayette County Public Schools earlier this year, and was purchased by a resident of the neighborhood.

In my opinion, it is a beautiful school building in a beautiful neighborhood.  That's not an objective fact, nor is it material in any discussion about it's redevelopment.  However, the neighborhood will no doubt be very interested in protecting their interests as it pertains to that site, as they should.  If the school across the street from my house ever was auctioned, I'd be all over the plans to redevelop. 

I believe there is a right way and a wrong way to be involved in a development planned for your neighborhood.  Typically, neighbors, being the irrational types they are, of course will fear the following possibilities:
  • Those people moving in
  • Property value decline
  • Titty bars
  • any other uncertainty
More appropriately, the neighborhood should focus on what they DO want on the site:
  • No change whatsoever
  • and, um...yeah...that's pretty much the list
I kid, I kid.  Though more often than not, the public comes across as fearing any sort of change rather than putting forth ideas for what would enhance their neighborhood and let the developer make a profit. 

My neighborhood, should Julius Marks ever redevelop is subject to entirely different constraints than Julia R. Ewan school.  Marks is adjacent to a large city park and townhouses/condos, duplexes and apartments already.  Ewan borders only single family residential.  However, they are similar in that they are both roughly 4 acre sites, zoned R-1C, or single family residential.

Both the similarities and differences are hugely important factors in how the sites might develop.  The single biggest factors that opponents to development often ignore, is

  • 'What is the worst thing the owner can do with the property RIGHT NOW?'
  • and 'Can we live with that if we oppose his requested zone change?'
The second point is the one MOST forgotten.  Right now, at this very moment, the owner of Julia R. Ewan school could rent a bulldozer and demolish the school, file a plat to subdivide the lot into as many as 21 single family lots, and start building snout houses.  That would require NO notification to neighbors, and a public hearing on the plan would be largely administrative unless the owner asked for some sort of waiver to the subdivision regulations.

If you live in the fairway neighborhood, and you cannot accept that as a possibility, then you are in NO position to play hardball on his plans.  You need to get behind a proposal you can live with, and be engaged in trying to improve it incrementally.

If on the other hand, the property was zoned A-U still, there would be no viable development options and the neighborhood would hold considerable sway over his requests for a zone change, a public hearing that does require notification and has a legal burden to meet in order to be granted.

So, let's say the neighborhood most wants the school building to remain.  The existing zoning is not appropriate for an adaptive reuse of the building.  No single family would purchase and renovate a school building that size to live in alone!  Therefore, the neighborhood MUST support a proposed rezoning to something that would enable the keeping of that building.

I believe that a request for P-1, Professional Office, would be the highest and best use of the property, and still enable the keeping of the building.  P-1 allows for office and residential mixed-use.  The owner could easily renovate the ground floor for offices and the upper levels for residential condos.

Let's go back to the school across the street from me.  The same worst-case scenario still applies.  Could I live with that?  Yeah, I could, begrudgingly. However, Marks lacks the 4-sided street frontage that Ewan has, that enables more single family lots.  To utilize all 4 acres for single family would require much greater costs in building additional public street frontage.  Single family snout houses are possible, but you can bet that any developer would be seeking a zone change.  My guess is they would ask for R-3 for additional apartments would be their preference.  And my neighborhood would go nuts, for all the reasons I listed above.

I don't have a problem with additional apartments, though I would prefer to see a better commercial/residential mixed use plan that utilizes the park, including something that had apartments.  Losing the school would be a blow to the neighborhood.  It would be less vibrant and the crowd of people passing every day would diminish.  A unique commercial development that integrated the park would be an asset.

Friday, November 6, 2009

Defeating Deflation - Option 2, Stimulus and Deficit Spending

Let's get a couple of myths out of the way up front.  This isn't a political blog post.  The world today can barely debate a topic on the merits of the facts because ideology clouds all judgment and discourse.  I'm not attempting to prove X ideology was wrong and Y ideology was right.  I'm trying to separate the ideology from the policy.  In my mind there is a clear distinction.


From an economic perspective, the following are important truths to remember:


  1. Deficits DO matter, at least as a percentage of GDP.
  2. Advocating stimulus and deficit spending is NOT the same as saying deficits do not matter.



So let's say that the party in power would prefer not to respond to a period of deflation by letting millions of people lose their jobs, let the market reestablish a new lower equilibrium for wages, and also have billions in debt go into default when folks can't meet their non-deflation adjusted debt obligations thanks to their new low wage.  If that particular scenario doesn't sound so great, that's because it isn't(we ought to know, it was happening in front of our very eyes as banks failed).  Economist Irving Fisher wrote his debt-deflation theory after the 1929 crash:


  1. Debt liquidation and distress selling.
  2. Contraction of the money supply as bank loans are paid off.
  3. A fall in the level of asset prices.
  4. A still greater fall in the net worth of businesses, precipitating bankruptcies.
  5. A fall in profits.
  6. A reduction in output, in trade and in employment.
  7. Pessimism and loss of confidence.
  8. Hoarding of money.
  9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

This is the precise cycle of what we've seen in 2008 and 2009.  It is just as relevant today as it was in 1929.


In the current economic crisis, Republicans proposed tax cuts to the wealthiest Americans, a staple of supply-side policies as a means to encourage spending and capital investment.  But as mentioned before, it's not enough to just encourage spending to defeat deflation.  Even the wealthy will just hold their funds if they fear that their investments will go down, or that a dollar spent today will be worth less tomorrow.  (see step 8 above) That doesn't mean that cutting taxes for those individuals is a bad move, but it does mean that expecting tax cuts alone to stop deflation is beyond silly.  There has to be spending initiated by the government that brings the money in off the sidelines and into the economy.


In the 1930's it was considered the height of irresponsibility to propose deficit spending to fight deflation. After all, that was considered a pro-inflation stance.  Keynes and Fisher spent the first 5-6 years of the great depression attempting to make arguments that distinguished inflation from re-inflation and advocating that Hoover stop raising taxes to offset losses in tax revenue from people not working, then urging Roosevelt to stop raising taxes to cover the cost of his spending programs.    Hoover never listened, Roosevelt finally did. 


Does running deficits really save wages, though?  There is no doubt that while policy is being formulated and passed through Congress, jobs are being lost and wages lowered.  A stimulus package will head off unemployment and I'm sure it could be debated in a partisan fashion whether government spending is required to spur spending, after all, that is what cable news debated ad nauseum for weeks during the auto-bailout and stimulus package discussion.  But for economists, the question isn't one of whether it's required or not, it's a simple matter of efficiency.  Government dollars used to get an economy moving again and prices back on a measured, steady upswing is absolutely more efficient than letting the market self-correct.

Tuesday, November 3, 2009

Defeating Deflation - Option 1, Reducing Wages

One point that I failed to mention in my previous post that I think is an important one is that the financial sector meltdown: AIG, Merrill Lynch and so forth were not, in and of themselves, responsible for the economic crisis that started in 2008.  Just like the stock market crash in 1929 was not the root cause of the Great Depression.  Both events were the manifestation of poor monetary and fiscal policy, and the first sign that there was a large problem coming home to roost. 

Now, this post is about the first of the two options I specified previously for how the government fights periods of deflation, a reduction in real wages.  The reason that died in the wool republicans favor this solution is that it is truly the market solution, leaving markets to move production back to equilibrium demand and reducing employment or wages as required to do so.  The option to let wages self correct in the marketplace doesn't mean that every business calls a meeting with their employees and says, "Well guys, we're in a bit of a pickle here.  We're not selling as many widgets, so I need to cut your pay by 10% each."  What that business owner actually has to do is make fewer widgets: open the doors later, close earlier and that requires fewer employees.  Reducing their workforce by 10% increases the pool of available workers.  You've now increased the supply of workers, in a weak job market demand scenario.  Those companies that do hire, can now offer lower wages, after all, someone will take the job making less because...hell, that beats no job at all.

2009 is playing out this way.  Unemployment is still fairly high, in some areas it is still increasing, and those being offered jobs are being paid substantially less than when they last worked in 2007.  The market wage has been in correction mode, even though GDP growth has returned in the latest quarter.  This method of letting deflation correct itself via a correction in real wages is a painful exercise in Capitalism.  Does it work?  Sure.  Is it quick?  Hell no.  Let's try to list the pros and cons of letting the market play itself out:

  • Government avoids running deficits


  • One consequence is that in the long run, this creates labor and social unrest in an economy.  That social unrest and the political uncertainty that it creates can dog stock market and economic recovery.
  • While wages fluctuate in a market, debt remains fixed.  The ability to repay debts is severely compromised when policy makers choose to let the market put downward pressure on wages and people's ability to pay down debt.  This pressure is not just on individual consumers, but on the business owner who has borrowed for capital improvements.
Keynes had much to say about this approach to dealing with deflation, and often he was accused of being in favor of inflation, which during the 1930's was a very serious accusation.  The common economic thinking of the day was to control inflation at all costs, even if that meant deflation.  The label of pro-inflation was not accurate, but given a choice of inflation or deflation, Keynes would accept inflation much more readily, because the issue was much easier to address.

From The Economic Consequences of the Peace, Keynes wrote:

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

If that's not a denouncement of using inflation as policy, I don't know what it.  So it wasn't with a light heart that Keynes encouraged the second option we'll look at for addressing deflation: stimulus spending and the running of deficits...

Monday, November 2, 2009

Dealing with deflation (also What I'm reading, November Edition)

Some good press on NPR and the Wall Street Journal led me to the new book from Bruce Bartlett, The New American Economy:The Failure of Reaganomics and a New Way Forward.  I'm sure that sounds horrendously boring to 99.99% of people, but I haven't moved that fast to buy a book since the last Harry Potter novel. I'm odd, what can I say.

It's fascinating to me that a man credited with creating and implementing supply-side economic policy in the Reagan years can write such a profound endorsement of Keynesian economic ideas.  It takes true intellectual honesty to call into question everything you have ever written previously, and say "You know, I might have been wrong."  That kind of integrity is worthy of my reading.

The New American Economy starts with a reminder on the causes of the Great Depression, and how similar those causes are to what caused the crisis of 2008.  Bartlett points out that Roosevelt initially rejected Keyne's ideas for running deficits to stimulate the economy out of a period of entrenched deflation.  For all the immediate expansion of the federal government that Roosevelt pushed through, they were funded with tax increases.  Only when the economy faltered again in 1937, Roosevelt was forced to rethink his ideas.  Manufacturing support of Europe in WWII was born out of economic necessity as much as it was out of national defense worries.

It's important to point out that dealing with deflation is a much tougher task than dealing with inflation.  The 2008-2009 crisis was made even more difficult because we already had exceptionally low interest rates.  There was not a lot of room for maneuvering by the Federal Reserve because you can't go below 0% interest rates, after all, banks won't loan money at a negative interest rate.  Under a scenario of inflation, there is no upward ceiling on how high you can raise rates to check rising prices.  The Fed though, can only encourage money circulation, it can't actually spur spending when the public fears that prices will continue to fall.  Deflation is the nastiest of economic beasts because of the impact it has on consumers attitudes.  People fear spending money and producers fear capital investment.  Additional measures are required beyond just making capital available through loans.  As Bartlett says, only lowering interest rates in a period of deflation is like trying to get fat by buying a bigger belt.  You've enabled capacity, but you haven't set anything in motion.

Deflation requires one of two options for recovery, it really is that cut and dried.  It requires a lowering of real wages to offset falling prices for goods (otherwise firms fail), or it requires massive spending by the government as a means to get products and goods flowing again.  This is the dichotomy that defines supply-siders and Keynesians.  Any attempt to do something in between or halfway only results in furthering deflation and encouraging consumers to hoard cash.  The Fed cannot act alone to get prices moving upward, and they are especially hog-tied if deflation hits during a period of already low interest rates.  The correlation of the Great Depression to the current crisis should be getting clearer now...

In my mind there are a couple of lessons to be learned and hip pocket solutions that policy makers should have at the ready to address deflation in the future.  In the next week, I'll try to put those thoughts in writing here.
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