Philosophical questions can be raised when a city or a state adopts a policy that often is stymied by other regional and national market forces.
For instance, St. Paul has approved a ban on restaurants using non-recyclable takeout containers. If it does this while other municipalities do not, will this really reduce use — and waste — of non-renewable resources?
St. Paul also wants to increase the number of rental properties for which the landlords agree to keep rents for at least 25 percent of the units below a specified cap so that they will be affordable. In return, real estate taxes on the properties would be reduced substantially with the goal of increasing the availability of affordable housing in the city.
At a state level, would spending more on roads, bridges and other infrastructure increase employment and business activity enough to inoculate that state’s economy against a national downturn?
Specific answers vary across these cases, but there are some common themes.
Start with the non-recyclable-containers issue. When a restaurant owner asserts that the proposed rule would increase his costs — and perhaps menu prices — and that he faces an already-tight profit margin in a highly competitive sector, he isn’t lying. But there are additional considerations.
First, exactly how large is this incremental difference in costs between recyclable and non-recyclable containers? How large would the resulting increase in costs be relative to ownership or rental costs for the facility itself, labor, utilities, ingredients and so on? This will vary between establishments: For one thing, take-out business is a greater proportion of sales for some restaurants than it is for others; for another, fixed ownership costs vary greatly with location.
While one particular owner may find it difficult to raise prices due to competitive pressure, that is easier if other establishments face the same cost increase. If the price of beef rises nationally, people do not stop buying steaks and restaurants do not go out of business. Menu prices rise over a short adjustment period. Yes, if the increment is great, sales of beef entrees may fall a bit relative to those with pork, chicken or seafood. Yes, steakhouses may find themselves at a slight disadvantage to Asian or Italian restaurants. But profitability of restaurants as a whole does not fall as long as the increase in this key ingredient hits everyone.
If the incremental costs really are a big fraction of total ones, and if only those in one municipality face the rule while competitors across city limits do not, then there are other possible market adjustments. Take-out food might become slightly more expensive relative to dine-in. If great enough, customers might drive to the next town over. Lower profits might make restaurants less valuable if put up for sale. Lower profits might cause the rental rates for buildings well-sited for restaurants to fall. This might make it cheaper to rent the space for an aromatherapy spa or baby stroller emporium. But these outcomes are speculative.
Adjustments in the value of real estate are more likely in the case of tax abatement subsidies for affordable housing. If more landlords get a discount on property taxes in return for limiting rents on some units, the total tax collected over the whole city does not decrease. Taxes will have to rise on other property, whether commercial, rental or residential. If this cost goes up in one city and not in adjoining ones, the selling value of such properties would fall. Existing owners would take a capital loss, but new buyers would not be worse off than if the affordable-housing tax incentive program had not been instituted. Again, possible in theory, but not likely to be measurable given the small scale of the program relative to the overall value of taxable real estate in the city.
Then there is the question of who would benefit from the lower-cost apartments. There would be some existing city residents who might get better housing for the same price. But they would have to compete with low-income families from any other city in the area. The market for apartments is not restricted by city limits. More limited-rent units might be good for society as a whole, but the cost would be borne by other residents facing marginally higher taxes. Someone needs to pick up the load. The decrease in the number of families in “unaffordable” housing within the city limits might not match the increase in the number of affordable units.
The idea that increasing state spending on infrastructure in the face of a possible economic downturn is interesting. The standard economic answer is that counter-cyclical fiscal policies like this don’t work at the state level for two reasons. One, a state does not have its own currency the way a national government does.
More importantly, the economic effects of increased spending cannot be held within state lines. When you see bridges being built in eastern Minnesota, you often see signage from a Black River Falls, Wis., contractor. The workers may be hired from Minnesota but may also drive in from across a neighboring state. Rebar or structural steel may come from a Wisconsin or Illinois fabricator rather than a local one. The cranes may have been bought from a dealer anywhere and their actual manufacture will have been somewhere else. The concrete supplier will be local, but the Portland cement in the mix will have come from Iowa, South Dakota or somewhere else.
So yes, infrastructure spending will boost local and state economic activity to a certain extent, but other states also will benefit. Remember, however, that our own state’s firms also may benefit when there is more spending, public or private, in other states. It is a national economy.