January 31, 2007
Economists advise the establishment of a stable investment environment is the key to economic growth. Investors are attracted to nations, states and localities, which create a predictable environment and avoid areas where actions are subject to the unpredictable whims of elected officials.Economic experience also demonstrates wages, incomes and asset values rise faster in countries and localities with stable economic environments. But residents of localities, whether nations or cities, suffer if their governments subject investors to continued uncertainty.Thailand’s stock market dropped sharply when its government announced new restrictions of foreign investment. They can expect to see income drop even if the restrictions are withdrawn. Thanks to an ill-conceived proposal to limit “scrape and replace” building, Aspen residents can also expect to see our wealth and our incomes cut, even if the proposal is rejected by the city council.Many who spoke at the council’s open session noted those who own older “tear-downs” see the value of their homes lowered. What was ignored is that the action is likely to drive down the value of new and newly remolded older homes because Aspen will be seen as a risky place to invest. Why should a family living in Los Angeles consider buying a property in Aspen today if the investment climate in other resort localities is more secure? The economic consequences are absolutely predictable: Prices of houses will rise more rapidly in other vacation venues. In time, property values in Aspen may even be seen as a bargain.However, do not expect investors from outside areas to rush to buy in Aspen, even if property values seem lower relative to other areas. Inevitably, the legal caveats regarding limitations on a property owner’s freedom of action will discourage buyers.Many Aspenites (including apparently two members of the city council) see this outcome as a virtue – more permanent residents and lower housing prices as a plus. They may want to reconsider their views because an investment-led slowdown often leads to declines in employment and wages.I suspect many will respond by saying “so what,” since in the first round the losers will be those in the construction industry, most of whom live downvalley. But in time, the slowdown will work its way throughout the town’s other institutions. Aspen may discover fewer and fewer vacationers are willing to put up with the deficiencies of our commercial air services if Aspen loses its cache.There are countless examples of economic problems and losses created by the type of actions proposed by the city council over the last 50 years. There are very few examples where actions of this type have resulted in long term benefits – unless one counts economic stagnation as a benefit.Tragically, the actions proposed by the city council may have even more severe implications for all property owners in this town because it may be deemed a “taking” by the courts. Financial theorists have demonstrated the price of a propriety includes a “real option.” The value of the option depends on what the owner can do with the property. We see options sold periodically in the valley in the form of “conservation easements.” In the case of older homes in Aspen the value of the option may be worth hundreds of thousands of dollars. The proposed legislation cuts the value of this option substantially. Were I the owner of a home which was a candidate for “scrape and replace,” I would seek out a class action lawyer to sue the town for the loss of value. The town’s liability could be in the tens if not the hundreds of millions.I would love to work with lawyers to quantify the town’s potential liability. It is an interesting topic and the affected home-owners deserve restitution. As a resident, I shudder to think how this ill-conceived action might affect my taxes.There is a solution. Economists at the IMF and the World Bank have advised nations to impose adult supervision over nations contemplating taking steps which would harm their economic prospects. It is clear Aspen’s city council requires the intervention from some adult authority – whether it is the courts or the state government.Philip K. Verleger Jr. is a professional economist who lives in the West End. He has served as a senior staff economist on the President’s Council of Economic Advisers, as a Senior Official at the U.S. Treasury and been a Senior Fellow at the Council on Foreign Relations. Editor’s note: If you’d like to contribute to Soapbox, contact Naomi Havlen at The Aspen Times at 925-3414, extension 17624 or e-mail firstname.lastname@example.org.
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