Should Subprime Lending Die For Good?

This post is resurrected from a draft post written April 28, 2012 when the aftermath of the Financial Crisis was still fresh in our minds.

The subprime mortgage industry is dead. Should it die for good?

There are basically two reasons to object to subprime lending. First, the industry as it was conducted before the financial crisis is unsustainable. Second, the industry as it was conducted before the financial crisis relied on unconscionably luring borrowers into making objectively bad decisions from an economic perspective for most of its business.

Subprime mortgage lending should be revived only on a sustainable basis, and only in the narrow subset of transactions where the decisions borrowers are making to borrow money on this basis are not objectively bad ones from an economic perspective.

But, it is possible to reform the subprime mortgage lending industry to be sustainable with important, but relatively subtle modifications to its business model. Its underwriting standards need to be reformed, mostly by rethinking how the risk that the collateral will be insufficient to satisfy the loan in the event of a default is evaluated. The way that the subprime mortgage industry funds itself also needs to be changed to create simpler, more transparent mortgage backed securities whose risks are more clear and that have inherently less risk than those that the markets declared to be toxic.

Situations where subprime lending makes sense

It is also possible to identify categorically situations where subprime lending transactions do make economic sense for both the lender and the borrower, and to limit subprime lending to categories of loans, in some cases with terms necessary to make them appropriate to that category of loan, where the transaction is not objectively bad for the borrower.

These situations include:

(1) reverse mortgages to provide cash flow for the elderly while allowing them to remain in their homes,

(2) hard money lending on business and investment properties where the owner's income from sources other than the property is not the main source from which the loan is expected to be repaid,

(3) loans where (i) conventional loan refinancing is not available because the homeowner is in default or at a high risk of defaulting or has a hard to determine risk of defaulting, (ii) that replace existing secured or unsecured loans, and (iii) reduce the homeowner's effective interest rate, monthly payment, or both, (iv) that the homeowner believes he or she has a realistic change of paying, (v) that do not unduly increase the homeowner's obligations beyond those that would survive a bankruptcy.

(4) loans to people whose past bad credit was due to causes that are no longer present, have a present ability to pay the loan, and would not be better off renting a home,

(5) hard money loans for personal residences to people who can make a substantial down payment and would not be better off renting a home, and

(6) loans to people who have significant home equity, have no investments or lower cost source of credit from which they can obtain funds, urgently need funds for purposes that are practical necessities (such as medical care, bail, defense against serious criminal charges, a pending judgment or tax lien, etc.), and for whom selling their home is not an option that is available soon enough to meet the need or is for some other reason an unreasonable option.

The big constraint is that for first time subprime buyers, the cost of owning is often much greater than renting, mostly because rental rates reflect the prime credit interest rates of the landlords much more than they do the often subprime interest rates of the tenants.  Otherwise, subprime lending pretty much only makes sense for existing homeowners who have an interest in stability and face a "choice of evils" situation.

A subprime mortgage lending industry organized within these constraints would be much smaller than the industry as it existed before the financial crisis and would have a much different character. But, there is a good case that subprime mortgage lending should not die for good, but instead should be dramatically reformed. Indeed, the creation of a subprime mortgage lending industry that is available to meet subprime borrower's legitimate needs would be a positive development because it would discourage the development of more toxic subprime mortgage lending.

Is Subprime Lending Inherently Unstable?

As it was, was the financial crisis proof that subprime lending was an inherently unsustainable industry?

If the subprime mortgage industry is inherently unsustainable, it should die, for the same reasons that, for example, the Ponzi scheme industry should die, or Tulip mania had to collapse in Holland in 1637. Even if some people can profit from it, in the end it might be an inherently unstainable business model. The financial markets killed the subprime market because, as it was originized at the time, it was an unsustainable industry that was rotten to the core.

But, was subprime lending inherently unstable? Not necessarily. So long as its business model doesn't rely on rising asset prices and insists on enough equity or credit strength to buffer the harm to the lender if there is a default, it can be a sustainable industry, and with suitability rules incorporated into underwriting standards, it can even be non-exploitive.

But even though it is possible to organize a subprime lending industry on a sustainable basis (with government or private sector customary practices that prevent it from repeating the mistakes of its past business model, which itself would limit its scope somewhat), a recreated subprime lending industry should also be subject to regulation that would often make subprime lending unavailable in circumstances where it was most commonly used in the past.

Does Subprime lending prey on irrational decision making?

The main objection to subprime lending that liberal policy analysts like myself, who accept the conclusions of mainstream economics and have a healthy respect for the autonomy interests that market economics advance, have is not that subprime lending is inherently unsustainable. 

Liberal policy analysts, instead, are concerned that subprime mortgage lending, and many of its cousins like payday loans and rent-to-own transactions, lend mostly in circumstances where borrowers are making decisions that are objectively bad when viewed by a well informed third party observer, and are made only as a result of deceptive marketing and insufficient information that could be provided cheaply enough if someone had the right incentives to provide it.

When private business transactions are objective bad ones, a strong presumption arises that they are unconscionable, and there is a long common law and regulatory tradition that holds that unconscionable private contracts should not be upheld, or at least, should be enforceable in the courts to the extent that they are unconscionable despite the general rule that agreements reached between private parties create legally enforceable obligations.

Why did the subprime mortgage industry die?

The subprime mortgage industry died because: (1) the underlying mortgages were underwritten on the assumption that the property values that provided security for the mortgages would fall only slightly or increase in value, without sufficient regard for the risk created by a developing housing price bubble, (2) mortgage backed securities were created in ways that enhanced the risk inherent in the underlying mortgages that backed up these securities, and (3) credit rating agencies understated the risk involved in these securities causing them to be underpriced and causing them to be purchased by inappropriate investors.

Credit rating agencies understated the risk involved in these securities. They understated the risk because: (1) they too underestimated the risk that the mortgages would decline in value as a result of falling housing values when the housing bubble collapsed, and (2) they underestimated the counterparty risk involved in credit enhancing guarantees in the form of credit default swaps from third parties. They underestimate the counterparty risk because the credit default swap market and credit default issuers were insufficiently transparent for credit rating agencies to evaluate the risk. Credit rating agencies were also insufficiently aggressive in insisting on more accurate estimates of the risks that they underestimated because credit rating agencies had conflicts of interest arising from the fact that they were chosen and paid by the issuers of the securities to which they assigned credit ratings.

In theory, regulating disclosure in mortgage backed securities would solve the problems that caused its collapse, because the money to fund them would dry up when underwriting became reckless, but in practice, it is very hard to regulate anything that effectively.

The financial crisis was triggered when subprime loans soured in large numbers, and years later, the losses that the financial industry is suffering in the mortgage market overwhelmingly involves subprime loans, which are defaulting at astronomical rates.

The subprime industry was killed by the marketplace, not by government regulation, and the market was far more swift and decisive than government regulators. Investors divested themselves from the market so completely that the entire subprime and Alt-A mortgage lending industry almost entirely ceased to exist in a matter of months. Government regulation has since made it virtually impossible to resurrect the subprime mortgage industry on the business model that was in place before it crashed, but that regulation came after the industry was dead anyway, it was not the cause of the collapse which died without government regulatory intervention.

The investors weren't wrong.

"Planet Money," an NPR syndicated program about business issues, illustrated this point graphically by having their staff by a $1,000 "toxic asset." It was a complex mortgage backed security tied to the performance of a portfolio of mortgages with unexpectedly high default rates, but was still producing a small stream of interest payments. They named it "Toxi" like a mascot. They traced its life, interviewed people whose loans were included in the pool and tracked its returns. Last week, Toxi died, reaching a point where it would no longer ever make any more payments. Despite the fact that they bought Toxi at a 99% discount from the price it was originally sold to investors for of $100,000, they lost a little more than half their investment. The return on the original $100,000 of principal investment was less than $500.

Some of those mortgage backed securities really were horrible investments that lost a very large percentage of their value.

Most often this is because the securities were highly leveraged investments.

In some cases, mortgage backed securities had leverage that flowed from the collateral they held itself, because the collateral they held was made up of non-recourse or poor credit borrower second mortgages on part of the last 10% to 20% of assumed value of the loan, rather than first mortgage loans of the first 80% to 90% of the loan (often available from conventional commercial banks or government banked lending programs). This second mortgage collateral could be significantly impaired by even a modest decline in the value of the home that was collateral for the mortgage.

In other cases, the underlying assets weren't particularly highly leveraged, but a pool of loans was broken up into subpools of risk in which higher tier securities received paybacks only when lower tier pools were repaid in full. Thus, leverage was created from fundamentally sound underlying mortgage investments in the pool in the higher tier subpools.

Sub-Prime Mortgage Lending And Hard Money Lending

These mortgage backed securities were themselves examples of hard money lending. The ability of the loans to be repaid from the underlying mortgages that were collateral for the loans, while unrealistically high, was always in doubt. But, the mortgage backed securities received inflated credit ratings because in addition to the underlying mortgages they were also backed by guarantees from the originating mortgage finance companies, which were themselves big businesses sometimes with long track records, that default rates would not exceed a certain level, and from third party guarantors via derivatives called credit default swaps, who were themselves often reinsured by big established financial institutions like AIG., which the U.S. government eventually bailed out in exchange for 80% of its stock which the U.S. is now about to start reselling to the public in an effort to recover some of the money spent on the AIG bailout.

Investors in mortgage backed securities were making hard money loans backed by the ability of the underlying mortgage borrowers to repay, by the value of the houses that were collateral for those mortgages, by the ability to repay of the mortgage finance companies, by the ability to repay of the credit default swap issuers, and by the credit of the credit default swap issuers reinsurers. The soundness of these collateral and guarantee arrangements was then blessed by credit reporting agencies.

Not necessarily.

Banks take losses on loans only when both of the following two circumstances are present.

First, the borrower defaults, something that generally happens in the case of a recourse loan when the borrower is unable to repay the loan, or when there is a dispute over whether the loan is owed.

Second, the collateral securing the loan is worth less, on a distressed sale basis, after the costs of collection and the costs of disposition of the collateral, than the amount owed.

In California, which was the epicenter of mortgage losses when the housing market collapsed, and to a lesser extent in Florida, both of these conditions were absent in a huge number of loans.

The first condition didn't apply, because the loans were non-recourse, so borrowers had the ability to not pay mortgages, even if they had the ability to repay them and did not dispute that the debts were valid.

The second condition didn't apply because the loans were made against collateral valued at prices that had risen dramatically during a housing price bubble which then collapsed to amounts far below the purchase price, in the case of purchase money loans, or the appraised value, in the case of home equity loans.

Regulators and the market have responded to the massive failure to their collateral to prevent them from suffering losses by becoming much more strict about the first condition. Now, underwriters are usually approving loans only to people who can prove that they have an ability to repay their loans as they come due from their incomes.

In this business model, the collateral is as much an incentive for borrowers to prioritize payment of the debt as it is something that lenders are relying upon to make them whole if the borrower defaults.

The borrower's more than economic attachment to a personal residence, and the hard that a foreclosure does to a borrower's credit rating, along with the hope that losses from declining home values can be recovered if the home owner keeps the property until real estate values appreciate again, encourage borrowers who have an ability to repay not to default on upside down loans (i.e. where the house has a fair market value of less than the loan), even in states like California where the loan itself is non-recourse and they have the ability to simply send in the keys and walk away from the home.

But, the whole point of the subprime and Alt-A mortgage market was that lending to people who can't prove that they have an ability to repay their loans from their income can be good business too, since the second condition is true, even if the first is not.

At its greatest extreme, this kind of lending is called "hard money" lending. I've represented private lenders doing hard money lending. 

 For example, it makes sense to make this kind of loan to people who need a small amounts of money relative to the property value for legal and business expenses necessary to cure problems that make it unmarketable for legal reasons. I've also represented borrowers seeking hard money loans because their income is hard to document, for example, because they are relying on income from a loved one to whom they are not married.

There is a small network of affluent private individuals out there in Denver who make hard money loans for real estate developers who build spec houses, fix and flip, scape and increase density, or pop top and flip houses, all of which are basically different species of infill development in Denver. In these deals, what matters is that the proposed sales price after the development is realistic, that the costs and time frame for the improvements is realistic, that the purchase price of the property is sufficient low, and that the developers have enough business acumen and enough of a financial incentive to finish the deal. Sometimes the principals of the borrowers actually would have an ability to repay, but organize a limited liability companies to make the loans effectively non-recourse, and the private lenders agree because the economics of the hard money loan still make sense and they can charge a higher interest rate.

When the lender is primarily relying on the value of the collateral, and not the ability of the borrower to repay a loan, "no doc" or "low doc" lending (in theory, including so called "liar loans") can make sense, because the loan can be good business for the lender even if the loan defaults.

Westminster Mall Slated For Major Infill Development

Following the successful examples of redevelopments the moribund Cinderella City mall in Englewood, the Villa Italia mall in Lakewood (now Belmar), and the Southglenn Mall (now "the Streets at SouthGlenn, a 70-acre outdoor shopping, entertainment and residential area"), the City of Westminster, a Denver, Colorado suburb, has acquired most of the property in the dying 108 acre Westminster Mall ("all but the Sears store, the Brunswick Zone and a small office building, all of which will remain open. The city also plans to keep the J.C. Penney store open.") near U.S. 36 and Sheridan Boulevard, which it plans to redevelop as a municipal downtown with "5 million square feet of offices, residences, restaurants and shops."

Westminster Mall opened in 1977 with 30 stores. Within 10 years, it became among the most popular malls in metro Denver, adding May D&F and Mervyn's in 1986, followed by J.C. Penney a year later. At its peak, the mall had about 300 stores, a far cry from the 15 that remain open today. The city and the current owner invested $10 million to renovate the mall in 2000-01.

These suburbs were frequently developed in the wake of the construction of the interstate highway system as bedroom community subdivisions, rather than as traditional municipalities with a central commercial and government downtown district, usually had strictly segregated residential and commercial zones, and saw little downside to sprawling parking lots that were distant from individual shops in retail district, a set of flaws that has left these communities without souls or character that left them vulnerable to New Urbanist land use approaches.

The transition has also been inspired by ongoing Red Queen hypothesis style conflicts between municipalities for a stronger tax base. 


The Gallagher Amendment, passed by voters in 1982 in Colorado and phased in over the next several years causes residential real estate to be taxed at a lower percentage of its value than non-residential real estate. Also, for a variety of reasons, many municipalities have tended to favor sales taxes over property taxes as a revenue source. This means that communities with predominantly residential real estate tax bases and little retail development must impose much higher property taxes to pay for the same municipal services as communities with substantial commercial, and in particular, retail development. The combination of higher property taxes and inferior municipal services, in turn, drives down housing values in these communities creating a vicious circle. Cities with office building developments can turn to head taxes and, at least, benefit from larger property tax bases, but the bedroom communities planned in the late 1950s, 1960s, 1970s and early 1980s have suffered in this local taxation environment.

Retail development, in contrast, through a combination of its non-residential property tax rates and the sales tax revenue that it generates typically raise far more in local taxes than the cost of the governmental services that they consume (and draw significant volumes of tax dollars from non-residents), subsidizing municipal services for residents of the municipality and making housing in those municipalities more attractive.

So, there is a strong incentive for local governments in Colorado to do everything possible in a never ending struggle to lure retail developments with robust sales from their neighbors, even if this creates excess retail capacity in the aggregate that leaves a suburban landscape littered with dead shopping malls that have failed to keep up with the competition. For example, in the case of the Westminster Mall, the City and County of Broomfield's new Flatiron Crossing Mall and thriving retail development in Boulder sucked much of the remaining life out of the older Westminister Mall.

Mixed use mall to downtown redevelopments try to mute the competition by not focusing so intensely on destination retail shops that can be picked away easily by new retail developments.  Instead, they favor of residential uses and governmental uses that are sure to stay put, and location sensitive retail options that are more likely to continue to be supported by local residents even if a new destination retail mall springs up. These developments also bet that the steady stream of traffic from residential and commercial and governmental users who are relatively wed to the location will make the area attractive to other retail uses on an ongoing basis.


These redevelopments try to boost the brand of the suburb's housing stock (and hence property values) by giving the municipality more of an identity, a more positive character and more definition.

This development joins a major new development planned for the Chatfield Reservoir area, the redevelopment of the old University Hospital complex on Colorado Boulevard, and a number of transit oriented developments along light rail lines that are heating up as the real estate industry in Denver starts to recover from the financial crisis. Insiders in the industry that I've spoken to discount these major projects as mere "dreams" until more concrete steps to implement them progress, but the planning for a wave of new real estate development in the Denver metropolitan area, much of it infill, is underway.

Outsourcing The House

You probably don't have a cook, a butler, a live in maid, a stable boy, or a live in gardener. It isn't unlikely, however, sometimes pay someone to cook food for you and deliver it to your table, to mow your lawn, to clean your house, to plan your child's wedding, to press your shirts, or to maintain your car. The personal services industry employs many people, but today, those people are organized as independent contract small business people who provide the same service to many customers, rather than as household servants.

Suppose that you take that idea one step further. Suppose that in addition to outsourcing the work of people who work in your house, you outsource the house as well. We're already seeing this happen, and the trend is likely to continue.

Outsourcing the Workshop, Shed, Basement and Attic

One of the first instances of outsourcing household space was the safety deposit box which is a substitute for a household safe.

Many gun clubs offer safe storage of firearms intended for hunting or target shooting or as collector's items, away from your home, an increasingly relevant consideration in an area where many dorms and public housing don't permit them, and where prudence and state and local laws and ordinances require safe storage of firearms or impose liability for failure to safely store firearms. This obviously doesn't make sense for a firearm kept to defend one's home against intruders, but many firearms aren't intended for that purpose and many people have multiple firearms and don't need all of them to be in their home at once.

There is a whole industry that sells storage units to people who lack basements or sheds or attics or unused closets to hold their infrequently used stuff. These used to be limited to glorified garages (and many offer RV parking as well), but now there are climate controlled storage units and units specially designed to handle special contents like wine collections. Who hasn't seen one of the "PODS" parked in front of someone's house to be filled, taken away, and then retrieved (possible at a new and different house) later? What if there were a business that had mini-PODS that were tucked away with your out of season clothes that sent you a reminder card at a date you set when you thought you might want them again?

There are already several off site file storage companies, and "cloud computing" which stores data and computer program resources at some remote Internet accessible location is becoming commonplace, even for household users.

Down the road from my office is a place that rents workshops and studios for people who don't have their own.

Reading, Office Space and Study Space

Many new developments have community mailboxes rather than mailboxes attached to individual houses. One could imagine a neighborhood "reading room" that would be sort of a mini-library, with a full compliment of newspaper and magazine subscriptions, coffee and teapots, and a small stash of trashy reading - many campgrounds across the American West have that kind of space.

My own office, while fairly conventional, includes use of a break room, reception services, copying machines and scanners, fax machines, a lobby and conference rooms that are shared by the suite, and if I wanted to have a home office while not having real estate nice enough to meet with clients, I could arrange to have a "virtual office" with all of the services except the room devoted exclusive to me - those would be available on a reservation basis for a certain number of hours a month. Most virtual offices are oriented towards small businesses (and this also avoids some of the hassle of trying to take a home office deduction for tax purposes).

One can imagine a virtual office oriented towards students instead. More of more neighborhood library branches now have study rooms and community rooms where people might otherwise have gathered in a living room or large home office, that receive heavy use. University libraries have long had study carrels, but as studying and research become divorced from physical books, it wouldn't be too surprising to see a place that offered study carrel rentals by the semester together with a few hours a month of group study rooms time minus the library in the future. The neighborhood study rooms could have tutors on staff to help answer questions, actively encourage the formation of homework groups and writer's critique groups, have small stores that sold school supplies and snacks, and offered Internet access and affordable subscriptions to academic journal databases or virtual libraries. These kind of spaces might be particularly attractive to students in online high school or college programs, and to non-traditional students who need to get away from a chaos of a home full of children and all sorts of household activities and attention demands. Perhaps these kinds of centers could be natural outgrowths of branch college campuses, community colleges, or franchised tutoring businesses.

Entertaining

The outsourcing of the guest room and entertaining areas has probably not yet run its course.

Once upon a time, birthday party's at home were very common; now there is a whole industry built on creating usually indoor "play spaces" for children's parties complete with separate rooms for eating cake and opening presents on one hand, and racing around having fun on the other.

Coffee shops and bars aren't just places where you buy coffee and beer, they are to a great extent outsourced parlors and living rooms.

Many restaurants offer private rooms for meal gatherings.

While there have been hotels where out of town guests can be housed, and where one can rent rooms for events, this really hasn't penetrated the "house outsourcing" market yet. When I was in law school, a lived for a year in the law school dormitories called the "law club." This had, in addition to a sharing dining area, a mail room, and a shared recreation area, a suite of guest rooms where visiting friends and family could stay. This would be a natural addition to a subdivision of not so big houses, alleviating the anxiety of people who feel the need to own a house based on their peak need, rather than their usual need. For example, a senior citizen's development might be much more attractive if residents knew there were places in the complex where their children and grandchildren could stay on holiday visits. In existing neighborhoods, converting an existing property into a guest house or bed and breakfast for out of town family and household guests might offer more intimacy and walkable access to your host's home than sending guests off to a Holiday Inn or Motel 6, and thus be a more socially acceptable option for space constrained families. In fact, a number of new high rise developments combine condominiums and hotel rooms in the same building.

There is also a small but growing niche of places where one can entertain guests and hold parties that are separate from full fledged hotels oriented towards business conferences and large weddings where many guests are staying overnight, particularly as fewer people have natural and easy access to church halls, civic club halls and country clubs. Some condo complexes and apartment buildings in Denver have them. Since one of the factors that often drive people to purchase large houses is the desire to be able to hold large parties a few times a year, the availability of respectable entertaining venues, perhaps as part of a homeowner's association, perhaps as part of a "virtual office" or "time share" style subscription service, or perhaps through simple rentals, might make it more palatable for people who want to hold occasional big parties to live in smaller houses.

A Japanese style innovation that we might see is some variation on the rented karaoke room. While many American cities have karakoke bars where you can belt out your favorite tune in front of a large room full of strangers, fewer have private rooms where you and a half dozen of your friends can do that in greater privacy. And, similar sized entertainment rooms, outfitted a deluxe home theaters or multi-player deluxe videogaming rooms (with media rentals included and concession service available), for example, might also be hits.

The Yard, Workshop and Garden

Next to my children's school is a community garden where people with little or no lawn of their own can grow vegetables or flowers in a little plot down the road.

The "patio home" concept where single family homes share a communal front yard tended by a homeowner's association is also increasingly common. Some resort communities have private parks and beaches to provide residents with the benefits of a place to throw the kind of parties that one would ordinarily throw in your back yard in a single family house with a beach without the expense and waste of having one for every property when most go unused most of the time. The concept of urban residential neighborhoods like my own Washington Park is that each homeowner has a tiny lot, but in exchange the neighborhood has a premier park that everyone shares.

Rather than having a home gym, people join neighborhood health clubs or go to neighborhood recreation centers (incidentally, some even have showers that you can use when you have plumbing problems). Many homeowner's associations and condominium complexes have small community pools and exercise rooms.

What about the dog house? Lots of people in urban areas live in places that don't permit pets, but have or want pets. There are kennels, of course, but those are expensive and a lot of the cost goes into staff to provide care for the pets while their owners are absent. What if there were a kennel-like structure with a nice dog park within a short walk from a no-dogs apartment complex? Dog lovers could keep their dog there, talk their dog on daily walks, feed their dog themselves, and perhaps the structure would even have little rooms a bit like library study rooms where you could relax, watch TV, read a book, or have a coffee in the company of your dog, before or after work. It wouldn't be the same as having your dog in your own home, but it would be the next best thing. Similar arrangements already exist for people who live in the city but want to have horses.

The Sick Rooms

It isn't uncommon for someone who lives in a house without a ground floor bedroom or bathroom to experience a short term injury or illness that limits their ability to move around the house. Perhaps a broken leg, perhaps simply being very weak for a while.

Sometimes, a stay at home parent needs to recover from surgery or being sick or is pregnant and on bedrest, and doesn't need any special caretakers or hospital equipment, but does need to be genuinely relieved from the temptation to do any household chores or childcare while resting and recovering.

Sometimes, someone learns that they have an infectious disease, TB for example, and needs to stay away from a vulnerable elderly person or infant or other person with a weak immune system. Perhaps a child visiting frail grandparents comes down with the measles on Christmas vacation.

These conditions may all be ones where family members and friends and perhaps daily or less frequent nurse visits are all that one needs as caretakers, but staying at home is not a great option, and a hospital stay would be absurdly expensive for such a minor condition. It would be a shorter term alternative to an assisted living facilty or senior housing complex.

There are motels near most hospitals with a multistate draw (e.g. Mayo Clinic and National Jewish) that cater to this medically needy customers, but few closer to home that market themselves and are designed to meet this need niche.

This might be a niche for short term recovery room suites, a bit likely weekly motels but with the immobile and ill who need rooms that are accessable and antisceptic on short notice in mind. There might be room service available and a referral service for "home nursing" services.

Of course, hospices and nursing homes have already been brought into use for high intensity need cases.

Sharing Toys and Tools

The idea of outsourcing things that you need infrequently to avoid having to buy things based on "peak use" has applications in households beyond the house as well. Lots of people buy boats, ATVs, RVs, motorcycles, pickup trucks, cars with more seating capacity than most families usually need, specialty tools, snowmobiles, and the like that they may only use a few days or weeks a year. But, those things take space to store, often need to be maintained every year even if you don't use them much, and spend a lot of time sitting idle. Rental options exist, but they can be pricey because they are extracting large profit margins from people who don't regularly use those items, are in a place where their plans demand that they have them, and have only a choice between buying or renting. Rental operations also have a fairly high risk that the items will be stolen or damaged, because the renters are engaged in one time transactions and have no emotional stake in taking care of the equipment.

But, what if you were part of a "recreational toys and household tools co-op" that provided members with use of these items at cost (be offering annual rebates if there were any profits, in proportion to patronage), had a substantial deposit and credit check up front to make individual transactions for members go more quickly, trusted members a little more so that they would need less paid employee or volunteer services, and turned the relationship between the firm renting the stuff and the person renting it into a longer term, more warm and fuzzy one (what they call in the literature the "warm glow"). What if the co-op had multiple locations and you could get what you needed at one location and drop it off at another?

Denver's bike rental program is an example of the concept in practice.

Limits To The Trend

We haven't, and probably never will, go as far as some societies in this direction.

For example, public baths, while common in some parts of the world and developed at a time when many homes lacked them, are unlikely to make a comeback. The public Laundromat while still in existence is also fading away with increasing affluence and the appearance of affordable laundry machines that both wash and dry clothes further reduces the space constraints involved.

Sex hotels and capsule hotels also seem unlikely to come to a place near you anytime soon. But, the house outsourcing trend surely isn't entirely played out either.

How Will We Use Vacant Public Space?

Empty Public Space Abounds

Denver is littered with grand old churches that are empty or have Congregations of a few dozen in edifices built for many hundreds.

The Denver Public Schools has far more space in schools than it has students, a few neighborhoods have overcrowding (like Green Valley Ranch and Stapleton) while other neighborhoods have a particularly great excess of empty school space. My neighborhood has the old Beyer's School (once home to Denver School of the Arts which relocated to fill part of an abandoned North Campus of the Universty of Denver, the rest of which was filled with Johnson and Wales University) looming over it and fervantly seeks to make it the home of a new Denver School of Science and Technology Charter School.

As the volume of mail sent via the postal service declines in favor of e-mail, one by one, post offices are going to sit vacant. Budget cuts have left communities like Aurora and Colorado Springs, and even Denver, unwilling or unable to keep recreation centers open, leaving more public spaces vacant. As multiplexes replace humbler theaters, the old theaters have had to find new uses. Dead malls lurch quietly. And, the declining rolls of service clubs from the Masons to the Eagles chronicled most famously by Robert Putnam continue to dwindle, their lodges and halls sit underused or empty. Converting old public spaces into private ones is a growth industry.

Taken together there is a lot of empty public space.

New Uses

Sometimes, old churches and public spaces become lofts. S. Broadway has a church converted to lofts at about 1st Street, University Boulevard has another church converted to a residence at about 5th Street, 10th Street in Congress Park features an old fire station converted to residences. There is an old school converted to residences near Old South Gaylord in Washington Park. The home can be delightful, but it is also a shame to see public space become private.

The old late night post office and mail sorting facility in LoDo was replaced by a shiny new, eco-friendly EPA building. In my home town, Oxford, Ohio, an old post office became a municipal court.

Train stations are seeing a renaissance, ironically, as train stations, mostly supporting metro area transit rather than intercity rail, although rejections of federal high speed rail funds in Ohio and Wisconsin, and indifference towards them in New Jersey and Florida, makes Colorado's hopes of securing some of these funds look like less of a pipe dream. Denver's Union Station is already well in the process to be restored to glory as a transportation hub (even as the Greyhound Station looks for a new home).

The dead malls at Cinderella City (in Englewood, Colorado) and Villa Italia (in Lakewood, Colorado) were razed and replaced with mixed use neighborhoods, in the case of Cinderella City, complete with a new city hall and library.

Movie theaters have found mixed dispositions. Some, like the Esquire and Mayan have been subdivided into multiscreen art house theaters. One at S. Colorado Boulevard and Alameda in Glendale became a gym. One on S. Broadway was converted into a climbing gym. Several have been converted into venues for live rock band performances. One on Federal Boulevard was converted into a missionary megachurch.

Libraries are beautiful public spaces, but I can't think off hand of what has become of any of them, despite the fact that I know some that have closed fairly recently, and others that are at grave risk of closing.

An old grocery store, converted to a church, near East High School, originally slated to become a new Central Denver Recreation Center, has wound up for the time being, as a community garden and dog park instead. Across the street, an old live theater has been converted into a book store, record store and restaurants, as well as a movie theater that died and since has been reborn with the Denver Film Society relocating there from Tivoloi on the Denver's Auraria campus.

Challenges To Come

This, of course, only scratches the surface of the general issue of finding new uses for no longer needed properties. Greater Denver has a variety of spaces that need repurposing.

Old Saint Luke's Hospital has now become Post Properties in the rechristened Uptown, and Old Elitch Gardens has become a residential development (which defeated efforts to have a Wal-Mart put in their neighborhood, only to have one spring up ten blocks down the road in Lakeside). The old Children's Hospital Campus is reportedly going to be the home for a new Saint Joseph's hospital, because its existing tower has fire code issues.

But, the disposition of the old University Hospital, abandoned in part of the effort to remake the old Fitzsimmon's military base and turned over to a redevelopment company, is not yet clear. In a year or two when Saint Anthony's Hospital off Colfax in Northwest Denver relocates into its under construction new facility, there will be yet another big hole for Denver to fill in a space where the impetus for new development has not been as vigorous.

A defunct public school which has passed from one speculative investor group to another in the Golden Triangle remains vacant. Ironically, the neighorhood has transformed enough that it could really use a school again, although that use for the space seems unlikely.

Denver also has its brownfields. The financial crisis stalled the redevelopment of the Old Gates Rubber Plant, but sooner or later, it will have to find a new use. I know of a couple of families who have turned old industrial buildings in North Denver into residences and art studios. Between Sante Fe and Kalamath a few blocks North of Alameda, old industrial properties have been repurposed to be a micro-distillery and a Hispanic cultural center. Another old public building near the Auraria campus off Colfax was also repurposed to be a cultural center. Perhaps this trend will continue.

The Coming Inversion Of Center And Fringe

Maybe Denver proper will be O.K.

Infill construction has continued steadily while suburban Denver construction came to a screeching halt. The rising price of gas, increased dissatisfaction with long commutes, and increasing public faith in the Denver Public Schools, represented most recently by a remarkable surge in middle school enrollments may fuel an influx of new people to the central city. For most of history from the Middle Ages until the construction of street cars, central cities were considered more desireable than the urban fringe. Street cars created street car suburbs, like Washington Park. Interstate highways pushed attractive housing even further away from the core for a generation or two. But, the trend seems to be reversing itself. It may be only a matter of time before the metro area's ghettos are in Highland's Ranch instead of already gentrifying Five Points.

Denver Greyhound Station Seeks New Home

They days, a Greyhound bus station is a symbol of those down on their luck. Denver's fills a block between 19th and 20th Street between Coors Field and the federal court house. It is increasingly pricey real estate, and they have decided to seek less expensive digs elsewhere, ideally with good access to light rail and RTD bus lines.

This leaves Arapahoe Square in downtown Denver with a choice new piece of property to be developed, and a little less urban blight.

It leaves some other neighborhood with a new Greyhound bus station. Given the criteria that Greyhound has identified, and assuming that it can't be accomodated in Union Station with a favorable long term lease of a little space, which would really be the savvy thing for the city to do, given its overall transportation plan, the most plausible place to put a new Greyhound station would be near the I-25 and South Broadway area in my neighborhood. This is now home to the indefinitely delayed Gates Rubber plant redevelopment, some industrial property, and some strip malls, some nicer than others, as well as the headquarters of the Democratic Party of Denver. I'd like to think that the West Washington Park Neighborhood Association wouldn't oppose that kind of move, although, given the reputation that bus stations have for attracting people who are down on their luck, I have doubts about how enthusiastic they will be. A third plausible possiblity would be to put a Greyhound bus station near the Auraria Campus South of downtown Denver.

Of Greyhound and Amtrak

Greyhound goes more places than Amtrak does, marginally faster, more often on time, and for less money, without a direct government subsidy of either its capital costs or its operating costs. It manages this despite the fact that it has competition on select routes, such as trips from Denver to Mexico, and competition with heavily subsidized Amtrak. It doesn't offer glamour, but it delivers its passengers to their destinations for the cheapest available price.

Greyhound runs reasonably full buses and uses them until they have no choice to replace them, which makes it very environmentally friendly compared to any other means of intercity transportation. A Greyhound bus half full of passengers is more fuel efficient that a car pooling Toyota Prius with every seat full. And, while no means of transportation is perfectly safe, far fewer people die in traffic accidents per passenger mile on the bus than they would if they had driven themselves.

Greyhound is really the main reason that Amtrak is losing money. They are competitors in low cost intercity ground transportion market. Rail isn't economically viable when buses can get you to your destination faster and cheaper. In the age of the interstate highway, that means that the only economically viable form of rail travel is high speed rail, which can get you to your destination faster than a car, or a cab, or a bus, and ideally faster than a commercial airplane on short haul trips where a long trip to the airport, check in, security checkpoints, long boarding periods and the trip from your destination gate to your final destination add two or three hours to any trip before even considering actual flight time. If passenger rail offered a service that got you to your destination faster than a bus could, it could charge enough for the service to break even, something demonstrated by the Amtrak Metroliner in the Northeast Corridor whose "high" speed rail service is competitive speedwise with the alternatives. But, if you run a railroad on a 1950s business model, it isn't going to work in 2010.

The other reason that Greyhound has been successful is that its very low overhead operation that moves just one busload of people at a time scales well to low demand routes, so it is well suited for low population densities. Rail requires a lot of infrastructure investments to be fast enough to be competitive. It can make those investments worthwhile by moving lots of people on a single train. But, it only makes sense to sacrifice frequency of service for longer trains and higher speeds made possible by investments in rail infrastructure when you have a high volume of passengers.

Outside the Northeast Corridor, Florida and the Pacific Coast, the United States has a quite low population density, interrupted bit intermittent patches of urban density. The demise of manufacturing in the Rust Belt has greatly reduced the population density of the area from Chicago to the East Coast that used to be a bustling passenger rail corridor, making it much less viable there.

In an era where oil prices look likely to increase indefinitely, the fuel efficiency of freight rail, and the possibility that rail offers for powering transportation with non-petroleum fueled electricity, makes rail more attractive than it has been for half a century. But, rail is not a dogma. It is desirable when, and only when, it delivers better results for a lower cost, appropriately considering externalities, than the alternatives.

When rail is fast and populations densities on its routes are high, rail is a good option. When rail is slow and population densities on its routes are low, trucks and buses are better.

High speed rail would make a lot of sense in the I-25 corridor of Colorado, which has high population density, distances that are short enough to make air travel unattractive, and flat terrain that would keep construction costs modest. High speed rail might also make sense on the high volume I-70 corridor that links Denver to its world renowned ski resorts, famous for becoming a parking lot on ski weekends, if a rail line could be put in at a cost less than that to expand that mountainous stretch of road and could carry enough traffic to make a road expansion unnecessary. Colorado's ski resorts are one of the few places outside Chicago and the East Coast, where it is possible to manage just fine without a car at your destination, so it could be an attractive option.

But, unless you're too phobic to fly, can't drive, don't need to worry about getting to your destination on time, and want a long, slow, spacious opportunity to take in the scenery without rubbing shoulders with society's less fortunate, Amtrak is not the answer, and that turns out to be a pretty small market in Colorado.

So Much For The Central Denver Rec Center

Denver Direct notes that the City of Denver first appears to have overpaid for a property adjacent to East High School that was to be used to build a Central Denver Recreation Center (which was a great idea, the Rec Center, not the overpaying part), and then ran out of money to build and operate it in the near future, forcing it to make the $6.5 million dollar property assessed at $1 million in value into a dog park and urban garden instead. Westword has also picked up the story.

In fairness to the City, I think that some of the purchase price discrepancy may have come from a change in use. Immediately before the sale, the property was being used as a church (before my time, it was a Safeway grocery store), which poses unique property assessment challenges that aren't important to be accurate about because churches aren't subject to property taxes anyway. In a real transaction, in contrast, the property has to be valued at a true fair market value that reflects development value beyond the current use.

The story of this parcel of land also says a lot about an urban neighborhood in transition. The grocery store's closing contributed significant to a "food desert" in what was one of the lowest income, most crime ridden neighborhoods in the city at the time. It was called "North Capital Hill" then, although now it is pitching the moniker "Uptown."

The plan for the recreation center did not come about when the need for one from low income city kids was greatest, although there are still plenty of kids in the neighborhood who could benefit and the City's parks and recreation department runs a vibrant track and field program that draws participants from all over the city at the adjacent East High School track. I spent what seemed like most of my summer in and around the parcel while my kids had track practice and I polished off an extra hour or so of work in the car or adjacent coffee shops three time a week.

Instead, it came about after intense gentrification and revitalization of the area, with the Tatter Cover-Twist and Shout complex moving in, the Post Properties (formerly Saint Luke's Hospital) development, a new high rise across from City Park, gentrifying development along 17th Avenue in Uptown, the gentrification and redevelopment of much of the Five Points neighborhood, and a major refurbishing of City Park.

Still, a Central Denver Rec Center would have provided a focal point to a development mini-downtown near East High, helped advance the somewhat counter-factual concept of East High as Denver's Main Street (Denver's real main street neighborhood is the Cherry Creek Mall neighborhood), and would have shown that the city was willing to make investments to revitalized its neighborhoods, which was the point of the bond issue that funded the purchase of the parcel.

East High School is also the most racially integrated, reasonably academically healthy high school in the city, in addition to claiming to be the direct successor to Denver's oldest high school. This development public-commercial complex is ground zero in the effort to accommodate Denver's several, still ethnically segregated communities, although these communities are increasingly integrating without formal public mandates as people start to value living close to the central city more and dislike commuting long distances to a greater degree. (As an aside, a remarkably large share of college bound African-American graduates of East High School are choosing to go to college at Mesa State College in Grand Junction for some reason.)

A dog park and community garden are superior to a vacant lot or a parking lot in that location, which is struggling to cross the line from its formerly blighted status to that of a healthy neighborhood. The church that owned the old structure on the site couldn't afford to maintain it in good repair and was not vibrant enough to provide a positive anchor in the neighborhood. In its off hours, it had become a place for families with kids to try to avoid and favorite resting spot for drunks, the homeless, and teens looking to escalate every encounter into a fight.

Still, it is sad to see this opportunity to build a stronger neighborhood postponed with the delay in the construction, if indeed it is ever built, of a Central Denver Recreation Center. The choice is understandable as budget pressed Denver is struggling to pawn off existing recreation centers that it is having trouble finding funds to operate on local non-profits since it can't afford to keep all of them open in these hard economic times. But, this still has to be reckoned as a good plan compromised.

Ten Public Finance Reforms For Colorado

Colorado has an inherently unstable system of public finance that is ill equipped to handle business cycles, and has a host of other problems that create bad land use incentives, encourage environmental damaging development of open space when it doesn't make economic sense to do so, makes it hard to fiscally manage local governments sensibly, distorts its economy, and fails to provide appropriate education funding to all students who should be benefiting from public education at both the K-12 and higher education levels.

This post explains the problems and proposed ten public finance reforms to put Colorado on a firmer fiscal foundation, with only slight adjustments to overall tax levels, without running long term deficits, and with only modest adjustments to the mix of taxes paid by people in Colorado. These are long term, permanent solutions, rather than band aid solutions. These proposals concentrate cyclic public finance pressures in state government and gives state government the tools it needs to handle these pressures better, and reduces the harm that recessions inflict on the state economy. They also seek to make our state and local public finance system less complex, and to reduce the impact that state and local government policies have on economic decision making in the state.

Tax Revenue Is Not Stable

Tax revenues are very cyclic. Sales tax revenues amplify booms and busts because the tax base excludes the necessities that can't be cut even in hard economic times. Income tax revenues fall with payrolls and declining investment income during recessions. Tourism and gambling based tax revenues fall during recessions with a fall in luxury and business travel. Real estate transfer taxes in resort communities are similarly highly cyclic.

There are less cyclic taxes as well.

Property taxes change only when properties are reassessed, have a near 100% collection rate because the first priority liens they create on real estate with high interest rates are good investments and can be sold quickly to private investors, and can be designed so that revenues remain constant even when property values change.

Colorado also imposes its property taxes on vehicles as part of vehicle registration charges, and this tax base is also quite stable, although collection rates aren't quite as immaculate and the revenues from these taxes gradually declines if people postpone buying new vehicles.

"Sin taxes" on liquor and tobacco, are relatively more stable, because people buy these products in good times and in bad, and because these taxes are based on volume rather than product price. There is a long term decline in tobacco purchases, however.

Gas taxes vary more, but cyclic variation in gas taxes is less of a concern because reduced driving also reduces need for the road maintenance that they finance.

Severance taxes on oil and gas production fluctuate wildly with the oil and gas commodity markets, but these fluctuations aren't neatly cyclic. Sometimes they boom during recessions. Sometimes they slump when the economy is strong.

Government Service Demand Is Not Stable

Demand for government services is also cyclic. In recessions, people need more government assistance. In economic booms, people need less. As in the case of taxes, however, some forms of demand for government services is greater than others.

The demand for means tested financial assistance programs, like free and reduced price school lunches, food stamps, cash welfare payments, Medicaid, unemployment assistance, housing assistance, homeless shelters, foreclosure assistance, and grants to non-profits that help the poor all rise when the economy is weak, and fall when the economy is strong.

Demand for higher education is cyclic. When the labor market is weak, people go to college and retrain.

Other government programs are relatively indifferent to business cycles. Water and sewer services, fire protection, public education, libraries, parks, the conduct of elections, and police protection all cost about the same amount to provide in good times and bad. The cost of operating prisons tends to be stable, because, contrary to common perceptions, crime isn't strongly cyclic.

Demand for a few government programs is counter-cyclic. Demand for building permits and inspections, zoning changes, and public works construction for new developments, for example, rises when the economy is strong, and falls when the economy is weak.

Against Balanced Budgets

So, in general, the tax revenues fall and demand for government services rises during recessions, and tax revenues rise while demand for government services falls during economic booms. Given this predictable trend, the notion that government expenses should match government revenues in good times and bad doesn't make good sense. Expressed this way, balanced budgets in every fiscal year are bad policy.

While medium and long term balance between government revenues and government expenses is desirable, short term and annual balance between government revenues and government expenses is a bad idea.

Distortions In Land Use Incentives

As noted, not all tax revenue streams are cyclic, and a lot of important forms of public spending are stable. In general, local government programs tend to have stable spending, while state and federal government programs tend to have cyclic budget demands.

Local governments in Colorado, however, have not heeded this fact. Most municipal governments in the state, and many counties, are highly reliant on sales taxes for revenues, although they do collect some relatively stable property taxes, despite having programs (other than state funded and locally administered programs) that require stable funding. Colorado's state government gets the vast majority of is tax revenues from taxes whose revenues are cyclic, and has strongly cyclic funding demands.

Municipal reliance on sales taxes and the structure of Colorado's property tax system also creates problems in land use policy. Reliance on sales tax revenues gives Colorado municipalities a disproportionately strong incentive to encourage retail development over other forms of commercial, industrial and residential development.

Colorado's Gallagher Amendment further complicates the matter, by imposing higher property taxes on business property than on residential property. As a result, residential property development, already discouraged because they don't generate sales tax revenues, are further discouraged because the property taxes generated from residential development aren't sufficient to cover the demand for the government services that residential development generates.

The Gallagher Amendment also further enhances the incentives for urban planners in local governments to encourage retail development, whose sales tax and disproportionately high property taxes cause these developments to generate far more tax revenue than their demand for public services. The Gallagher Amendment also makes non-retail commercial development and industrial development reasonably attractive, because these land uses generate little demand for government services but generate disproportionately high property tax revenues.

Commercial and industrial development also generates tax revenues from "head taxes" that many local governments employ on a fixed amount per employee per year basis, while residential development does not.

The land use biases created by the tax system affects the entire state economy and the state's environment.

Existing local governments have strong incentives to enter into a race to the bottom to attract the retail businesses that generate the most taxes in excess of their demand for services, and to a lesser extent commercial and industrial properties, while discouraging residential development.

As a result, developers respond to these regulatory incentives by putting new residential development in "green fields" rather than doing infill development, because there are no zoning and building code restrictions to prevent this from happening there.

Also, developers often don't bear the full costs of building new infrastructure in "green field" areas, whose roads and new schools are often heavily subsidized by state government departments that have little or no ability to tax or prevent new land uses. Likewise, infill developers rarely profit from the fact that infrastructure is already in place to support their development, reducing costs to the public.

The bottom line that flows from these facts is that new residential development is frequently built in unincorporated areas that require costly new infrastructure, rather than in more densely populated existing municipalities that have infrastructure already in place. This also eats away at a finite supply of open space in the state.

In sum, Colorado's current tax system creates incentives to over encourage retail development, to discourage infill residential development, to unnecessarily invest in new government infrastructure, and to unnecessarily develop open space.

Distortions To the Colorado Economy and Tax Base

These incentives distort not only our land use, but our economy. It encourages a retail heavy economy that also over invests in the construction industry, and in particular the part of the construction industry that builds suburban housing and new government infrastructure.

A system that allows retail businesses to reduce their share of the tax burden by locating themselves in unincorporated areas, a particularly great problem with auto dealership whose products are high value, infrequent purchases where inconvenience is outweighed by the tax savings of making a vehicle purchase in a low tax jurisdiction.

Tax Administration Problems

The great variety of local sales tax bases and sales tax rates in Colorado complicate tax administration and make operating retail businesses with multiple locations in Colorado much more cumbersome. For example, groceries are not subject to state sales taxes, but are subject to local sales taxes in many localities, and grocery store chains have to manage a system where there are differences in sales tax rules for every store.

It is also much easier to collect sales and use taxes in taxable mail order and interstate transactions when there is a single uniform state sales tax than it is when there are different sales taxes for every locality.

Educational Inequality

The per capita size of the property tax base varies dramatically from one locality to another. Some jurisdictions, like resort towns, have an immense property tax base for each resident. Others, like rural communities, have a very large property tax base for each resident.

In the area of providing local government services, this isn't problematic. Local residents who benefit from local governments services are expected to pay for those services and if that means that high property taxes must be imposed (and perhaps passed onto customers from outside of the locality in the case of businesses), so be it. But, in the case of public education, this is a problem.

Colorado has a state constitutional mandate to provide free and adequate public education to every child. So, disparities in the availability of property tax funding for education for K-12 education varies dramatically from place to state in the state, and the state government has a legal duty to make up this shortfall.

The current state school funding formula goes part of the way in solving this problem, but at best, the existing system is clunky and provides school systems no say in residential property development that dramatically impact the financial burdens imposed on those school systems. In reality, the current system also creates gross inequalities between large property tax base and low property tax base areas that cause the state to fail to meet its duty to provide an adequate free public education to every child.

Funding schools with local property taxes also greatly complicates the state policy of allowing any child to choice into any public school to the extent that space is available.

Political Mismatches

Local sales taxes are also popular because they seek to get people who don't live in a community and impose few service demands upon it to pay its taxes. A political disconnect between the people who approve sales taxes and those who pay them is problematic. While taxation without representation is not a strictly prohibited by the state or federal constitutions, it is still a bad way to run a democracy.

Solutions

A number of reforms to the state and local tax system in Colorado could enhance its fiscal stability during recessions, reduce tax induced demand to develop open space, reduce unreasonable competition between jurisdiction for retail development, and reduce tax compliance and administration costs.

The first two proposals really need to be enacted together to prevent unnecessary disruption in overall property tax rates. But, otherwise, each proposed reform could be enacted independently of the others, and the fourth proposal for a rainy day fund and credit facility in times of declining state revenues, could be broken up into two independent proposals.

1. Replace local sales taxes with a single uniform state sales tax at a rate comparable to the existing combined state and local tax rate; replace the lost local government revenue with property taxes.

Making sales taxes an exclusively state responsibility and making sales taxes uniform, and replacing the revenue lost at the local level with property taxes, would provide several benefits:

* Local governments would have much more stable and predictable revenue streams, reducing their reliance on inherently inaccurate economic forecasting and allowing them to maintain basic government services, which mostly have stable spending demands, undisturbed even in hard economic times.

* The sales tax base would grow as businesses could no longer reduce sales taxes by locating themselves in low tax jurisdictions.

* The incentive for local governments to disproportionately encourage retail development in a way that distorts the economy and land use decisions would be reduced. This would also help the environment by reducing the tax incentive to develop open space.

* The cost to government and retail sales businesses, particularly those with multiple locations, of administering the sales and use tax would be greatly reduced and sales tax enforcement would be easier.

2. Replace local property tax funding of schools entirely with state funding of schools.

* The reduction in the property tax burden created by ending local property taxes for K-12 education almost exactly matches the increase in the property burden created by requiring local governments to replace sales tax revenues with property tax revenues.

* It is much easier to develop a sensible school funding formula that provides an adequate free public education to every child when a highly varied mix of local and state funding doesn't have to be considered.

* Statewide school choice will meet much less resistance from schools if their funding isn't tied to local property taxes.

* Amendment 23, guaranteeing school districts stable funding would remain in place, matching their stable expenses, so that the task of balancing cyclic state government revenues and expenses would fall to state government alone, rather than having to be addressed in parallel by every school district in the state.

3. Develop a coordinated development fee that adequately reflect the public cost of new infrastructure.

New development should be required to pay development fees to each local government impacted by the development that reflect the public cost of that development, collected by the local government in charge of building permits and distributed to the governments impacted in proportion to the public costs they incur.

* School districts would receive a share of the development fee that would mostly reflect the cost of building new buildings, equipment and buses and the hiring process new teachers (but not their continued employment and operations which would be covered by state school funding formula money). This would be lower in places already served by schools that aren't full, and higher in places where new schools will have to be built, even if that means that development fees are different in different parts of the same school district. State standards would determine how these costs are determined.

* State government would receive a share of the development fee that would mostly reflect the cost of building new state roads and opening new government offices.

* Local governments would receive a share of the development fee that would reflect the cost of building new local roads, other new local infrastructure, and tap fees to secure water for the new development. State standards would determine how these costs are determined and they could vary in different places within a locality.

* Developers would be required to show proof of ability to pay development fees before beginning construction.

* Development fees don't stop growth that can pay for itself, but it does discourage growth that would be economically irrational by privatizing externalities associated with development. They do encourage smart growth by favoring development in places where it has less public fiscal impact. This check on economically irrational development would discourage the kind of housing bubbles that were intensely harmful where they occurred whose collapse caused the financial crisis.

4. The state government should establish a rainy day fund and credit facility.

In times when state revenue exceeds the highest revenue in the medium term past (perhaps five or ten years), a significant share of the revenue increase (at least as much as the TABOR amount which would be discontinued) should be required to be devoted to a rainy day fund.

In times when state revenue falls, the state could tap the rainy day fund, and to the extent that it was insufficient, borrow money with medium term debt (with a repayment period of perhaps five to ten years) without voter approval, to make up a large share of the decline, perhaps half to three-quarters of it, so that state budget cuts in hard economic times would be muted.

A state budget that is under no stress during hard economic times would probably be even better as an automatic stablizer in hard economic times, but politically, some amount of shared sacrifice by government during hard economic times is probably necessary. But, a "Little Hoover" economic policy of fiscal restraint during recessions is bad policy from a macroeconomic perspective.

A rainy day fund and credit facility would give the state the power to balance out flush good years and scarce bad years in a way that wouldn't take superhuman political will. Funding a rainy day fund is much more politically acceptable when it comes as a share of increased revenues in good times, rather than forcing a cut to existing spending levels for government programs.

State legislators could still cut spending in hard times, but they wouldn't be required to do so by fiscal necessity even if it didn't make sense to do so. Indeed, even in a TABOR style regime, voters might actually favor debt to allow government programs to remain funded in recessions, but recessions rarely happen with enough advanced warning to allow the electoral process to run its course in time for voters to act.

5. Allow temporary tax increases to make up declining state revenues.

TABOR's requirement of voter approval for tax increases also means that in tight budgetary times, legislators cannot balance tax increases and spending cuts. Yet, usually, a mix of the two would be the best choice.

Allowing temporary tax increases up to the amount of a state revenue drop as reduced by rainy day funds, would even the scale between taxes and spending, while limiting that authority in the absence of voter approval to amounts necessary to maintain the status quo of government spending.

This way, legislators could use a combination of spending cuts, temporary tax increases, rainy day fund spending, and medium term borrowing to address dropping state revenues in recessions, rather than having to address the entire burden of recessionary declines in revenue through spending cuts no matter how much hard that would do to state programs and the state economy. This would make it easier to secure a "soft landing" when the state economy is weak.

6. Gas taxes should be increased to, at least fully cover the cost of road maintenance.

Gas taxes are basically a fair users fee. Those who use roads pay for their upkeep in rough proportion to the amount that they use roads. The general fund, which has to cope with a great many cyclic pressures, should not have to deal with road maintenance as well when there is a more fair alternative.

7. The Gallagher Amendment should be adjusted to reduce the disparity between residential and business property tax rates.

Property taxes make intuitive rough justice sense as a way to pay for local government when only residential property is considered. Home value is a proxy for a family's fare share of local government costs, which are paid either directly through property taxes, or indirectly through rent a part of which is used to pay property taxes.

Businesses complicate this sense of rough justice. Everyone pays property taxes indirectly through increased prices charged by businesses for their goods and services, in addition to paying them directly on homes that they own and indirectly on homes that they rent. The right proportions are not obvious.

What is obvious is that the current balance produces property taxes that are insufficient to cover the cost of providing local government services to residential property, while providing more tax revenues than the cost of providing local government services to businesses.

When a state formula allocates the share of the total property tax base to be paid by businesses and residential properties respectively, as the Gallagher Amendment does, it is important to get these revenues and expenses in balance, because the share of the property tax base that is residential varies greatly from one property taxing jurisdiction to another.

A mismatch of tax collections and local government service provision costs artificially discourages local governments from permitting residential development in property taxing jurisdictions.

But, dramatically changing the Gallagher formula immediately and dramatically, for example, by ending all distinctions between residential and business tax burdens in a way that greatly increases individual property taxes would be a problem, because families have built their family budget around expectations of what their property taxes will be under Gallagher and can't easily make different residential choices in the meantime.

Addressing the current imbalance doesn't have to be an all or nothing matter. There is no sacred reason that business property tax rates and residential property tax rates have to be exactly balanced to the cost of providing local government services to those kinds of property. The harm filters through to local governments through this imbalance mostly arises through the filter of the incentives local governments have in formulating land use regulations and economic development plans, so the connection isn't direct or exact.

Ending the funding of local school districts with property taxes also reduces the pressure to get the balance exactly right, because local governments adjust other taxes and charges, like head taxes and licensing fees, if the property tax rates for residential or business property are a little too high or a little too low.

Also, an increase in local government property tax revenues by increasing local property taxes to make up for the loss of state sales taxes that is made manageable by eliminating property taxes that fund local school districts would help bridge the gap between the cost of providing services associated with residential property and the tax revenues generated by residential property.

A good measure of the reliance interest that homeowners have in the financial decision associated with buying a home is the average time between sales of a home, which is about ten years.

Right now, residential property pays property taxes based upon 29% of their actual valuation. A reasonable adjustment to Gallagher might increase this percentage from 29% to 49% over ten years, with the valuation increased by two percentage points each year over ten years, and nominal property tax rates reduced each year to make total property tax revenues neutral over the adjustment period. At that point, the public could look at the situation and see if further adjustment is needed.

8. Unemployment insurance rates and benefits should be increased, and unemployment eligibility should be liberalized.

There is already one rainy day fund in the current tax system. Unemployment taxes go into a trust fund that is used to pay unemployment benefits. But, those taxes are low, the benefits paid for meager, and many unemployed people don't qualify for them, so the inadequately buffer our economy.

Stingy unemployment benefits come at a price. Weak unemployment benefits are one of the main reasons that demand for government services is so cyclic. People who are unemployed and receive inadequate unemployment benefits experience great financial distress that results in other cyclic burdens on government. Unemployed people lose their homes causing property values to fall. They buy less causing sales tax revenues to fall and shrinking the economy. They drop health insurance because they can't afford to pay for continuation of health insurance coverage and get themselves or their children on Medicaid funded health care instead. Their families fall apart putting long term burdens on a variety of social services and law enforcement resources.

Certainly, there needs to be an incentive to find work. But, the current system, which involves immense red tape regarding efforts to look for work, is overkill given that benefit levels are far below what is necessary to give people strong incentives to return to work. And, every unemployed person who is excluded from employment because their termination is not a type that qualifies for benefits still has needs that must be met somehow or other.

Even with a much more generous unemployment system, there would still be a strong incentive to find work, but the burdens placed on the public and the health of the economy by unemployment would be significantly reduced.

Also, the way the current system is run, in which great care is taken to make sure that anyone who has obtained employment should be stripped of benefits immediately, discourages unemployed workers from securing partial solutions to their problem, like temporary jobs, marginal partial employment or seriously pursuing jobs that might not work out and result in a swift unemployment benefitless termination.

A cheaper to administer system might replace short term unemployment benefits limited largely to people who are laid off, with a simple, no fault severance payment system that provides a certain percentage (perhaps two-thirds or three-quarters of pay) up to a dollar cap that is higher than under current law (perhaps $650 a week), in installments for a fixed time period (perhaps the three months), regardless of re-employment with another employer during the three month period, to anyone whose employment ends regardless of the reason and ends the link between particular employer unemployment rates and claims experience for these no fault claims. The dollar cap (but not the percentage of the total cap) might be removed for long time employees. This no fault severance pay system could fund lost income during family leaves like maternity leaves, as well as true unemployment.

Essentially, this kind of no fault system would be a mandatory emergency fund savings plan, with an insurance element that allows it to pay out even if the payroll tax deductions haven't matched the amount payable yet.

Long term unemployment might look more like the current system and start after three months from termination have passed, but could last longer, perhaps two years rather than the six months that is the norm when unemployment levels are normal and Congress does not extend benefits.

Unemployment benefits might also be supplemented by a system that paid a large percentage (perhaps two-thirds or three-quarters) of any continuation of coverage costs incurred for health insurance.

9. Establish a state property tax and use it to reduce state sales taxes.

Another way to make the state budget more stable, is to replace a cyclic revenue base with a stable one on a revenue neutral basis. Even a state property tax small enough to cover only a one percentage point reduction in a unified state sales tax would add a great deal of stability to the state's revenue streams, thereby reducing the strain on other counter-cyclic automatic stablizers like rainy day funds. Property taxes are the most stable revenue stream while sales taxes are the least stable revenue stream.

Alternately, to ease the burden on homeowners, part of the state property tax could be used to fund a reduction in state sales tax, and another part could be used to fund a homestead exemption available to all homeowners, which would disproportionately help the homeowners most heavily impacted by other measures in the package.

10. Shift significant higher education funding to need based scholarships.

Across the board vouchers for in state students for higher education is an inefficient way to fund higher education. It provides substantial aid to large numbers of college students whose families can afford to pay for college without financial assistance, and provides inadequate aid to college students who can't afford to pay for college.

This inefficiency is heightened in hard economic times when large numbers of people, affluent and less affluent alike, who would have otherwise entered the workforce go back to school instead.

While this would require administrative work to determine financial need, this administrative effort is something that is being done in any case, so the added administrative burden of this approach is minimal.

Directing funds to people whose attendance at college depends upon financial support, with more generous need based packages, would provide more benefit for the same funds than the current system.

Also, a need based system would significantly reduce the demand for higher education funding in good times, because there would be fewer students then and there would also be fewer students from financially stressed families because fewer families would be financially stressed. This in turn would help build up the rainy day fund for hard times.

The Past, New And Improved.

Everything from the 1870s and 1970s is new again, but this time we are doing it better.

The 1870s was a time when rail was changing society. Now, light rail, high speed intercity rail, and freight rail are all on the rise. The electric car industry that was emerging at the end of the 19th century is returning, with electric cars on the verge of entering mass production, another proposal of the 1970s that didn't reach critical mass.

With a refocusing on means of transportation other than the automobile has come an interest in returning via New Urbanism to the urban design patterns common in the 1870s. The 1970s marked a period when we were increasingly aware of the malaise of suburban growth patterns, but this awareness didn't take hold.

The 1870s and 1970s were both times marked by thriving drug cultures. Now, the war on drugs is in its final act. Marijuana is on the verge of legalization and its many legitimate medical uses are beginning to be legalized. Medical uses for psychedelics (for example, in treating PTSD) are also beginning to be recognized. Legislatures are finally responding to calls to replace harsh drug sentences with treatment regimes under budgetary pressures. Harsh federal sentences for crack cocaine use are on the verge of being made more lenient. Absinthe subcultures are starting to thrive again.

We also appear to be on the verge of seeing a couple of independent developments that greatly help drug addicts cure their additions. Ibogaine, derived from the African Tabernathe iboga plant is a psychedelic drug that have shown remarkable success in helping alcoholics, cocaine addicts and heroin addicts free themselves of their additions without the trauma of cold turkey withdrawal. Elevating levels of a microRNA called miR-212 in the brain has similarly shown promise in addressing additions to cocaine, nicotine and alcoholism in mouse models. We could be a couple of decades away from highly effective drug driven treatment of substance abuse. We are also increasingly close to being able to identify which people are at high risk of being ravaged by substance abuse and addition and which people are less vulnerable to going beyond moderate use of psychoactive substances, a tendency whose significant hereditary links are now reasonably well established.

Renewable energy projects and environmentally sustainable food production surged in the 1970s, but never really reached critical mass. Now, wind and solar power are making up a meaningful part of the our electrical power supply, there are viable modern sail technologies to reduce fuel consumption by ocean going freighters, and many vehicles on the road were designed to be biofuel friendly. Organic foods now make up an appreciable share of all produce sold, both due to the rise of natural food oriented grocery stores and the increased sold of organic foods in ordinary supermarkets. Fish farming has become the predominant source of many kinds of fish sold in grocery stores.

Recycling has taken hold as a norm, even in places that don't have bottle deposit laws, and large scale compost collection seems likely to follow suit. Together, the development have greatly reduced the volume of waste sent to ordinary landfills. A vibrant scrap metal market (some of its legitimate and some of its involving stolen scrap metal) has arisen in response to rising metal prices.

The nuclear power industry that the Three Mile Island nuclear accident killed, is coming back. A Denver company, Hyperion Power Generation, is well along in developing a telephone booth sized 25 megawatt nuclear power plant (enough to power 25,000 homes) that can be mass produced and has about 100 interested customers. The $100 million plants would produce electricity that could meet baseline power demands at five to ten cents per kilowatt hour, a price competitive with centralized power production, while producing no air pollution. The idea is particularly attractive in remote areas now reliant on oil fired power plants.

The 1870s were known for their elegant urban gardens, and the 1970s for its rather less elegant urban gardens and for kick starting the idea of a community vegetable garden. Urban gardening is back again, ironically, not so much in the land rich suburbs, as in urban residential areas where land is treasured and people have a deep craving to reconnect with all things natural. I admit to being part of the trend. Four years ago, the little front and back yard that my house and detached garage share its fifteenth of an acre with were almost entirely grass. Now, almost half of the backyard is planted in flowers and vegetables. My children have friends who raise chickens in the city.

Others want the fresh from the farm food, without the weeding and watering. My stepbrother, for example, has a share in the farm production of a local farmer that provides him with a steady stream of vegetables to fill his dinner table and feed his juicer for the unique smoothies that complement his biking and running hobbies. For my daughter's birthday, we went to pick strawberries at a 40 acre farm in Brighton that has a constant array of pick your own opportunities for city folk longing for the fresh from the garden tastes taken for granted in the country.

Also coming back from the 1870s is a renewed interest in chamber music, not just as a musical style, but in the sense of holding live acoustic concerts in people's homes and other small spaces. We have an abundance of highly talented musicians who would like to make money from making music as well as teaching others how to do so, but a limited supply of profitable opportunities to record and widely distribute music through traditional radio and record store outlets.

The 1870s was a time marked by interest in race, eugenics and ancient history. Now, we have a far more nuanced sense of our ancient history and roots as we have gone beyond the Origin of the Species to map out the genetic ancestry of populations across the world, and used technologies like radioactive dating to gain a much more firm hold on the chronology of the ancient world, but most investigations now proceed far more cautiously as they are informed by how political and intellectual doctrines based on crude ideas about genetics went awry. But, the rise of genetic engineering brings the ethical issues that were in the past associated with genetics much more serious.

Science has also provided substance to flesh out the field of psychiatry that was just coming into being at the end of the 19th century. We can now describe many of the biochemical and neurological roots of psychiatric conditions that were suspected but not established a century ago, and have added considerable empirical rigor to a science then based upon anecdote and intuition. We know much more about why people are irrationally anxious or depressed, about why people are impulsive or have difficulty paying attention, about what schizophrenia is at a biochemical level. For example, the biological basis on sexual orientation and gender identity is now far better understood now than it was when atypical forms of sexual orientation and gender identity were first systemically studied a century ago by sympathetic proto-psychiatrists.

The nationalism that forged many of our modern nation states in the 1870s has returned as a force for both good and ill in the world. Nationalism has driven the reunification of Germany, while prevailing over other concepts to break up Czechoslovakia, Yugoslavia, and the Soviet Union. It is on the verge of doing the same thing in Sudan. It is driving the war in Chechnya, and has been an important factor in Iraq, a complex multi-national civil war in which Kurdish and Shiite identities have become more visible. Belgium, Spain, Moldova, the Ukraine, the United Kingdom and the small countries in the Caucuses continue to deal with centrifugal forces that have become less ominous now that the European Union provides a framework to maintain a regime of social and economic liberalism and international fair play of emerging national states.

One way to understand the divide between liberals and conservatives in American politics in through the lens of nationalism. Conservatives strive towards of vision of an American nation-state, with a singular religious and political identity, something that drives their opposition to immigration, opposition to a strong First Amendment establishment clause, and tendency to cast our foreign engagements in religious and ethnic terms, for example, in their embrace of a war on Islam as foreign policy goal. Liberals, in contrast, have a vision of America as a multi-ethnic empire, distinguished not by its shared culture and ethnicity, but by its shared political institutions and broad scope.

Looming is the demise of the Oil Age that distinguished the 20th century. The popularity of Steam Punk is hardly surprising, because our future without oil may look more like the era that immediately preceded the rise of the oil age at the end of the 19th century, than it does like our more recent past.

Science, like it was at the end of the 19th century, seems again to be on the verge of explaining everything. Then, quantum mechanics and relativity destroyed that certainty. Now, we are on the verge of seeing if some variation on the Standard Model of Particle Physics and a quantum theory of gravity of some sort, can restore that certainty. There were loose ends then and now. Then, those loose ends ended up exploding into a completely new worldview as those loose ends had hinted at a vastly complex undiscovered world. Now, it isn't clear if we are approaching the end of science with an overarching Theory of Everything, or are about to witness new levels of complexity that have been theorized but not yet supported by evidence.

This time is different. For the most part, it is new and improved. But, we can learn something from how the last times around played out, as we move forward today.