Knock Them Down Economics Redux
Fellow poster TimB ran some numbers using my scenarios as a baseline and then creating an ‘Imperfect’ scenario of which life certainly is. His original post with his analysis is here.
I ran the numbers with an even more pessimistic scenario than what TimB had run. The only item of note is that my numbers reflect a higher number of units under the Imperfect Scenario as I thought TimB’s model were too low. Here are the results:
Imperfect Scenario (10 foreclosures Years 1-5, 15 foreclosures years 6-14)
City Revenue NPV(5%) : $792,858.99
Rebuild Scenario as TimB describes:
City Revenue NPV (5%) $913,813.36
City Revenue NPV (10%) $666,879.88
City Revenue NPV (15%) $508,809.05
TimB then good naturedly adds:
According to these figures, we start to see a relative increase in revenue starting in year 4. So this tells me that at least on paper, the strategy is viable. So unless you can point out any further major flaws with the model, I think you may have to retract the mathematical portion of your argument : )
TImB may be right if you view the scenarios as equally risky. In other words, if you believe both scenarios present the same level of risk to the city’s cash flows, then TimB would be right and I would be wrong.
On the other hand, if you think that the building scenario presents more risk than what the course is now, then who’s right and wrong gets reversed. So I maintain that going down this road of expecting a rebuilding in neighborhoods to be very high risk. So when you look at the numbers in parentheses above– 5%, 10%, 15%– they represent in a sense the level of risk that you perceive in the project. As you raise the numbers, you are recalculating with more and more risk. In a sense, it’s like investing in stocks versus CDs at the bank; in order to invest in a stock, you’re going to look for a better return on your money than you would buying a CD at the bank. The tradeoff of course is that the stock is riskier– you may make more money or you may actually lose money– while with a CD as pretty safe, you will take the lower rate for that safety. So mathematically I’m still in the right here with my assumptions of risk. Sorry Tim 😉
I think TimB suggests a rather pragmatic approach: Honestly, I don’t care that much whether houses get rehabbed or demolished as long as something gets done and it works.
I could not agree more.
But what can be done? I think the answer is rejecting the common wisdom that Amsterdam is a declining city. If you accept that premise, you will manage and enact policies that only reenforce that cycle. Why not reframe the question as how do we restore growth to the city? You get a much different answer. So until the framing changes and a critical mass of people push back against the conventional wisdom, we are metaphorically rearranging deck chairs on an ill-fated trip regrettably with no Gilligan or Skipper for a few chuckles before sinking.
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