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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2 Responses

  1. Tim B says:

    Well Flippin, kinda feels like you’re reframing the terms of the debate last minute here. In your original post it seemed your intent was to show that demolition was a losing proposition “by the numbers” – you were not factoring in any type of variable speculation on the risk. My intent was to prove that limited demolition of foreclosed homes only could work “by the numbers”. And I think I proved that well enough. I think you’ve shown that demolishing an entire street of tax income generating two family homes and replacing them all with single family homes would end up hurting us financially. I don’t think anyone was seriously suggesting that scenario, but nevertheless, it’s a good lesson.
    Now if you want to talk about the risk factor, that’s a whole other story. Now we are back in the realm of speculation and we could debate for days on that.
    I’m not sure if it’s helpful to frame the debate in terms of demo vs rehab. I understand you are a little sensitive about the Chalmers situation, but just because someone favors the demolition of Chalmers doesn’t mean they also want to demolish everything. Seems everyone is in agreement that there needs to be some demolition and some rehab, the debate really is about how much of each and where.
    The number crunching was fun, thank you for an informative and cordial debate! I leave the last word to you…

    • flippinamsterdam says:

      Tim,
      I think we share some common ground here and you are right that the debate is really about how much of each and where. I’d be supportive of a pilot program that would test the theory around targeted demolition and rehab. Let’s say that instead of an already blighted area we took a marginally blighted area where a few homes came down that needed to and we then tried to test the market waters with redevelopment. I see nothing wrong with some experimenting and piloting to test out what may or may not work. That way you better understand what drives success and failure. You may be right ultimately and if so, I’d be behind it as it works; in the end, I’ll support whatever works. I think I share that with you as well.
      I did not initially get into the risk side of the argument as in the widescale demolition scenario, there was no need to given the clear ‘lose’ of widescale demolition. But as matter of thinking about things I think you must view things in terms of risk. That’s also driving what I’m doing here. Think of it this way: it’s your birthday and you get two gifts: the first is $20 worth of lotto tickets, the second is a crisp $20 bill. Which gift is worth more?
      On Chalmers, well I admittedly get a ‘little sensitive’ , as you quite nicely phrased it. But on a risk/reward basis, I think it is a chance worth taking. I could rehash my argument or my criticisms of opponents to Chalmers but it’s captured elsewhere. Let me say that I do not view all opponents of Chalmers as one bloc; the bulk of my criticism is geared toward the blocs with a legacy mindset and legacy strategy; in essence, let’s keep doing more of what brought us here because the more we keep doing it, the better it will work. Madness really. Maybe the distinction isn’t always clear in my posts but I do see the distinction amongst what I consider sound arguments and quite the opposite.
      Thank you as well; I enjoyed the exchange

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