Bank Subsidies

“Are Larger Banks Valued More Highly?” by Bernadette A. Minton, Rene M. Stulz, and Alvaro G. Taboada. March 2017. NBER #23212.

Everyone asserts that large banks have an implicit subsidy from being “too big to fail” (TBTF)—that is, the banks affect so many people that federal officials would come to the banks’ rescue if they were to get into financial trouble. Is this belief supported by bank share prices? Does the market value banks more highly if they are larger?

One way to measure this is to use Tobin’s q, the market value of assets divided by the book value of assets. If TBTF is right, then Tobin’s q will be larger for larger banks.

The authors find that Tobin’s q for large banks are smaller than for small banks. And once a bank exceeds the Dodd–Frank regulatory threshold for large banks, Tobin’s q decreases with size. Within banks over time, the relation between size and valuation is negative over the period 1987–2006. So the market does not value banks more if they are larger.

Strictly speaking, the paper does not show that TBTF does not add value to large banks. But if TBTF does add value, it is not enough to overcome other negatives that make large banks worth less than small banks.

Water Pollution

“Consequences of the Clean Water Act and the Demand for Water Quality,” by David A. Keiser and Joseph S. Shapiro. January 2017. NBER #23070.

Since 1972 the United States has spent $1 trillion on water pollution abatement, which amounts to over $100 per person per year. What have we gained from this expenditure?

The authors study data from 170,000 pollution monitoring sites from 1962 to 2001. Dissolved oxygen increased by 5 percentage points and the share of waters that met fishing standards increased by 11 percentage points after 1972. But the time series shows no visually obvious evidence of a mean-shift or trend-break in water pollution after the start of the grant program in 1972. In fact, the rate of decrease in pollution levels actually slowed after 1972. The declining rate of reduction suggests decreasing returns to pollution abatement or increases in non-point sources (agricultural land runoff) canceling whatever positive effects point-source control had.

To estimate benefits of the water treatment grants, the authors examine housing values within 25 miles of treated rivers and conclude that for the average grant of $35 million (2014 dollars), housing values downstream increased by $9 million in the aggregate relative to housing values upstream that were unaffected by the sewerage treatment.

The authors put a positive spin on these estimates, arguing, “The benefits of these Clean Water Act grants exceed their costs if [the] unmeasured components of willingness to pay exceed the components of willingness to pay that we measure by a factor of three or more.” In other words, if there are $27 million in benefits that do not factor into increased willingness to pay for housing near cleaner rivers, then the $35 million expenditure results in $36 million in benefits and is cost effective.

Building Codes

“Economic Effectiveness of Implementing a Statewide Building Code: The Case of Florida,” by Kevin M. Simmons, Jeffrey Czajkowski, and James M. Done. May 2017. SSRN #2963244.

Hurricane Andrew in 1992 destroyed 25,000 homes, damaged 100,000 others, and resulted in $26 billion in damages in South Florida. Homes built before 1960 suffered less damage than those built later. Analysts concluded from this that Florida building code quality and enforcement had deteriorated over time.

In response, Florida enacted one of the strictest building codes in the country in 2001. (See “Do Coastal Building Codes Make Homes Stronger?” Summer 2014.) Since then, Florida has experienced 18 large wind events. This paper examines how damages were affected by the new building code using loss data from 2001 through 2010 on about a million homes.

The paper concludes that houses built since 2000 suffered losses that were 72% less than homes built prior to 2000. Many of the newer homes suffered no damage. For those homes that suffered some damage, losses were 47% less.

The authors then ask whether the additional construction costs were cost effective. The additional building costs from the codes were approximately $1.66 per square foot, or $3,254 for the average 1,960 square-foot structure. The average annual loss for homes built prior to the building code change was $466 per house for a present value of $21,474 over the 50-year life of a house. The 47% decrease in losses from the new building codes would equal $10,093 present-value over the 50 years. So $3,254 in costs prevents $10,093 in damages. The building code is very cost effective.

Plastic Bag Bans

“Bag ‘Leakage’: The Effect of Disposable Carryout Bag Regulations on Unregulated Bags,” by Rebecca Taylor. May 2017. SSRN #2964036.

Many people criticize retail stores’ use of thin plastic bags to package purchases because many shoppers do not dispose of the bags properly. As a result, the bags clutter roadsides, yards, trees, and waterways, where they are unsightly and can be a hazard for wildlife.

Some local jurisdictions have responded to this with plastic bag taxes and prohibitions. Consumers often respond to such policies by finding close substitutes that undermine some of the effects of the policy. To determine if this is happening with plastic bag policies and if this results in net harm, this paper studies the effect of plastic bag bans in California over the period 2008–2015 using scanner data from 201 food stores.

Bans on plastic bags resulted in an immediate and large increase in the purchase of small (67%) and medium (50%) garbage bags relative to jurisdictions in California with no bag controls. (Other categories of plastic and paper bags exhibited no change in sales.) The author concludes that people were reusing the shopping bags as trash bags at home, and after the bags were banned they purchased other bags for trash. The ban thus resulted in a 40.3 million–pound reduction in plastic shopping bag use but an increase in plastic garbage bag use of 16 million pounds and in paper bag use of 68.7 million pounds.

Is this change better or worse for the environment? To answer that the author considers the bags’ effects on carbon emissions. Manufacturing a plastic bag results in fewer emissions than substitutes like paper, trash, or cloth bags. However, the latter bags can be reused, so multiple uses can offset the emissions difference. To have fewer carbon emissions, a paper bag would have to be reused three times, a plastic trash bag four times, a polypropylene bag 11 times, and a cotton bag 131 times. Those reuse rates seem unlikely.

If such reuse does not occur, the simple carbon footprint of the ban may be adverse. But many people would argue there is a large, unmeasured benefit from not having plastic bags hanging in trees and floating on waterways. The author responds to this point with a question: “Do the benefits of reduced litter and marine debris outweigh the costs of greater greenhouse gas emissions and thicker plastics going into landfills?”