Gleaning Economic Insights from the Irrational and Unexpected

The Lincoln Institute provides a variety of early- and mid-career fellowship opportunities for researchers. In this series, we follow up with our fellows to learn more about their work.

As an economist in the Research and Statistics division at the Federal Reserve Board, Jacob Krimmel works on the kind of timely research that informs Fed policymakers and the Board of Governors as they make monumental decisions about national economic policy. Krimmel was awarded a C. Lowell Harriss Dissertation Fellowship in 2020 while earning his PhD in Applied Economics from the University of Pennsylvania. Named for a longtime Lincoln Institute of Land Policy board member and Columbia University economics professor, the fellowship assists PhD students whose research complements the Institute’s interests in land and tax policy. In this interview, which has been edited for brevity and clarity, Krimmel explains his fascination with how well-meaning economic policies can yield irrational market responses and unintended consequences, and what we can learn from those unexpected outcomes. The views expressed do not represent the views of the Federal Reserve.

JON GOREY: What was the focus of your PhD research?

JACOB KRIMMEL: My research looked at how changing the locus of control over school funding—which, in the US, is classically something that’s done at the municipal level, typically through property taxes—from the local level to the state level had unintended consequences or knock-on effects.

Because schools in the US are typically locally funded, there’s a lot of inequality in how much money is spent per student across space. So I studied a really well-meaning school finance equalization policy in California from the 1970s. This was the first one of its kind; by now in the US, almost every state has some sort of equalization measure to try to fund schools more equally. And it turns out, how you go about this equalization matters a lot in terms of educational outcomes—which wasn’t the focus of my paper, other papers have looked at that—and in whether it results in more distortions in where people live, and in land use policy and zoning.

When the state of California came in with this equalization measure in the 1970s, and essentially said [to wealthier municipalities], ‘You’re not going to be able to raise more money for your students, and we’re going to expropriate some extra money and distribute that around to other municipalities to equalize funding across space to make a more equitable arrangement,’ what these localities did was enact exclusionary zoning type policies—things like density regulations, minimum lot sizes, capping the number of homes that can be permitted in a certain year, things like that. I think the reason they did this is in part because there’s this idea that if you take away my ability to fund schools and set my admissions price, if I don’t have control over the price, the thing I do have control over is how many people can live there.

Thinking about California in the 1970s—it’s 50 years ago, it’s kind of like, who cares? But in one way this paper was kind of thinking about, what are the unintended consequences in other markets, and how are people going to respond to long policy dimensions that were not expected? Especially when you think about land use, these things can really cast a long shadow.

What’s really interesting in the housing market is there’s now sort of this movement to centralize some land use authority at the state level, or for states and even the federal government to provide localities incentives to change their zoning and land use rules to permit more housing. And so the paper’s come full circle. Because at first everything was at the local level, zoning and property taxes. Then property taxes and some fiscal authority gets centralized to the state, but they still had zoning locally, which ended up being not a great arrangement, especially in California, with really low property taxes, schools that are probably underfunded, and a lot of really exclusionary places. And now in California, and other states as well, they’re moving to a system where they’ve centralized, at least in some ways, the land use policies as well. I don’t know if it’s a better arrangement one way or the other, but I think that alignment is important.

JG: What are you working on now or excited to take on next?

JK: I’ll highlight two. One is pretty much finished, it’s a policy analysis of Seattle’s mandatory housing affordability policy. Like many cities, Seattle was looking at a housing crisis, both in terms of overall prices, and not enough units being built, and especially the affordability issue at the very low end of the socioeconomic distribution. So they created a policy that was intended to make everyone happy—the developers, the YIMBYs, and also the folks who were worried about affordability at the low end—which was to do a mandatory inclusionary zoning policy in certain places.

So this was sort of a carrot-and-stick proposal to developers: If they wanted to build in certain core areas in Seattle—around transit, especially—then the city would upzone those areas to allow for more dense development. That was the carrot to the developers, but then the stick was that they had to reserve a certain share of housing in each project at below-market rates.

My coauthor Betty Wang and I looked at the short-run effects of this policy in terms of developer behavior and what got built where. And what we found was that developers sort of strategically avoided these sites where they were required to have the inclusionary component, and they moved to nearby places that didn’t. Now, it’s not as if construction completely stopped in the inclusionary zoning places, but it probably wasn’t as great as it could have been.

We talked to developers in Seattle, we talked to land use lawyers, we talked to people who were involved in creating this ‘grand bargain,’ as they called it, and they acknowledged that having the perfect alchemy or the perfect combination of carrots and sticks was going to be really difficult to do. But this was a really necessary first step, just to say, ‘These are the carrots and sticks, and these are the places we want to build. We know that it won’t be the perfect policy, but it is a policy that we’re able to enact.’ So they got this big reform through, and then they can sort of work around the edges to change the alchemy, and that’s a lot easier to do than to tear the system down and start anew.

The second paper is about the effect of mortgage rate lock-in on household or residential mobility, and housing markets in general. The lock-in idea is that there’s a disincentive for someone to move if the rate they’re paying on their fixed-rate mortgage is lower than the market rate out there. The basic idea is that if you’re ‘in the money,’ so to speak, if your rate is above what you can get on the market, then you can either refinance to a lower rate, which is nice, or you can move and buy a bigger house for the same monthly payment, or you can buy the same-priced house for a lower monthly payment. When you’re ‘out of the money,’ or locked in with a lower mortgage rate, the opposite is true, so that incentive to move goes away.

The paper is trying to determine a couple of things—one is to what extent is the decline in residential mobility that we’ve seen since rates started going up in early 2022 due to the lock-in effect? And we find that there’s a pretty sizable effect. Overall, we think that about half of the drop in mobility since 2022 is due to this lock-in effect. But that also leaves another half on the table, so what’s that all about? We think that mobility would have declined anyway, because during the pandemic, there was so much refinance activity, there was so much mobility, the housing market was so hot, that many people basically settled into the home of their choice or a home they expected to be in for the long term. So we think in many, many cases, people wouldn’t have moved in the next couple of years anyway. Typically, if you buy a home or you refinance your mortgage, you’re probably not going anywhere for the next couple of years.

JG: What do you wish more people knew about economics?

JK: There’s a lot more to economics than this assumption that people are rational and markets are rational. Most of what I think is very interesting about economics is when those assumptions fail—why does zoning, for example, have negative effects on affordability, and negative effects on new construction? And then talking about what’s a better design for a policy, given that we know that there will be these frictions?

The second thing is that everything is urban economics, everything is housing economics. Even the economists who don’t think they’re doing that, it’s in there somewhere. Anybody who thinks they’re doing labor economics, for example—yes, you are, but there’s a really important spatial component that we need to consider, too.

JG: What keeps you up at night, and what gives you hope?

JK: I actually think a lot about institutions, and trust in general, and how you need a lot of collective action from both voters and policymakers. You need buy-in and trust both ways, and we’re not in a place right now in this country, and also not in the world, where there’s a lot of that trust in either direction, which I think is a huge impediment to making progress on these big collective issues.

But I’m also one of those people who thinks most things are better now than they were before. Though something that does keep me up as well is this disconnect between ‘the vibes,’ the fact that everyone thinks the national economy has sort of gone to hell in a handbasket, but then you look at a lot of these indicators, whether they’re macro indicators or even more nuanced, microeconomic indicators, and things are overall going pretty well, all things considered. It’s not without exception, but in the US—and especially compared to what’s going on in Europe and other developed countries—we’ve recovered really well from the pandemic. We have a much more stable labor market, financial stability is there. Of course the economy is not just these macro indicators and the stock market, but it certainly doesn’t look as bad as people feel it does. So what is the reason for this disconnect? I don’t know exactly how to square those two circles.

JG: What’s the best book you’ve read lately, or a podcast you’re listening to?

JK: I’m currently reading The Verge, by Patrick Wyman, who’s a historian. So it’s not about economics at all, it’s a historical book looking at the years post-Columbus, around that time in European history, and it takes 10 different individuals from those years and talks about them and what was going on in their lives in their countries and how it has shaped the modern world and modern geopolitics as well.

And I’m a pretty big podcast listener. I like the Odd Lots podcast—they just had one about the ‘vibe session’ and this disconnect between economic indicators and how people feel. And then Derek Thompson from The Atlantic has a good podcast called Plain English, and that has a great combination of economics, politics, science, sports—all the stuff that I’m interested in.

Jon Gorey is a staff writer at the Lincoln Institute of Land Policy.

Lead image: Federal Reserve economist and former C. Lowell Harriss fellow Jacob Krimmel. Credit: Courtesy photo.