Thursday, July 4, 2013

Should companies be required to take out Building-Removal-Insurance?

Emily Badger at The Atlantic recently summarized a new proposal for dealing with the problem of how to pay for clearing away the abandoned buildings that stay behind when the corporations that built them are no more:
"You can't force companies that no longer exist to pay for dismantling these buildings. But what if the government required them – years earlier – to buy property insurance to do that? Think of it as life insurance for commercial sites. ...
...A similar solution already exists for landfills, mining sites and oil rigs. In some communities, companies must also put up bonds on new cell phone towers to ensure that they eventually come down (no one wants an abandoned cell phone tower to tip over). ...
...In short, force companies to financially plan for a property's end-game, and it could change how they think about every stage of the building's life."
 While this may sound like a good idea, I will argue that it neglects some important considerations, while raising some important questions regarding the purpose of public policy.

First, let's be clear on what this policy does: by requiring companies to take out insurance or put up a bond to pay for the removal of any structures that may remain after the company's demise, the policy would impose some of the cost of a company's failure that is currently borne by all local taxpayers in advance on any company that wants to build a factory, office building etc. In other words, it is a tax on companies that want to invest locally in a way that requires a building.

The main reason why this might be a good idea according to the paper by LaMore and LeBlanc is that empty buildings that might be left behind impose a negative externality on the community that has to remove them, and decrease the desirability of the surrounding neighborhoods.

However, does the fact that a negative externality exists always justify taxing that activity  - in this case building factories? Only, if the negative externality is not outweighed by the positive externalities of the activity. And in this case, the presumption should be that the positive externalities are large: not only may the investment of capital into factories and buildings increase the productivity of a firm's workers, but the establishment of local production facilities usually has a positive impact on the economic activity of surrounding areas as well. The best evidence for that is probably the fact that many cities have policies in place that subsidize companies that are willing to invest in building factories nearby.

As a result, we have to weigh any negative externalities of companies investing in new buildings against the positive externalities and only then can we know whether or not to encourage (subsidize) the activity or discourage (tax) it, but doing both in an offsetting way is certainly not advisable.

As the insurance payment for buildings would be higher in regions that are more likely to suffer from  economic problems and the resulting empty buildings, the intended policy would make it more expensive for companies to expand into exactly the struggling areas of the country that are most in need of investment, while encouraging them to crowd even more into metropolitan areas like New York City, where the resale of a company building is almost certain and the insurance premium accordingly low. Regional inequalities may be exacerbated as a result.

Last but not least, the administrative deadweight cost of having to evaluate, administer and enforce the insurance requirement for every privately built structure might be quite considerable - and the interest groups (e.g. insurance companies) that would thrive on an expansion of this policy would lobby strongly for these costs to ever increase.

Overall, I think it is unlikely that such a policy would be beneficial due to its negative impact of discouraging investment in less affluent regions of the country. After all, factories and other company structures are very different from "cell phone towers" and "oil rigs" where such insurance schemes may be appropriate: factories are embedded in economic communities, and, as nodes of local production networks, their investments and increases in productivity have positive externalities due to supporting "specialized providers of industry inputs, thick markets for specialized labor skills, and information spillovers" (Krugman, 2010).

No comments:

Post a Comment