EYE ON THE PIE: School projects create winners and losers

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Strange it is that Indiana newspapers are atwitter with concern about changing the clocks. One would think this is some terrorist threat. All Indiana counties will go to daylightsaving time, which will be a novelty for the majority of us. Some counties now on Eastern time will switch to Central time and not have to change their clocks until October (Central Daylight Time being the same as Eastern Standard Time).

The time switch is a non-event. It is an unnecessary step taken in the name of false modernization. But we have it now and let’s live with it. There are more important issues for us to consider.

For example, one newspaper executive sent me an e-mail concerning school expansion issues in his community. “One common refrain,” he reports, is “if we don’t spend this money right now, next year the construction costs will increase and the taxpayers will be asked to spend more.”

Let’s think about the issues involved here. If we delay building, can we build at the same cost? Over the past decade, construction costs for structures have increased 4.7 percent annually while prices for personal consumption have risen only 2 percent annually. Thus, our new school is likely to cost more to build in the future than it will now. Wages or income may keep pace with the rise in consumer prices, but that does not offset the increase in construction costs. Thus it would seem better to build now.

Further, these data do not include financing costs. Will interest rates be higher or lower next year? Will bond attorneys and investment advisers offer lower rates next year?

Now, about those taxpayers. Who are they? The residents of this community next year and every year thereafter will be a changing group. But that doesn’t matter. Current property owners will bear the burden of the increased taxes and realize the increased benefits of that new school. This happens because buyers consider what they are getting for their purchase. They know they are getting a better school, but higher taxes as well. Economists say this means the future stream of benefits and costs are capitalized, or included in the sale price of the property.

Residential buyers are likely to value the benefits of the school more than will industrial developers. Hence, the price of industrial land will be more adversely influenced by building the school than will residential property. In fact, home prices may go up because the new school could be seen as a commitment to quality education.

The key point in all this is that different people are going to feel the consequences of a decision to build a school differently. We cannot assume it all averages out. We do not all gain or lose in the same way or in the same proportion.

These differences in the distribution of costs and benefits give rise to community disputes. Even if we could show that the overall benefits exceed the costs, there is no reason to expect consensus, unless we have a way of identifying and compensating the losers. The interesting part of all this is that if the majority of a community identifies itself as winners, it can get a project through, even if the costs exceed the benefits.

Ah, the joys of democracy that await the people of Iraq.

Marcus taught economics more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. To comment on this column, go to IBJ Forum at www.ibj.comor send e-mail to mortonjmarcus@yahoo.com.

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