Thursday, August 15, 2019

It's the season


The very long U.S. election season is here.  What to keep on mind? Two things strike me as fundamental.

1. Knowledge is complex and dispersed. This means that innovation (and progress) depend on trial-and-error innovation in a competitive environment – one not encumbered by the heavy hand of you-know-who. This is especially important in a season when the candidates have policies, plans and programs for everything.

2. In fact, there will always be a political class (includes their many private sector cronies) working hard on cronyist plans and policies.

Millions of voters have sat through some version of an economic principles class. How many of them have encountered these two fundamental principles? Too few, I worry.

These two fundamental observations are facts of life and in conflict. That’s what makes it interesting. The economist Peter Boettke has elaborated and even imagined a derby involving “Three S’s”.  Smithian gains from trade, Schumpeterian competition, and, third S for stupid.

All three are always in play. And it’s election season.

Saturday, July 27, 2019

Thirteen thoughts on growth and cities


  n  Economists’ favorite question is still “How did we get so rich?” We learned how to coordinate production. We learned how to coordinate discovery. We learned how to form mutual loyalties – for social as well as economic reasons. Can we unscramble the social from economic? Does it matter?
  n  Supply chains for commodities are ubiquitous; they illustrate and deliver the gains from specialization and exchange. Most chains for things are accompanied by chains of information. Think of instruction manuals and accompanying videos and websites and/or live  instructors.  Buy an airplane and they send you to their own training school.
  n  Supply chains for information are everywhere; these nurture supply chains for ideas. The more information, the more ideas. We live in many goods chains as well as many information chains; we are also likely to live in many idea chains. Some of the latter involve face-to-face contact. Location choice and interaction mode choice are concurrent.
  n  The more new information, the more new ideas. We seek both. Information can hatch ideas and also help test ideas. Ideas and information feed each other just like theory and hypothesis testing feed each other.
  n  Neither information, nor ideas, are manna from heaven. Key facts and idea are deemed useful -- and are sought. The search may start with a hunch but can lead anywhere. Nevertheless, it is directed.
  n  All this says (once again) that technological change is endogenous; new knowledge and supply chains for ideas are emergent.
  n  Supply chains involve many nodes/locations; spatial patterns and interaction patterns emergent. Entrepreneurs must choose what to make vs what to buy. But that’s incomplete. Make vs. buy involve where to do all these; e.g., location choice.
  n  All this illustrates how prosperity and human settlement are two sides of the same coin. Propitious location choice (opportunities for propitious choice) denote prosperous cities – and prosperous economies.
  n  What can we, should we, do about location choice and cities? We should leave room for emergent orders. This is how we get a chance at greater prosperity.
  n  The continued outward growth of major cities is nearly universal. Local policy regimes seem to make little difference.
  n  Agglomeration opportunities are not restricted to the old centers. There are many sub-centers. Locators are drawn to favored places as they economize in light of their peculiar interest in specific commodities, ideas and information flows.
  n  Cities are a complex mesh of an uncountable number of supply chains. They are much more than simply labor markets. It is not about journey-to-work or journey-to-shop but much more.
  n  Instead most urban policy/city planning discussions dwell on top-down plans and “visions”.  They even call it “smart” growth.


Tuesday, July 09, 2019

Engines of growth -- and new ideas


Fly low over a major urban settlement and what do you see?  A mesh of an uncountable number of supply chains, including supply chains for things and for ideas.

Discussions of cities and how they work are of three kinds. Economists like the neoclassical model of spatial equilibrium; sites are evaluated by competitors and equilibrium site rents emerge. Designers (often utopians) like ambitious plans: their top-down design skills can be scaled-up significantly. Followers of Jane Jacobs disagree and celebrate the complex spatial arrangements that emerge bottom-up; knowledge is complex and dispersed.

Most urban planning is about growth controls, containment, limits to sprawl – all of which are based on an abiding faith in getting big things right, top-down.  The fact that most urbanization continues to be at the edges demonstrates that the old-time religion fails again and again. But it does impose costs, notably housing unaffordability for many. “Costs of sprawl” indeed.  These are the costs of anti-sprawl.

Agglomeration (often vaguely defined) explains why cities even exist. My favorite approach to agglomeration introduces the idea of supply chains for ideas. Think of it this way.  Ideas are not simply “in the air” and therefore public goods – and a challenge to economic modeling. Rather, we keenly seek useful ideas for our various projects (thank you, JoelMokyr).  Also, as we engage in normal (ubiquitous) supply chaining, we are likely to exchange ideas along the way.  At many of these junctures, ideas can be re-stated or refined, perhaps in new and interesting ways. As new ideas make new product, there is feedback to ideas. Ideas are purposefully exchanged and renewed. How else would we get enhanced productivity and growth?

Supply chains are all about specialization and gains from trade.  Supply chains can be very long and very complex. They are ubiquitous. We all participate in an uncountable number of supply chains – for things and for ideas – as demanders and as suppliers.  Whereas Coase taught that entrepreneurs and managers grapple with the make-or-buy challenge, add the obvious thought that what to make or buy where is embedded in these decisions.

Everyone is keen to find conveniently located trading partners -- where trades can involve things and/or ideas. We approach site choice with this in mind. Exchanging ideas may (or may not) involve nearness.  Tacit idea exchange and trust-building may require nearness. Many ideas, many things, many modes of communication: many choices to evaluate and trade off.
 
John Cho and I have shown (using plant location data for Los Angeles) that nearby (same census block group) location (“clustering”) is barely explained by input-output links. These (sales as well as purchases) only explain about 2% of the block-group association. That leaves supply chains for ideas.

Enhanced discovery, growth, and human betterment depend on how things are arranged in space. Let the sharp people discover these. There is no other way. This is how cities become "engines of growth."

ADDED

Listen to what Will says about cities.


Sunday, July 07, 2019

Be a persuader


David C. Rose explains Why Culture Matters Most. Small-group moral intuitions, small-group trust, are our heritage. But how to get large-group trust? How do we get and sustain the many individual acts that create and sustain large-group trust? Large-group trust is a commons and hard to sustain. Rose writes that today's multiculturalism embraces tribalism and is a step backward. Yet he remains optimistic. “Changing prevailing beliefs is hard but we have done it before.” (p. 168). He cites the civil rights movement and the environmental movement as recent spontaneous examples.

Civil rights, yes. Re environment, its complicated.  The LA Times reports L.A. is hemorrhaging bus riders — worsening traffic andhurting climate goals” (June 27, 2019).  The LA bus system has been declining for years because of the 40-year (and counting)  MTA drive to build high-cost-low patronage rail transit.  They want to “get people out of their cars”. But they are moving in the opposite direction. I keep citing Baptists and Boootleggers (thank you, Bruce Yandle). It’s one of those ideas (like economic growth) that once you start thinking about it, you cannot get it out of your head. 

So Mancur Olson was right. Cronyism is inevitable in the modern mixed economy – and it just gets worse over time.  In this conversation, George Will and JonahGoldberg conclude with, “be a persuader.” This is from two of the best. It will have to do.

Monday, June 24, 2019

Perhaps

There are many possible futures we hope are not in our future. Nuclear war, meteor colliding with Earth, infectious diseases that we cannot stop, many others.  The consoling thought is that (for all we know) the odds of a bad outcome are low. But here is a scary future that is by no means low-odds: is crony capitalism inevitable?

The widespread acceptance of "green" policies (accompanied by the constant bleating that climate armageddon is inevitable) is a case in point. Here is Matt Ridley. Does Bjorn Lomborg appear on school syllabi except in isolated cases?

As the wise Bruce Yandle showed us, when bootleggers and the baptists hold hands, we are in trouble. I just started reading George Will's new book. He gives up on today's Republican Party as being sensible on this (or other) issue(s).

What to do? A Constitutional convention is unlikely.  Executive of legislative action is, by definition, unlikely. That leaves the courts. This morning's WSJ editorial on the court suggests that a new seemingly originalist court is finding its legs.  Perhaps there is an antidote to ever more cronyism. Perhaps.

ADDED

Bjorn Lomborg interviewed by Russ Roberts.

Wednesday, June 05, 2019

Road diets

It's clear that most people like their cars. But it is also true that many people like to complain about cars and traffic. Some of the confusion comes from the fact that the auto-highway system is poorly managed.  Access and parking ought to be priced. But many planners see pricing as exotic and/or nefarious. Bob Poole's latest book is a great reference.  These are policy failures even though textbooks still call congestion a market failure.

The latest in a long list and variety of policy mis-steps in the transportation field involves "road diets."  There is nothing exotic or arcane here. Take lanes from normal traffic (in the interests of cyclists or just plain anti-auto animus) and first responders cannot get through. And people die. Nothing says policy failure more than needless death.

Look at the HBO Chernobyl history. Or look here. Needless death from politically inspired incompetence. Thirty (perhaps more) people died.  We will kill many more with our road diets.

ADDED

From the anti-auto hysterics. http://www.newgeography.com/content/006325-when-it-comes-road-diets-small-businesses-are-biggest-losers

Tuesday, May 21, 2019

Help for graduates


Climate change is hard. It is a global phenomenon and any effort to “do something” must involve seemingly near-impossible global political cooperation. Sacrifices made by already relatively Green U.S, citizens are, about virtue-signaling which is in much demand throughout the U.S. (and beyond) these days. Joseph Epstein explains.

Betting beats BS, they say. Trouble is that there are few instances where the two parties can agree to terms and then sign on to the deal. The famous “Doomsday” bet between Julian Simon and Paul Ehrlich (which Simon won and was ready to repeat) was an exception.  But outcomes like this matter very little. Virtue signaling is too important.

Nevertheless, a fine addition to debates like this is Pierre Desrocher and Joanna Szurmak’s Population Bombed! Exploding the Link Overpopulation and Climate Change. The book is informative, well sourced, and clearly written. In addition, the final chapters wonderfully probe the mind set of the pessimists. Pessimists-zero-summers-neo-Malthusians-“anointed” elites (thank you, Tom Sowell) are given their due in the chapter entitled “Blind, blinkered and bought?”
Much of this has been said before, but not (in my view) this well.

The NY Times Book Review often asks authors which one book they would have the President read. I understand he does not read much. But he and many others would benefit from the Desrocher-Szurmak book.  Better yet, of the many young people graduating this month, many very likely will not have heard these arguments. Help them.


Saturday, May 04, 2019

What is the Fed to do?


The U.S. economy is doing well -- and no one really knows why. Keynesian macro-economics (aggregate demand economics) is no help because there is no theory of mood and investment. How could there be one? The donnish Keynes simple wrote investment off as from "animal spirits".  Not much has changed. The Obama-Trump hand-off seemingly incited animal spirits. With no better theory, that's all we have.

With no useful models, we are left to just argue over Fed monetary policy.  Is there an employment-inflation trade-off? What would be the timing? No one knows. Without a theory of how and when we get new and improved labor productivity, there is no answer. 

Can we ever get a better (useful) macro-theory to guide the Fed? Will the pretense of knowledge ever subside? Probably not. Enter Scott Sumner and the introduction of (you guessed it) markets to guide monetary policy.

"You can think of markets as a sort of super committee with 7.3 billion potential members, instead of 12. Markets are privy to even more useful anecdotes and impressions than is a committee of 12, and markets have even more perspectives and underlying models. ... So why not have the Fed set a 4% NGDP target, level targeting, and offer to sell unlimited NGDP futures at 5% and buy unlimited NGDP futures at 3%? In that case, the rule would be that the Fed is forced to put its money where its mouth is, anytime their policy views sharply diverged from the market consensus on expected NGDP growth. As a practical matter, the huge mistake of late 2008 would have been impossible under my ‘guardrails’ approach because investors like me would have gone short NGDP futures at the 3% price, as it was very clear we were going to have sub-3% NGDP growth in 2009. (NGDP actually fell by roughly 3% from mid-2008 to mid-2009.) If the Fed didn't respond adequately, their losses would have been massive. ... In this vision of monetary policy we have the best of both worlds. The ‘wisdom of crowds’ that you get from decision-making by committee, as well as the rigorous constraints on monetary policy imposed by rules.” Scott Sumner, Why Not Both?



Wednesday, April 17, 2019

Where's the cronyism?

I enjoyed Tyler Cowen's BigBusiness: A Love Letter to an American Anti-Hero.  Indeed, I have not yet come across a negative review. There is a chapter on crony capitalism ("How Much Does Big Business Control the American Government"?)  Corporations are cited as spending about $3 billion a year lobbying the federal government but they spend $200 billion advertising (p. 171).

Sad to say, perhaps these corporations get the job done with more leverage and fewer dollars. That, of course refers to the "Bootleggers and Baptists" model developed by Bruce Yandle. Unmentioned in Cowen's chapter but perhaps the most powerful model in public choice. In politics, assembling winning coalitions matters most. In a world where many voters are rationally (and irrationally) ignorant, assembling such coalitions is quite doable and perhaps even inexpensive. Hence, "only" $3 billion.

But perhaps the worst cronyism involves the public schools. Politicians dare not cross the unions involved. Poor performance is routinely ascribed to "underfunding."  But two scholars who know of what they speak reported this a few years ago: "Nor is money the answer. The U.S. spends $12,000 per pupil in grades K-12, one of the highest in the world. Among U.S. states, increments in spending per pupil between 1990 ad 2010 show no correlation with changes in student performance." (P.E. Peterson and E.A. Hanushek, WSJ, Sep 12, 2013).

This morning's WSJ includes a story on charter schools in New York.
Most children at urban public schools aren’t learning what they should. So it’s encouraging to see New York Governor Andrew Cuomo ask fellow Democrats who run Albany to lift the cap on the number of charter schools allowed in New York. 
The state now caps the total number of charters statewide at 460. But in New York City, where the demand is greatest and where 235 charters are now teaching 123,000 students, the subcap has already been reached. New York public schools teach about 1.14 million students overall with a budget of some $25 billion. 
Why cap the number of good schools? The most recent state test results for grades 3-8 show that while the majority of New York students attending traditional public schools are not proficient in either math or English language arts (ELA), a majority of charter school students are. 
For New York City, the charter performance is even more impressive when broken down by race. At city charters, 57% of black students and 54% of Hispanic students pass ELA, compared with 52% of white students statewide. It’s the same in math, with 59% of black students and 57% of Hispanics at city charters passing, against 54% of white students statewide.

The Economist (April 13, 2019) notes "Governments should stop regarding private education as the enemy." Who are "governments" in this case? They are the shameless coalition of cronies who are doing great harm to some of our poorest children and families.

Sunday, March 31, 2019

Time horizons



Robert Shiller writes “Modern Monetary Theory Makes Sense, to a Point” (MMT) in today’s NYT.  What is MMT?  It comes out of the Bernie Sanders campaign (among others) and seems to say “print all the money you want -- because you can.”  Sound silly? 

The printing must be for “good causes.” But aren’t they all? 

And increased national debt is not a problem “because we owe it to ourselves.” But who is “us”?  Mercantilism (you would have thought) was disposed of many years ago.  Are nations meaningful economic entities?  Most people are interested in with whom they trade insofar as whether they trust them enough to arrange a mutually attractive deal. Nationality only enters the discussion when political economy becomes tribalist crazy. There is way too much tribalism in the world without this.

I have been driving Japanese cars almost my whole (driving) life.  The national origins of the product are irrelevant.  So it is with most purchases – unless politicians seize on national origins of product for their own jingoist reasons.

But say this for the MMT people. They have three things going for them. (1) Americans (for the most part) have stopped caring about the national debt. (2) And – to this point – they have been right. The world continues to want U.S. securities in their portfolios.  (3) And politicians love to spend but hate to tax.

So go for it? Political time horizons are what they are. Reason #995 for small government.

ADDED

Arnold Kling calls it Modern Ponzi Theory

Wednesday, March 27, 2019

Planners and policy makers, call your office

People who talk about macroeconomics are captivated by the Philips curve trade-off between unemployment and inflation.  The thinking has been re-packaged many times but the idea seems not to go away.  When there is economic growth, there is the possibility of "overheating" and inflation. So, do something! Trouble is that the theory tells us nothing about timing.  So mistakes are made and policy-induced business cycles follow.

Likewise, when it comes to cities, there is usually just one (old) idea. Spread and "sprawl" are costly and must be avoided.  Contain "sprawl" and do "containment," "clustering," urban "growth boundaries," etc. Evidence that this is misbegotten arrives almost daily. Look at Newgeography.com.  Also look at this morning's WSJ which includes "A Decade After the Housing Bust, the Exurbs Are Back."

Rank the top ten U.S. urbanized areas for all of the recent census years. In 1950, the top ten (in order of population) were New York, Chicago, Los Angeles, Philadelphia, Detroit, Boston, San Francisco, Pittsburgh, Knoxville, St. Louis. For the 2010, it was New York, Los Angeles, Chicago, Miami, Philadelphia, Dallas, Houston, Washington, D.C., Atlanta, Boston. Gordon and Lee report the ranking for all of the seven intervening census years.

Here are number of intercensal rank changes (from the top): 0,1,1,1,2,2,4,4,6,6.  New York was always #1 but there is natural churn.  More churn as you move down from New York. Stability towards the top.

Growth happens when net agglomeration economies prevail. How do the bigger places retain a net agglomeration advantage? By growing at the edges. No costs of sprawl. Quite the opposite.

Planners and policy makers, call your office. And do read Alain Bertaud's Order without Design.

A Decade After the Housing Bust, the Exurbs Are Back

Tuesday, March 12, 2019

Non-partisan?

There are probably good medical definitions of overweight and underweight. There are many other serious examples. But many other casually used overs- and unders- are hard to define.  They are rhetoric. We hear many complaints about things "overpriced." More that I want to pay? Or the popular "I am underpaid," even "underappreciated?" Many more.

In private life there are bankruptcies and business failures. In public life, these are rare. Instead, many agencies or services are "underfunded." There is seldom recognition that something is wrong and the outfit should re-group and leave us alone.  Perhaps some private businesses on the verge of bankruptcy entertain thoughts of being underfunded. But if capital markets do not come to the rescue, there are probably good reasons. (Seeking cronies in government is another unfortunate approach.)

At the local level, is there an excuse for potholed streets? Why do the folks with clear responsibilities for the basic duties of local government fail?  One would think that fixing the potholes is non-partisan. One would think that the things that really matter to most people are the purview of local governments. One would think. (And that may be the case for smaller jurisdictions. The Homevoter analysis suggests the same.)

One would be wrong. Big cities are different. By all means, pay attention to this when referring to "local government".  This is not a simply defined sector. At the large-city level, instead of the basics there is preoccupation with social justice and climate change programs. Why fix the roads? Big-city politicians secure election by looking after a coalition of labor unions (their pay and their pensions) plus the fans of "good causes." Bootleggers and Baptists is powerful as always.

Non-partisan suppliers of public services indeed.

ADDED

The people who cannot fix the potholes do embark on transit projects that cost huge amounts but serve very few people. In fact, net ridership increases are negligible (in a good year) but usually negative. Here is the latest for L.A.  Again, stop talking about "local government". Big-city local government is special and not in a good way.

More on "underfunded".

Monday, February 25, 2019

Slippery

Socialism and Capitalism are fraught labels that many people will define in their own convenient way. Crony capitalism is surely the wrong capitalism but perhaps defines our unstoppable drift. Both political parties inevitably find cronies with whom they would like to do business: special dispensation in return for political support. Too many businesses sign up for the deal.

Millennial voters are supposedly prompting a shift to the left among would-be candidates for the Democrat Party's nomination for President. Interesting political footwork will be on display for some months. Democrat Party Chair Tom Perez was on one of the news shows this AM showing off some of his dance steps.  Many of the things that many voters seemingly enjoy, he mentioned, were once deemed "socialist." He cited Social Security and minimum wage laws. Others add the modifier "democratic" socialism to distance themselves from the well known socialist catastrophes; Venezuela's Maduro and the plight of his nation are in the news daily. Others prefer current European examples. Arnold Kling notes that they get the story less than half-right.

Russ Roberts and Mike Munger discuss crony capitalism in this week's Econtalk. Is crony capitalism inevitable? Does our Constitution protect us?  Does our culture protect us? Are both layers of protection fraying? Did both political parties (and most economists) wrongly embrace bail-outs in 2008? Did they give away the store? Did they provide ammunition to the left that will be used to challenge defenders of market economics for many years?

I enjoyed the conversation and encourage others to listen to it. I did not come away with the feeling that the drift to cronyism can be arrested. I do not see a modern-day Churchill with the rhetorical and intellectual skills to turn the tide and make the case that "democratic socialism" or cronyism are slippery slopes to avoid. Far from it.


Monday, February 18, 2019

Sunk costs


In recent weeks, California’s new governor canceled (actually scaled back) California’s high-speed rail (previous post), Airbus canceled further work on the A-380, and Amazon has second thoughts about New York city. Is it the end of the sunk cost fallacy? Not really. The sunk cost fallacy results from the natural human tendency to not admit mistakes – and to somehow strive to redeem mistakes. Gamblers seldom walk away from a losing streak (casinos make a lot of money).  Couples and friends with relationships gone sour often stick with them for many years. (We seemingly have no data on this).

Throwing good money after bad has limits. More than half of new business fail within five years. But this is less clear when other people’s money is involved. It is also less pronounced when Bootleggers and Baptists coalitions are in play. Finally, when (especially) vain politicians think of their legacy (and “legacy projects”, e.g. Jerry Brown and the bullet train) the plot thickens. Amazon walked away from a bad prospect way earlier than California did.

I expect that many more economists teaching intro courses talk about market failure than government failure.  I will never know why.

ADDED

http://www.newgeography.com/content/006228-airbus-a380-death-plane-born-die