Tuesday, December 16, 2014

Fasten seatbelts

Is it possible to have low interest rates and low down-payment requirements on home purchases without there also being risky lending? Events leading up to 2008 suggest that the answer is "no". But we are now heading this way -- again. Will this time be different? Who will be the adults this time? Marginal Revolution points to "fear of God" oaths required of Dutch bankers. But that's over there.

I just came across this from Arnold Kling and his review of Peter Wallison. Their summary of the last "boom" is convincing. I cannot see how a next round will be different. The participants are as politicized as ever. Housing markets and credit markets are seen as a great opportunity for policy makers of all stripes. Many on the left want to "help" low-income households get into a home; many on the right want to "help" builders sell more homes. That's quite a potent coalition.

Take a moment and take policy makers out of the picture; ask what would markets do on their own? Lenders would assess risk and adjust terms (including required down payments) accordingly. Lenders who guess wrong would (we hope) pay the price. Learning from failure is all we have. Fraudulent practices would have to be policed and prosecuted -- as with all transactions in all markets.

But in light of the potent coalition just cited, this is not the way housing will be financed in America. As they say, "fasten your seatbelts."

Thursday, December 11, 2014

Faith-based planning

It's an old story but the hole gets deeper. The idea was to "get people out of their cars."  Or perhaps to line the pockets of cronies.

Be way generous and find creative accounting ways to cut the cost figure in half. It's still a disaster.

What $15 billion (spent on rail transit in LA) buys*


Bus only system
Bus and rail

All unlinked trips (million annual unlinked) 497


Light rail

Heavy rail na

LA county population (m) 8

LA county immigrant population (m) 0.64

* Capital costs only


$15 billion spent: http://ti.org/RailCapitalCost.pdf

MTA unlinked trips: http://www.ntdprogram.gov/ntdprogram/

2010 county immigrant pop: http://www.caimmigrant.org/wp-content/uploads/2014/09/LosAngeles.pdf

1985 immigrants: http://www.censusscope.org/us/s6/m4480/chart_migration.html


"The trouble with Socialism is that eventually you run out of other people's money" — Margaret Thatcher

But what about "sustainability"?

Monday, December 08, 2014

Light touch?

The Economist of Dec 6 features "A planet of suburbs". They editorialize about "A suburban world." Yes, the world is becoming suburban. This is why it is useless to generalize about so large a space (so large a population) via a single moniker. One upon a time, city vs suburbs worked. But no longer.  Many suburbs now include "sub-centers" significant enough to rival many downtowns.

The coverage also suffers from the usual cliches about "sprawl". "Suburban sprawl imposes costs on everyone." The Economist has seemingly accepted that central planning has had its failures but its writers still look for the central planning of cities to somehow fix the many "market failures" of sprawl.

Getting this wrong is no small thing. Growth is the biggest economic challenge. Cities are "the engines of growth."  But we have to grasp how and why. I have often mentioned that the economy that serves us is one where supply chains are formed and managed via the interactions of large numbers of strangers. Many of us ask our students to read and ponder I, Pencil.

Many of the supply chains that serve us occur in cities. Parts of chains may be best under one roof (industrial organization) or within one city (spatial organization). Which parts? Getting each kind of organization right requires entrepreneurial trial-and-error. That means significant freedom. Top-down planning ought to be minimal and with a light touch.


Some ideas on growth -- for anyone who has not already seen this collection. 


Sunday, December 07, 2014

Amazing containerization

Here is Scott Sumner writing about, among other things, our modern world. I liked this part:  
Did King Louis the 16th of France (who was probably the richest person in the late 1700s) have a lower or higher living standard than an average American today? It depends on what you value. If you have a big ego, and like to live in a big house and be surrounded by people who flatter you, then you'd say he had a higher living standard. But he only lived 38 years (not untypical of that period) and lacked cell phones, TV, films, jet trips to exotic locales, Japanese and Thai restaurants, the internet, fast cars, etc. In some ways his life was quite monotonous. You can probably tell which life I'd prefer. On the other hand, if you read Thomas Piketty you might come to the conclusion that he'd make the opposite choice. ... However, I don't think antibiotics would have saved Louis XVI's life . . .
Or as William Baumol, et al. put it, “The most astonishing thing about the extraordinary growth and innovation that the U.S. and other economies have achieved over the past two centuries is that it does not astonish us.” 

I must say that I am astonished, and even more so, having just read Marc Levinson's The Box. Ports and transhipment points are bottlenecks and chokepoints. All the more reason to implement containerization whereby freight is easily moved from truck to train to ship and back again. Costs came way down. But not easily or in a simple way. Tremendous capital had been sunk into bulkhead ships -- and their established labor forces. To get to where we are now required a small revolution, including the difficult cooperation of regulators, port authorities, unions, shippers from different modes and competing countries, not to mention the major shipping countries (and their various port authorities) around the world. This did not happen overnight. Levinson tells the story and in a very readable way throughout. Read it and, once again, cherish the fact that all of this came about -- not instantly and not easily -- but in time to make our lives many times better than that of any Louis or any historic royal.

Wednesday, December 03, 2014

Silicon Valley

Here is Nicholas Lemann writing about Google in a recent New Yorker:
What about the emphasis on that ninja-attracting culture? That’s especially difficult to transport outside a tight radius from Mountain View. One of the ironies of the tech economy, duly noted by Schmidt and Rosenberg, is that while the products and the users are geographically untethered, the businesses that supply them are increasingly clustered in one physical location, Silicon Valley. That’s because of the unusual, and apparently non-replicable, infrastructure of support there: the Stanford engineering school, the Sand Hill Road venture-capital firms, the angel investors, the talent pool of coders and engineers, the technical-infrastructure providers. First-rate coders are in high demand, and employers, including Google, have to deliver special working conditions and high-performing stock options in order to keep them. The ability to attract talent has a much bigger economic payoff in Silicon Valley than it does in most industries; conversely, the rest of the world is littered with the remains of attempts to create the next Silicon Valley, complete with smart creatives.
There is untertheredness and there is clustering. We should think about location choice. Location and land are inputs in production and must be carefully evaluated -- just like all other inputs. All the players are involved in complex trades -- of things and ideas.  There is a complex and profound choice problem. Given the site choices available at any moment, we trust that entrepreneurs will make good choices, ones that poise them to succeed.  There is nothing static about this. There are many moving pieces and continuous re-evaluation. Land use planners cannot do this for them and must be prepared to be flexible. 

Ed Glaeser even suggests this: "Primary Idea: Eliminating Local Land Use Powers." It's worth reading.

Monday, December 01, 2014

Los Angeles

I want to re-post what Joel Kotkin and Wendell Cox say about LA traffic and transportation.  Read it. They are, of course, correct in their analysis.  Trouble is that this message has been falling on deaf ears for as long as I can remember.  Billions have been wasted on rail transit in LA and transit ridership remains stuck, very low considering the large low-income immigrant populations in the area. Kotkin and Cox explain that we are not and will never be another NYC.

But the mantra of public officials and the LA Times and other local worthies is that we "need" more funding to fix local infrastructure and you-name-it.  Why in the world would new money be spent more wisely than what has already been thrown away?  Because the same folks would do the deciding (and "analyzing") and spending.  High-profile projects will come before common sense projects. So there never can or will be "enough" money.

Saturday, November 29, 2014

Micro to macro

Aggregation is the price paid for modeling convenience. There is always the question about the nature of the bargain. Many economists worry that macro-economics assumes away most of economics -- including choice and discovery. But Paul Krugman cites evidence that Keynesians have been right (mostly); Tyler Cowen says not so fast.

There is little debate that no one predicted the depth of the recent recession. Krugman and others are scrambling to claim that they did get the slow recovery right. There is the problem of not just extreme aggregation but also the fact that the models pay no attention to public choice considerations. I doubt they can have much usefulness.

The Journal of Economic Perspectives (Fall 2014) includes a symposium on Social Networks. How can anyone resist Vasco Carvalho's contribution with this title: "From Micro to Macro via Production Networks?"  The analysis involves taking a national input-output model and looking for supply chains among the 417 BEA sectors.

But (1) Supply chains are everywhere and formed at much greater levels of sectoral disaggregation than 417; and (2) Supply chains tend to be situated locally and much more interesting than what can be found from studying  a national IO model. Industrial organization discussions ask how much of any supply chain is within the firm and how much is outsourced. The associated spatial organization question is how much of the supply chain that is outside the firm is local. Cities are agglomerations of supply chains (parts or whole) -- within and beyond local firms.  Getting this part right would be a better micro-to-macro.

Monday, November 24, 2014

The other four-letter f-word

Many people like to assert "fair" this and that. They usually get away with it in spite of the fact that they do not offer useful definitions. Perhaps there aren't any. So this is a big scam. Politicians and other grand-standers love to align themselves with policies and proposals that are "fair."

The U.S. graduated income tax is a mess. The Economist (May 25, 2013; gated) published these details: Changes to IRS code since 2001 = 4680; number of words in the tax code = 4 million; man-years spent complying each year = 3 million; percent filers paying for help = 89%; money spent on compliance = $168 billion; taxes owed but uncollected each year = $400 billion. This is a "progressive" tax with strong leavening of (and invitation to) crony-capitalism and lobbying. The various meanings of "progressive" seem to get stranger all the time.

One can say that almost anything other than the status quo would be an improvement. Here is a Hall-Rabushka proposal. In this version, there is a 19% levy on all consumption above $12,600 -- for a family of four. This was suggested some years ago so the numbers would change. Indexing is surely possible.  This H-R proposal does build in a high marginal tax rate as soon as spending crosses the $12,600 barrier. Is that "fair?"

How about no exemptions but a guaranteed universal basic income ($50,000 per family per year?).  "Universal" as in for everyone.  The super-rich would probably use theirs for charitable donations.  Is all this "fair?"  Think about no welfare administration plus a vastly slimmed down and simplified IRS. The still unfolding Lois Lerner saga (30,000 lost emails found!) adds to the attractiveness of the proposal.

If we could only place (and collect) a tax on use of the f-word. 

Friday, November 21, 2014

The big issues

When you think about immigration, the gains from trade argument is fundamental and significant ("Trillion Dollar Bills Left on the Sidewalk"). The humanitarian angle is also profound; the accident of birth arbitrarily leaves many people in hell holes. One has to like liberalized immigration -- by all of the "rich" countries. It would be nice for the U.S. to show the way.

I cannot get Arnold Kling's "three axes" model out of my head. He suggests that different people emphasize one of three "axes". These include freedom vs. coercion, oppressor vs. oppressed, civilization vs. barbarism.  He suggests that libertarians focus on the first, progressives on the second and republicans on the third.  And the three often talk past each other.

But each of the three views holds a grain of truth. This is why liberalized immigration cannot mean "open borders." The latter would bring in some bad actors. What to do? Pres. Obama as well as his Republican critics talk about "securing the border."  This is rhetoric. The U.S. War on Drugs is almost fifty years old, involves billions of dollars, and countless civil liberties abused -- and has failed completely. Borders were not "secured."  Anyone who lightly banters this one around owes us an explanation.  The "hell" really is in the details.

What markets cannot handle is left to politics. The drafters of the U.S. Constitution knew that politics is a necessary evil and thought hard how to guide and contain it. Change would be subject to checks and balances.

 LBJ had very big politics on his hands with civil rights in 1964. He won and settled the controversy by winning in Congress, not by issuing an executive order.  I trust that some lawyers will opine that the executive order(s) that Obama described last night have a legal foundation.  But that is not the point. The big questions (civil rights as well as immigration) are only settled when the three branches of government find a way to agree. LBJ understood that. I have no idea what Obama is thinking.

Thursday, November 13, 2014

Third arrow?

The financial press has accepted the catchy label "Abenomics" re Japan Prime Minister Shinzo Abe's proclaimed three-pronged economic policy. There would be aggressive fiscal and monetary policies as well as "structural reform". The latter is the famous "third arrow" that has not yet been fired. Launching fiscal and monetary largesse is second nature to politicians here and abroad. "Reform" is another matter.  But it's absence means the other two legs of the stool will not accomplish much. In fact, that's been the case in Japan, the U.S. and much of Europe.

The three-pronged stool idea suggests an equal distribution of weight. So it's a bad analogy. The part that could make a serious difference is number three, reform. John Taylor explains that (i) post-2008, the policies that came from Washington were erratic and ad hoc; and (ii) "reforms" have been mixed at best, e.g., Dodd-Frank.

And what do we read almost every day? Discussions of whether fiscal and monetary policies been aggressive enough. But it's not just the politicians, it's (most) economists on that same page too.

Sunday, November 09, 2014

Zero-sum and negative-sum

Today's NY Times includes "The LeBron Stimulus ... King James may resurrect a basketball team, but can he save a city too?"  To be sure, any shock ("stimulus") redirects expenditures and thereby reallocates resources. But there is less than meets the eye because this does not necessarily amount to new wealth.

Fans and others who choose to redirect their personal spending are by definition better off. But new sports facilities built via edict (city hall crony-boosterism) also redirects spending but increased welfare is by no means assured.  Similar misunderstandings surround practically all discussions of government stimulus. Redirection is among sectors as well as places.

The biggest error is the one that sees war (even WW II) as a great economic booster. Does anyone need to be reminded that wars are great destroyers? War efforts can prompt new technological achievements which can add to wealth. But one has to ask: at what cost?  It's the old Econ 101 question that must be attached to all "good ideas" and associated policies

This brings us back to Cleveland and LeBron James. Can anyone point to new productivity? Do basketball-energized Clevelanders work smarter and harder? Does capital and labor that may stream towards northeast Ohio work better and smarter in its new setting? The Times piece evokes Keynes' "animal spirits" and suggests that "mood matters." But we do not know. Microsoft in Seattle was a source of great innovation. Would Microsoft in Portland instead have been any less innovative? New ideas are embedded in new capital but to what extent does this apply to re-directed labor and capital?  Unless we have strong reason to suppose otherwise, re-direction is zero-sum; politicized re-direction is probably negative-sum.

Wednesday, November 05, 2014

Gravity still matters

I used to think that "monopolistic competition" is an oxymoron. (But more than 46,000 cites at Google Scholar.) I was stuck on "mono" meaning "one". It is actually about the impossibility of perfect substitutes and the fact that we each make personal judgements about which are the "good" vs. the "bad" substitutes.

So whether we shop online or the old fashioned way is not a simple choice. They are imperfect substitutes and each occasion involves a peculiar choice for each of us. This is elaborated in David Bell's Location Is (Still) Everything. The gravity law of retail gravitation is still valid -- and cities will not disappear. Coming almost 15 years later, Bell's book is the one to place next to Frances Cairncross' The Death of Distance.

The gravity formulation recognizes the friction(s) of distance as well as the attraction(s) of mass. Again, on a case-by-case basis we have personal subjective valuations of each. This includes whatever affinities or loyalties we may have for "first movers" into any product line. It also includes whatever agglomerations or clusters we choose to live in or visit.

No one ever said that marketing (or Tiebout-sorting) is simple. We form (and manage) networks in the real physical world as well as via the internet.  Bell cites many examples where the uses complement each other.  We often go online to help us with old fashioned shopping.

My major quibble with Bell's book is that he applies the Zipf rank-size rule to cities -- not the entire metropolitan areas. City boundaries are political and not functional. There is no reason for there to be a good fit.

Monday, November 03, 2014

Old downtowns and new tech

Manhattan's downtowns are the model that many American city planners dream of.  But it is not a plausible model in most auto-oriented cities. You get street life when enough pedestrians use the streets to get around proximate destinations. Today's NY Times includes "Los Angeles, in the Rider's Seat ... The personal car is still king in Southern California, but smartphone apps for ride-sharing services have made the city's night life more like New York's when it comes to accessibility ..."

The promise of the combination of smartphones, broadband, apps and smart tech entrepreneurs is well understood and appreciated. I expect that this is just the start and that the stagnationists are wrong. But the real point here is that we have another case of 50+ years of policies and public monies poured into downtown LA's revitalization with little effect. Then two things happened with which policy makers had little to do. The fall in street crime and now the rise of Uber-type services. In fact, the latter has to fight off the efforts of policy makers in LA whose impulse is to sustain the city-sanctioned taxi monopoly.

Hayek thought that policy successes are hard to achieve because policy makers are inevitably data deficient; they are also hampered by inevitable politicization. But as in my previous post, it is possible to achieve policy goals in spite of the policies enacted.

Matt Kahn sees all of this as pointing to the importance of '"consumer cities."  Finally, tech does not give us the "death of distance" or any such thing. Rather, old tech (downtown) and new tech (Uber) can complement each other to achieve something novel. Cities will keep spreading out and old centers will gain in some places.

Friday, October 31, 2014

The real world

Hydraulic fracturing is partly responsible for a positive "oil shock". "How Plunging Oil Scrambles Geopolitics" by Prof. Brenda Shaffer (gated) in today's WSJ looks at discomfort in Russia, Venezuela and Iran. But there are positive effects in all of the oil consuming nations also. Administration policy did not see this one coming; they do what they can to impede fossil fuel production and push hard for "renewables." 

We also have new records on Wall Street. High asset prices (that reward "the rich") are another one of those embarrassments because Washington policy (on its face) was to help everyone but "the rich." Policy (here and abroad) that keeps interest rates low do a so-so job providing an economic recovery but they do push up asset prices. Good for asset owners. What about the poor and the middle class?  Not so good. Here is a nice NYT summary.

Central planning is hard work. At best, you hit the target you want to hit. At worst, your policies backfire. We have neither. For the case of oil, we get a windfall of good economic outcomes from policies that are the opposite of those executed. For the case of asset prices, there is also a windfall but not the one policy makers had in mind. It could have been much worse. The worldview our policy makers use is seemingly not of the real world.