Detroit and much more

Today's WSJ includes "GM Prods Dealers to Sell Cars Online ...Software Lets Shoppers Bypass the Showroom."  There is an app. But there is also understandable opposition from dealers, most of whom have state franchise laws on their side. Dealers are influential in local politics.

I just read David Nye's America's Assembly Line which I greatly enjoyed. The book is a great blend of history, economics and engineering.  Students in at least these three fields will learn plenty.

But, to go back to today's GM news, Nye mentions that in 2002 only 6 percent of American cars were made to order whereas more than 60 percent were ordered this way by Japanese and German customers. "As a result, US automobile production was still 'pushed' to the consumer far more than it was pulled by orders" (p. 236).

Even great authors stumble. Why, of all people, does Nye mention "planned obsolescence" (p. 261)? Surely, Nye knows that the international competition he writes about has increased the quality and longevity of cars.  Nevertheless, a great read.

Hope

Richard Thaler writes about Americans' appalling financial illiteracy. As a result, many plan poorly and become dependent on others, including the various forms of public assistance.  This links to the various debts and unfunded liabilities at the various levels of government.  Timothy Taylor cites a 75-year $50-trillion problem at the federal level (mostly medicare and social security).

Federal budget problems are all over the news and have given us the (partial) closure of the federal government, the debt ceiling debate(s) and all of the associated problems.  Both sides have their well rehearsed talking points, many of which were recited on this Sunday morning's TV talk shows. It is just sound bites and talking points because of the many uninformed and untrained in the audience who Thaler writes about. They would be unable to grasp national financial planning and debt if they cannot even understand their own financial situation.

What to do? Tyler Cowen mentions that the brightest spot on the horizon for improved learning involves games. Here is the relevant quote from his recent econtalk conversation with Russ Roberts:

Russ: I agree with that. Let's talk about games. You have some interesting things to say about games and the application toward education. Guest: Well, if you ask in what sphere of modern life has education really succeeded, I think it's gaming. These games are incredibly complex. When I look at them I feel they are too complicated for me; I could never learn them. But the people who are interested--the game itself teaches people how to play. It's all done by software and very often online. And it seems it really works. They teach you in steps. They make it hard enough to be interesting but easy enough that you feel you are making progress. And in my view the big educational breakthrough has already come with games. It's just a question of how do we apply that to educating everyone else to do other things. And we're far behind on that. Russ: What are some of the ways that might be applied? Guest: Imagine an intro to economics textbook but structured more like a game, where you move on to different levels and maybe you capture pieces or you acquire points. And there's a competitive angle. And I'm not saying everyone has to do it that way. But I think there's really a big chunk of people who get interested in games, who would otherwise, say, never be interested in medieval history or battles or whatever else, but the games get the interested. And I think that's a big frontier for education, where we've actually solved the problem. We don't quite even know we've done it yet. Now we just need to apply what we've already learned.

Bill Gates and other philanthropists have been supporting various educational experiments. All this suggests that the way out may involve pairing philanthropists with gamers. The latter would have to invent games that boost financial literacy. Would that put an end to the sorts of claims the talking heads and pols were making on TV this morning?  One can hope.

Chicken and egg in LA

Last June, the LA Times lamented the low voter turnout for LA's recent mayoral election (23.3%). Today's LA Times reports that (no surprise to those who live here) we lead U.S. big cities in the condition of our roads ("L.A. has worst big-city road in the nation ...").  A coincidence?  Just like the fact that chickens and eggs are often found in close proximity. Chicken-and-egg will probably go on for a very long time. In our other cycle (voters are turned off-interest groups win and take all the money-city services decline-voters are turned off) how long can that go on?

Los Angeles' core area will continue to have declining share of a growing metropolitan area. The core and the periphery continue to hang on together -- even as their relative weights continue to shift. The New York metropolitan area has been #1 in the U.S. for a long time, even as New York City went through bad as well as good times.  LA has been #2 for many years too (although not as many) for the same reason. Chicago has been #3 since 1960 when it switched places with LA. There is remarkable stability at the top because big cities get big suburbs.

How can "car crazy" Los Angeles have the worst roads?  How can it survive with a dysfunctional city hall? It hangs on as center of a large patch that offers just enough variety of opportunities to remain attractive to just enough labor and capital. This suggests that the dysfunctional city hall will also survive.

Not how this game works

The LA Times reports polling of California voters, the majority of whom now report buyers' remorse and worry over the California bullet train project. "52% want bullet train stopped, poll finds ... California voters are showing signs of buyer's remorse over the $68-billion bullet train project, poll finds." 

Sorry guys. That is not how the game is played. 

Sunk costs are irrelevant every time businesses drop product lines or even close shop. These are tough choices made every day. But sunk costs are seriously considered in emotional contexts. Marriage counselors routinely deal with some version of "I cannot leave this [unpleasant] relationship; I have invested so much in it." My guess is that such counselors do not then reach for the economic thinking.

It is not at all strange that sunk costs are taken seriously in politics.  When it is other people's money, we may as well go with unexamined impulses.

Here politics as usual where rhetoric matters.  The great practitioner of all this was Robert Moses. Robert Caro does a good job laying it all out in The Power Broker.  My copy is not handy but the key passage is cited by Peter Ubel here.

Is this a cynical use of power? Is there any other kind? Is the "buyer's remorse" of Californians relevant to anything?  Once some concrete is poured, it's all over.

ADDED

Here is Timothy Taylor citing a wonderful paper by Cliff Winston.  The way transportation should be (Winston) and the way it is (Robert Moses, Jerry Brown and countless others) remain breathtakingly far apart.

Beyond zero? (not a Fed funds rate story)

What is the most important thing we learn from economics? High on the list would be the idea of consumer sovereignty. That goes with the idea of the invisible hand.

Consumer sovereignty leads us to the idea of subjective choice and the conclusion that consumers evaluate options in consumption in their own personal ways.  Actually, they trade-off the various (many) aspects of any consumption choice.

This is why we say that judgments of "good" vs. "bad" substitutes are in the eyes of every beholder.

This is all old stuff but it comes to mind when one sees "College Football, Minus the Students" in today's WSJ.

The scene at home football games here at the University of Georgia is almost perfect. The tailgate lots open at 7 a.m. Locals brag of the bar-per-capita rate. The only commodities in greater abundance than beer are the pro-Bulldogs buttons that sorority girls wear.

There's just one problem: Some students can't be bothered to come to the games.

Declining student attendance is an illness that has been spreading for years nationwide. But now it has hit the Southeastern Conference, home to college football's best teams and supposedly its most fervent fans, giving athletics officials reason to fret about future ticket sales and fundraising.

As it turns out, Georgia students left empty 39% of their designated sections of Sanford Stadium over the last four seasons, according to school records of student-ticket scans. Despite their allocation of about 18,000 seats, the number of students at games between 2009 and 2012 never exceeded 15,000
.
Winning isn't even necessarily a solution. The average student crowd to see last year's Georgia team—which finished the season ranked No. 5—was almost 6,000 short of maximum capacity. Even at Alabama, 32% of student seats went unused by students between 2009 and 2012, when the Crimson Tide won three national championships. Alabama coach Nick Saban wrote a flattering letter last week in the student paper to recruit students back.

Georgia officials have been so concerned by student attendance that they reassigned 2,000 seats previously reserved for students to young alumni before this season. "It was a significant hole, and it was very noticeable," Georgia athletic director Greg McGarity said. "It was way too obvious."The inscrutable behavior of 18-to-22-year-olds is actually understandable in this case: For students today, there are more reasons than ever to skip the game.

The cellular reception at the stadium is bad. The nonconference schedules these days are worse. And the high-definition broadcast at home (or at the frat house, the bar or wherever) is gorgeous. The result is students are focusing on the few marquee games—like Saturday's matchup of No. 6 LSU and No. 9 Georgia—at the expense of others.

We have options as never before. Being at the bar (or wherever) in front of a large HD screen with closer rest rooms, perhaps a larger selection of beers (and more), often at lower prices (and no limits) than at the stadium appeals to many. Add better smart-phone reception, a controlled climate and much more and we see the results. Video on demand will only get better and cheaper.

So the biggest straw man is the thought that there is nothing like being there. For some, yes. But this is a moving target.  Attitudes change.  Many already have.

Dropping the prices of stadium seats my not end at zero.  Perhaps it might be a good idea to pay people to attend and fill those empty seats. That would make for a great looking stadium spectacle -- for all those watching on their big-screen or small-screen devices.

Phelps on cities

If you like reading economic history (how can you not?), one of the best I have seen is Mass Flourishing by Edmund Phelps. I am not sure I agree with his analysis of today's economic problems, but the first half of the book is splendid.  He asks the basic economic questions.  Why are some places rich and some poor?  Why did economic growth really get going in 1815-1820 -- and then in only a few places in Europe?  Phelps carefully evaluates all the usual suspects (culture and institutions being high on the list although he thinks they are linked). But then reports he is still short and something is missing.  I quote at length from pages 104-106 because his analysis is compelling.

Yet something is missing.  Why was it that, next to innovation in the 19^th century, especially after the first quarter with its wars, innovation was so paltry throughout the 18^th?  The answer may be that something may have grown to multiply or amplify the faint impulses of innovation – to potentiate the democracy and the vitalism that were already present at relatively high levels by the last quarter of the century.  But what might that something be?  Economic historians appear not to have identified it.  Why did innovation come earlier to Britain, America, and possibly Belgium than to France and Germany?  We do not have to share de Tocqueville’s impression that culture is everywhere the same to wonder whether differing intensities of the above forces argued to be central – the corporation, democracy, vitalism, and economic freedom – can wholly or largely explain why France and Germany got their dynamism later that the others.

The missing piece, which is obvious once one hits on it, is population density – the number of working-age persons in the country, excluding remote areas.  Not many innovations in a country can be encouraged by its culture and promoted by its institutions if there are few minds.  (Why, then, are Icelanders, with their small numbers, not backward and therefore poor?  The reason is their proficiency in English and Scandinavian languages virtually integrate them into the economies of America and Europe.)  Having more persons, all energized by vitalism and encouraged by democratic limits on arbitrary powers, surely increases the total number of new ideas being generated, even it leaves unchanged the number per generator.  Further, if the resulting new products and methods generally lead not to private use by the developers but to adoptions over the country – to diffusion – the end result is an increase in the number of innovations:  the new products developed by companies themselves and those developed by other companies, which grew in number with the increased population.  Thus, the more people there are in a rather integrated country to inspire, develop, market, and try out new ideas, the greater is its prospective rate of indigenous innovations per capita – provided the necessary institutions and culture are in place.  (Why, then, was China, despite a population far greater than that of Britain or America, not generating many innovations in the 19^th century?  Or earlier?  There was a phenomenal abundance of entrepreneurs in China’s cities in the 18^th century, the Irish economist Richard Cantillon reported in his 1755 study.  The reason is China was seriously lacking in the economic institutions or the economic culture of both needed for innovation, indigenous or exogenous.  It is far less lacking in the 21^st century.)  If the economy of the West experiences more innovations per capita now than 100 years ago, it is mainly because there are many more people engaged in innovation in that economy;  it does not follow that every (or any) subpopulation of a given size generated more new products and methods. 

The benefits of increased population come not only from more creations, most of them available for adoption by others.  If new ideas and new products based on them are striking a country, they are likely to spread faster through the economy the more dense the population is – just as heat travels faster when there are more molecules and a disease is apt to spread faster (and farther) through the world the greater the population size.  Ideas are communicated very much like diseases.  More people, more relays.  Also:  more people, bigger market.  The Beatles could play 1,000 nights in Hamburg, that city being big enough, but not Liverpool.

It's the cities and their role in facilitating the exchange and development of ideas. Yes, it's Jane Jacobs but in the hands of a masterful economist. Phelps' broad brush uses a generalized population density measure but notice that he has to arrived at his story, having carefully explored the others contenders.

Urban economists have for most of the history of the field modeled the journey to work as the spatial organizing principle. Recently, they have rediscovered Jane Jacobs.  The exchange of ideas is a key dynamic force.  

Aggregating capital (as many economic theorists do) does great harm because we get economic growth if capital markets screen projects so that we get the good ones and do not invest in the bad ones. But we should no sooner aggregate land.  Location matters and sites have peculiar advantages. We want an assignment of activities to sites such that producers (including individuals) go where they think they can be productive.  This includes where they can burnish their thoughts and ideas.  Ray Oldenburg wrote about this.  Look at the title of his book.

Snowflakes and cities

There is so much in Vernon Smith's Nobel acceptance speech (recording here and reprinted recently in the AER) that I have been going back to it more than once. Start with the three quotes that he begins with. Look at the one by Herbert Simon.

We have become accustomed to the idea that a natural system like the human body or an ecosystem regulates itself. To explain the regulation, we look for feedback loops rather than a central planning and directing body. But somehow our intuitions about self-regulation do not carry over to the artificial systems of human society. (Thus) ... the ... disbelief always expressed by (my) architecture students (about) ... medieval cities as marvelously patterned systems that had mostly just “grown” in response to myriads of individual decisions. To my students a pattern implied a planner ... . The idea that a city could acquire its pattern as “naturally” as a snowflake was foreign to them (Herbert Alexander Simon, 1981, 1996, p. 33).

Cities as snowflakes does not mean that the cities or the snowflakes involve a central planner. I often cite an old David Brooks NY Times Magazine piece (April 9, 2000) in which he notes that, "The ritziest suburbs are filling up with urbanites who swore they'd never live there. To make them feel at home, retailers are rapidly turning suburbia into SoHo."  We get this outcome (and an uncountable number like them) from markets, not planners.

A propos Brooks, my student Qian An has found that the average time spent to get to a shopping destination in the large U.S. metropolitan areas was just over 14 minutes in 2009. It was just over 13 minutes in the suburbs. The travel time variance was also smaller in the vast and "sprawling" suburbs. That is one nice snowflake.

The half-life of cliches is a thing to behold

Today's NY Times includes "Is Suburban Sprawl On Its Way Back?"  Not to beat dead horses, but it was never gone. Most Americans not living in rural places live in "the suburbs". This has been the case since 1970 (see Table 1-15).  Wendell Cox has been flogging this issue for years. Bob Bruegmann spelled it out carefully in one of my favorite passages, as follows:

Most American anti-sprawl reformers today believe that sprawl is a recent and peculiarly American phenomenon caused by specific technological innovations like the automobile and by government policies like single-use zoning or the mortgage interest deduction on the federal income tax.  It is important for them to believe this because if sprawl turned out to be a long –standing feature of urban development worldwide, it would suggest that stopping it involves something much more fundamental than correcting some poor American land-use policies.  In the following chapters I will argue that the characteristics we associate today with sprawl have actually been visible in most prosperous cities throughout history.  Sprawl has been as evident in Europe as in America and can now be said to be the preferred settlement pattern everywhere in the world where there is a certain measure of affluence and where citizens have some choice in how they live.

The writer and editors of the Times' piece could also have benefited from just a little research beyond the likes of Smart Growth America. The article dwells on all the awful commutes that must be the fate of suburbanites. But there is more to the story. Prof Alex Anas has summarized substantial research on commuting and cities this way:

The data on the largest U.S. MSAs show that commute times increase only slightly with city size: the elasticity of the average commute time with respect to the number of workers was about 0.1 in 1990 and 2000. (p. 146 of this Handbook).

People and firms make location choices that are strategic rather that suicidal. This includes finding ways to avoid impossible commutes. But that is a matter of trade-offs and we all make individual choices, including lengthy commutes by some, all things considered such as schools, prices, other destinations, etc.

Looking at the bigger picture is always a good idea. But that old time religion casts its own spell.

 

Sharing

James Surowiecki has an insightful column on the sharing economy ("Uber Alles") in the Sep 16 New Yorker.

Owning is no longer all it's cracked up to be. There is a lot of slack in what is owned but not used. Much of the not-in-use stuff can now be shared because, thanks to the internet, transactions costs are falling.  People are OK not owning but sharing/renting. Re the signaling model, he cites NYU Prof. Ann Sundararajan, "Instead of being tied to owning one car, I can drive twenty different ones." There is a signal!

There will always be the lobbyists and their regulator buddies to slow things down.  Re the one-million dollar price of a NYC taxi medallion, economists have been saying all along that regulators can reasonably regulate safety without closing the market. Well look at this: "If these companies become more established, they’ll have to reach some kind of accommodation with regulators, perhaps along the lines of rules that California’s Public Utilities Commission recently proposed, which would let Sidecar, Lyft, and Uber operate if they implement certain safety and driver regulations."

For 2011, the ACS reports there were 138.3 million U.S. workers, of which 76.4% drove to work alone. Transportation planners rue all of the "wasted" empty seats being driven around. But that's the wrong question. Carpooling has high transactions costs but Surowiecki reminds us that car-sharing has transactions costs that many people are surmounting.

No warning label.

Perceived inequalities are on people's minds.  We spend a lot of time worrying over our status and devising signals that might boost our place in the pecking order.  The measured indicators, including what we earn, get the most attention.  No wonder this makes it into politics; class warriors feast on it. "Fairness" and "equitable" are almost impossible to define in practical terms but serve as indispensable rhetorical devices that are used interchangeably with "justice" in normal political discourse.

Economists are involved because they are skilled at interpreting the data that we have. Data on income distributions are widely available but all of the shortcomings associated with these measures as indices of well-offness are less discussed. This is why one would think that a symposium on "The Top 1 Percent" in the current Journal of Economic Perspectives (open access) is especially useful.

It's easy to be misled. Count dollars per person or dollars per household?  For inter-temporal comparisons, household size changes.  Count in-kind transfers?  How? These are bigger than ever?  What about consumer surplus?  Much of what I get via the internet is practically free but quite valuable.  What about person-to-person swaps?  The list goes on.

But the biggest data challenge of them all involves the "comparing snapshots" problem. Inter-temporal comparisons are complicated by the fact that many people move in the pecking order. Young people, for example, are most likely to move up as they leave school, go to work and eventually achieve seniority. But most of our data on income distributions do not account for this phenomenon. Not acknowledging the problem prompts many people to make the mistake of asserting that the passage of time accounts for increasing inequality.

Comparing the shares of national income that accrue to any group (such as the top 1%) over many years misleads. The normative claim that we do want to be able to test is one that recognizes income mobility. How much is there? How does that compare to other times and other places?

Yet, of the six papers included in the JEP symposium, only one (by Miles Corak) addresses the mobility question. The other six should carry a warning label. I say this in all seriousness because the eagerness to misinterpret the data -- and to suggest ever more redistribution -- practically defines the politics we have.

Coase in urban economics

The passing of Ronald Coase earlier this week prompted many reflections on the man and the work.  I particularly liked this one. Most comments cited his two most influential papers, including his 1937 "Nature of the Firm."

Shorthand summaries of the paper's argument note that firm managers face many "make or buy" decisions. Buying involves transactions costs while making involves monitoring costs.  Management is hard work because these are tough choices that must often be revisited and reevaluated.

Another way to say it is to ask how much of any product's supply chain should be within the firm and how much should be beyond the firm. Here is a fine discussion of global supply chains in the modern world.

All this brings up the corollary of organization. Make or buy? If buy, then buy where? Locally or not? Needless to say, the way our cities look hinges on this elaboration of Coase's question. How much proximate co-location do we get? Consider these two views:

“ … a central paradox of our times is that in cities, industrial agglomerations remain remarkably vital despite ever easier movement of goods and knowledge over space.”  “Introduction” in Agglomeration Economics, E.L.Glaeser); and

“When co-location is infeasible, networks may substitute for agglomeration. This possibility of substitution means that small regions may survive and prosper …” “Agglomeration and networks in spatial economies” B. Johansson and J.M. Quigley.

I do not think there is a paradox. I do not think that it is either-or. The agglomeration vs networking choice is linked to the make-or-buy choice.  It has long been recognized that location and trade are part of the same puzzle. It is a huge and complex puzzle that Coase properly saw as way beyond "chalkboard economics."

Imagine

Greg Mankiw likes the idea of carbon taxes ("A Carbon Fee That America Could Live With ... To deal with climate change, internalize the externalities"). This is is the part of economics everyone likes. It's in all the textbooks. But mainstream economics places less emphasis on the political economy context. Public choice analysis, if it is even included, appears in a separate chapter.

In the Mankiw piece, there is this, almost at the end: 

A bill introduced this year by Representatives Henry A. Waxman and Earl Blumenauer and Senators Sheldon Whitehouse and Brian Schatz does exactly that. Their proposed carbon fee — or carbon tax, if you prefer — is more effective and less invasive than the regulatory approach that the federal government has traditionally pursued.

The four sponsors are all Democrats, which raises the question of whether such legislation could ever make its way through the Republican-controlled House of Representatives. The crucial point is what is done with the revenue raised by the carbon fee. If it’s used to finance larger government, Republicans would have every reason to balk. But if the Democratic sponsors conceded to using the new revenue to reduce personal and corporate income tax rates, a bipartisan compromise is possible to imagine.

The IRS code is close to four million words. Why so complicated? Because every revenue measure is inevitably politicized. This is why Mankiw has to to end with "imagine" -- as in John Lennon.

Patterns or points?

The NY Times' Invitation to Dialogue had touched on the question of whether economics is a science.  In today's Letters, economist Eric Maskin rejects the idea that successful predictions are a plausible a test of science or not. He cites seismology and meteorology as sciences that explain but that do not predict.

But think about general pattern forecasts. Are they not predictions? There are plenty of seismic maps that do not predict specific earthquakes but that are useful to insurers as well as insured.  There are many similar products developed by meteorologists.  It is not a matter of predicting vs. not.  It surely is a matter of patterns vs points.

Science can be involved in either. But so can other areas of investigation, including the study of history.

Whereas the Nobel in economics is (unfortunately, in my view) awarded in the name of "economic sciences," many of the most auspicious awards have been to economists working in a literary/historic tradition, e.g., James Buchanan, F.A. Hayek, Douglass North, Robert Fogel, Elinor Ostrom, Daniel Kahneman, and others. Does that make them "economics scientists"?  Look who's most popular!

Economics vs. physics involves people vs. particles.  Unlike particles, people have mood swings. We should forget about point forecasts.

Contrasts

I went to to see the "Never Built: Los Angeles" exhibit yesterday. These collections are always of some historical interest. And we get to experience the relief of knowing that this stuff was never built.

There were a few appalling Albert Speer-type renderings of creepy civic centers. There was a rendering (photo included in this WSJ coverage of the exhibit) of a more-than-creepy Santa Monica-Malibu offshore freeway that would have paralleled PCH and also obliterated miles of ocean view.  There were the usual "rapid transit" and "monorail" route maps of plans that died. The fun there was to overhear the occasional visitor exclaim "if only we had built this then ... ." There was even a map of how a compact-development LA would have looked like.

There were also the occasional sermonettes posted with drawings and maps.  Here is one of my favorites:  "The city's longstanding culture of timidity, political fragmentation, and subservience to developers has not only thwarted a century's worth of visionary schemes, but has engendered an ineffectual public realm."  How many not-so-bright ideas can one squeeze into one sentence?

Escape was easy.  The exits were not bolted and the Petersen Automotive Museum is right next door.  The restored cars are gorgeous.  Most are arranged with contextual mock-up backgrounds (an old gas station, a vintage auto insurance office, etc.). These autos were the technological marvels of their day, built to satisfy users. "Playthings of the rich" were within the reach of almost everyone very quickly.  It's still amazing  to see what competitive capitalism can accomplish. The Petersen benefits from the contrast with what is housed next door. I worry, however, that not many who hold the mindset of the cited sermonette will be drawn to the Petersen.

What do we know?

Creativity and innovation are hard to measure. Sometimes success is not immediately apparent. Forbes' Rich Karlgaard cites the Apple Newton as an apparent flop in its day but also a scientific success that tested new components and ideas and set the stage for many of the gadgets that we now cherish.

In "Creativity, cities and innovation," LSE's Neil Lee and Andres Rodrigues-Pose report that they were able to identify innovation in various "creative" occupations but not so for the various "creative" industries (UK data).  The authors report that creative people do their thing in not just the creative industries. One would hope so. But the Newton story should give these investigators pause.

Many city planners and policy makers have been smitten by Richard Florida's Creative Class research and have pinned local area revival hopes on finding ways to get the "cool" people to move their way. But this gets back to the problem of necessary and sufficient conditions. There are probably many of the latter. And findings such as reported by the two LSE scholars may be interesting but we do not know enough to boldly go forward with grand plans.  Too often the plans simply represent current fads.

Entrepreneurs and diversification

Diversification prompts resilience. It's a common sense notion but it's nice to see research that corroborates the idea that the notion applies to cities. They are more likely to survive if their portfolio of talent is diversified. We should say metropolitan areas rather than cities because we must include suburbs and hinterlands for it to work.

Alex Anas reports that doubling metropolitan area size only increases average commute times by about 10 percent. How could that be? All that spreading out is much better than "unplanned sprawl;" people do not choose locations foolishly; they consider co-locating with others they do business with.

I had previously blogged about the fact that U.S. suburban area growth does a better job of predicting central city growth than vice versa. First, they complement each other which surprises zero-sum thinkers. Second, suburban locations are opportunities for many; they can connect and link from there also; they can access local labor and they may find cheaper land.

It bears repeating that almost anyone in almost any supply chain manages many networks, some physical and some virtual. We choose networks along with location. Making the good choices keeps business in business. This is the way entrpreneurs maintain their edge. They are not lemmings in some "unplanned sprawl" fiasco.

Diversification is nice but it takes the actions of alert entrepreneurs to cash in on it. Being able to move into new fields is abetted by variety of local talents. Call that a necessary condition but call successful entrepreneurship added to that the sufficient one.

What to do?

NYU's Solly Angel argues that city planners should do what they can to attain "orderly expansion." He wants major infrastructure trunk lines (water supply, sewage, highways, etc.) to be planned and laid out in advance of development. Sounds good and supposes the planners are good at predicting demand (the time and place) for development. If they are good at what they do and practice a light touch, they can let market savvy developers do much of the rest. The hard part is actually attaining this balance. Could we end up with "ghost cities" if we get it wrong? What are the likelihoods?

This brings up the difficult division of labor question when it comes to city development. Randy Holcombe suggested that infrastructure be the domain of public planners while land use development be handled by private planners (developers). The latter wouldd take published infrastructure plans as parts of the "rules of the game." I elaborated in my Spontaneous Cities chapter (of David Emmanuel Andersson's volume), suggesting that only the one-off mega projects be left to public authorities -- and noting the inevitable risks involved.  Anything one-off will be risky but not likely to come into being via private risk taking.

Interesting but how do we get there? For starters, it would be nice if the question of a division of labor were included in planning curricula. Much of the literature presumes that markets are best characterized as "market failure" to be righted by public action immune to "government failure". But there is lots of evidence that the land use planning cherished by so many reduces housing affordability.  Why not start there?

Politics without romance

Many people have puzzled over the seeming contradiction between the fact that approval ratings of the US Congress are near single digits but incumbents keep being re-elected.  The simple story is that the people who bother to vote are not the ones who answer survey responses.  Or Congress in the abstract is easy to dislike but "my rep" is an entirely different matter.

I have just read This Town by Mark Leibovitch which is thoroughly enjoyable. The author is not Fox News or MSNBC. He has the just the right touch whereby he can describe the Washington DC egos and situations and the unfolding spectacle always speaks for itself.

Of all the things I teach, the one that is seemingly the oddest to most students is the story of public choice and "politics without romance."  Many people have an odd romantic attachment to politics and the inchoate idea of "the public interest."  Dan Klein wrote about "The People's Romance" a few years ago.  He has a point.

We chuckle at the bizarre attachments that citizens of petty dictatorships display toward their regime. I refer not to the obvious cronies but the many others who are swept up. Nazi Germany stands out because a broad and educated middle class eagerly took up the state religion. Politics without romance is pretty clear to some but somehow exotic to many others.

Loopy

We have to focus and concentrate to not call the Elon Musk "Hyperloop...(Imagine paying $20 and sitting down inside a Space Age capsule in Los Angeles. About half an hour later, you're in sight of the Golden Gate Bridge") idea hyperloopy (sorry!)  For anyone who thought that the California High-Speed Rail (HSR, the one on which they will soon break ground) is loopy, this one is really out there.

My friends at Reason write that the HSR is $50 billion short and counting. But no problem. There will be the inevitable sunk cost argument that is routinely applied to any once-low-balled project ("We can't quit now after all that has been invested ....!").  So if Musk thinks that the HSR money can be diverted his way, he is really throwing the dice.

The two proposals (HSR and Hyperloop) are obviously different. The first uses a very old technology that has been proven many times but that has been made irrelevant by the aluminum capsules we all fly around in quite comfortably. The second one proposes a technology that no one has ever seen in action.

But the two ideas share a fatal flaw. People who see Los Angeles and San Francisco as mere points on a map to be somehow connected overlook the key fact that we all have origins and/or destinations not at these points but scattered over large metropolitan areas.  High-cost ways to make the distant point-to-point part of journey faster make no sense. If LA-SF air flight time is currently about one hour and if I spend at least an extra hour on the ground at either end, then cutting the point-to-point time in half actually shortens my trip by just 17 percent. What is that worth to me? I can already fly business class and also get Global Entry to save marginal amounts of time. In fact, many people are already making these trade-offs.

Until we have beam-me-up technology, we still have to think about how to get to and from airports, train stations and even loop-ports (if that is the name they end up with).

NY City taxis

The LA Times reports "New York's biggest financial winners -- cabdrivers."  The value of a NYC taxi medallion (permit to operate in closed market) has risen to $1.3 million and has recently outpaced the S&P 500. This has occurred in spite of competition from Uber and similar services.

The story is wrong to suggest that the asset price gains all go to the drivers. Most drivers are not the medallion owners.

The Times story does mention the installation of credit card readers enabling customers to pay and tip with plastic. The lazy customer can simply put a check by one of three suggested tip amounts, 15% or 20% or 25%. Most people choose the middle 20%. When the choices were 10% or 15% or 20%, most lazy customers checked the middle 15%.  So push up the middle option. Behavioral economists would have predicted that most people will take the middle choice -- and these people are unlikely to do the math to fill in an amount of their own choosing.

People that print menus and wine lists have known about such strategies for years. But now the science of behavioral economics corroborates what has long been suspected. But this is what social science is supposed to do. How good are the hunches we have developed over many years?  Usually quite good.

Bay Area news

I have looked at the proposed Bay Area Plan (by the SF Bay Area MTC and ABAG) and can report it is awful. Cliche-ridden and uninformed are among its faults. Throw in counterproductive. Housing affordability and "equity" are often cited as goals but the land use proposals (greater density!) will have the opposite effect.

I can see the religious left (greens) going for it. They will be joined by connected developers who profit when limits are imposed. Reminds us of Bruce Yandle's B and B.

One shudders to think what was spent putting this mess together -- and how much will be spent to defend and see it through. This is all very sad.  But my friends at the Pacific Legal Foundation are making an effort to stand up for common sense.  Here is their introductory video. Here is their press release. Wish them luck.

Stop the shovel brigade

Industrial policy is risky for the well known reasons that it avoids capital markets (the only institution we have for allocating scarce capital) and compounds the problem by politicizing investment choices. This is not to say that we have "perfect" (or anything close) capital markets, but their problems can be traced too much crony capitalism (too little real capitalism).

These are old ideas but they have to be re-learned often.  This morning's WSJ includes "Volt Falls to Electric-Car Price War ... General Motors Lops $5,000 Off Sticker of 2014 Model; Cheap Gasoline Tethers Sales of Plug-In Cars ..."  Read the story. The details are amazing. The layering of blunders is stunning. Bail out General Motors instead of a Chapter 11 reorganization; push a pre-mature "green" but emotionally satisfying technology on the already politicized company; do all this in a city (Detroit) that is already in a deep hole; do all this in the context of an economic and federal budget crisis that are yet to be resolved; do all this as the fracking boom and cheap oil have arrived.

There used to be the idea of taking shovels away from people digging themselves deeper into holes. I expect that there will be more bail-outs of GM, Detroit and many others.  But whatever it is it, will be wrapped in something green and worthy, just like the Chevy Volt.

If we are going to have serious anti-carbon policies, they will be costly.  Further weakening a weak economy is not the way to prepare.

Wrong way

Preference aggregation is a huge problem. When transacting is out of reach, we get politics as the default -- and all the grievances that go with it.

Today's NY Times Sunday Dialogue ponders "Can Suburbs Help Cities?"  The idea of regionalism has been kicking around for a long time. Those who have moved to the suburbs, so the story goes, have skirted their obligations to those "left behind" in the cities.  Simple justice requires that they not get away with this and that we corral them via regional government  There is the linked idea that suburbanites get benefits from the cities that they do no fully pay for.

But that is not the way we address gains from trade in any other context.

In the regionalization process, we cartelize government and lose choice. More choice is better than less. Arnold Kling has argued that we have governmental units that are too large and choice that is too restricted. I agree. Making jurisdictions bigger, more remote, and less accountable to voters is precisely the wrong direction. It is just bail-outs by another name. Detroit (and other cities) got into the predicament precisely that way. It is interesting that proposed antidotes are often prescriptions for more of the same, but big-time the next time.

On a related note, the Times also reports on the city's race for mayor, "16 Vying to Lead Troubled Detroit." In this job market, we have gotten used to job openings drawing large crowds of hopefuls.  Or is that these 16 cannily see that the Detroit mayor these days has no authority and no influence and not much to do.

Downtown LA looking better

We should all claim our bad calls as well as the good ones.  I have long been critical of efforts to revive downtowns.  These had been declining for many years, as cities decentralized. In most cases, there have been downtown renewal/revival efforts and most of these have been too costly to be justifiable.

Los Angeles' downtown had been declining since the late 1940s-early 1950s.  But things are now looking up as gentrification sets in.  Whole Foods has anounced they will open a store in downtown LA in 2015. To be sure, this has less to do with planners' efforts than it has to do with the drop in crime.

The big plan for downtown LA was that it would become the "financial capital of the Pacific Rim." This never happened. The few Fortune-500 headquarters that were here all left. But LA redevelopers and boosters had already seen to it that new class-A office high rises (the new downtown skyline of TV's LA Law) were built.  They overbuilt, office space rents fell, B-office people moved into A-spaces and the B-spaces became available for loft and condo redevelopment, just in time for the drop in crime and gentrification.

The white elephants are still around.  There is a huge and underutilized convention center, a downtown-centered subway line and other baubles that we will be paying off a long time.  Developers have caught on that anything that can be sold as transit-oriented has a better chance of being greenlighted by planners.  My colleague, Jenny Schuetz, and her co-researchers have shown that this is not yet working out in LA.

Nevertheless, many of us apply our wisdom to predictions. Its pretty clear that I should have thought more about gentrification for downtown LA.

What the hell!

The Chetty et al. paper on inter-generational mobility has been getting a lot of attention. Social mobility data are essential to any discussion of economic performance -- and a welcome antidote to all of the misleading conclusions drawn by commentators who simply compare cross-sections. (You know who you are.)  People move between quintiles and it is most informative if we find a way to track their progress.  The Chetty et al. study develops a clever way to use IRS data to make comparisons of incomes, between parents and their offspring.  Have offspring moved up after 30 years?  To their great credit, the authors say that explanations for the geographic variation in their results remain to be explained.

The authors did include a bunch of bi-variate correlations which they point out are only suggestive of where people experience the most and least intergenerational mobility.  The usual suspects pounced on these and concluded it's the "sprawl" that inhibits progress.  I have often posted my thoughts on this misunderstanding. Here is my most recent.

Besides, "sprawl" is a vague and pejorative use. Suburbanization occurs everywhere and is much too varied to be described in overly simple terms.

Wilson and Singer of Brookings report where international immigrants to the U.S. choose to settle. The authors do this for the 100 largest U.S. metropolitan areas for 2000 and 2010. For each of these, they note whether or not the foreign born end up in the suburbs. For the whole set of metros (slightly fewer than 100 in 2010), 56.1% of the foreign born settled in the suburbs in 2000 while 60.6% did so in 2010.

I point this out because these immigrants, by definition, are not in the Chetty at al. data; they were not here (not in the IRS files) in the first year of the study. And by virtue of coming here, they are among the most upwardly mobile (see Lant Pritchett interview).

In the fast-and-loose manner that some have digested the Chetty et al. study, we could conclude that sprawl causes upward mobility.  What the hell!

ADDED

David King's analysis on point.

Less romantic

Thomas Friedman in "I Want to Be a Mayor" writes, "With both DC and the states increasingly AWOL, we need cities more than ever to be our engines of smart growth." 

Cities exist and grow because they are "engines of growth."  But the "smart" part can be many things. That's usually the problem.  Who are these smarties?

Friedman's whole essay is about how cities are governed. When he mentions "cities", does he mean city government?  Many people confuse nations with their governments; many also confuse cities with their governments. Friedman loves it that "Voters are putting up tax dollars for large-scale transit investments in Denver and Los Angeles ..." Politics without romance is adults-only sobering but Friedman will have none of that.

Economists refer to a "sun tax" (or a "commodity curse" or a "curse of oil") when bad governance is made possible in high amenity (or other good fortune) settings.  I have lived in a bad governance setting for many years but economic prospects are still passable.  Exhibit A would be Silicon Valley.  The shenanigans of Bay Area and California politicians have not killed it.  But not all areas have enough "sun" to offset high taxes, crazy policies, unfunded liabilities and such.

By the time a "perfect storm" gathers, it is usually too late. Detroit had badly run General Motors (with many industry soulmates including auto workers' unions) as well as badly run city hall.  Looking back, it is not easy to unscramble these eggs.

Cities are likely to be engines of growth if we do not look for "smart" stuff from city hall; less stuff would be much better. But that is less romantic.

Shipping

Last Sunday's NY Times included a lengthy story about the new Silk Road. Just when I thought that water transport had long eclipsed lengthy overland travel, it seems that the best way to get laptops from Chinese assembly plants to shops in Amsterdam is by train.

Trade begets development and development begets trade. That means both are dynamic and always evolving.

Closer to home, the Panama Canal expansion project is far along. I have found a surprisingly small number of studies that speculate on what this means for shipping and trade. Here is one of the few studies I have found.

Most of what is shipped uses more than one mode of shipment. If U.S. east coast-west coast shipping can more easily move by sea, what happens to U.S. rail and truck use? What about Pacific Rim trade bound for Europe, but that now traverses the U.S. by land routes?  As the use of the various modes changes, does business at the various trans-shipment nodes rise or fall?

But not so fast on mourning what will happen to U.S. overland freight.  Warren Buffett, who knows a few things about investing, made a big bet of trains several years ago. Just like the Eurasian Silk Road, our overland shipping may benefit from the new patterns that will emerge when the bigger and better Panama Canal gets going in 2015.

Detroit

I have long been poaching Wendell Cox’s urbanized area data.  One good reason is that he carefully flags the parts that are core cities. 

Looking at these data for the decades 1950-2000, one can quickly correlate core city population growth with subsequent decade suburban growth.  Using just the 24 largest of these for which six decades of data are available, two types of lagged correlations are easily found.  What does one decade’s growth predict for the next decade’s growth, core areas vs suburbs?  Here are some correlations:

1950-60: core cities growth with subsequent decade suburban growth, r = 0.64; suburban growth with subsequent decade core city growth, r= 0.66;

1960-70: core cities growth with subsequent decade suburban growth, r = 0.18; suburban growth with subsequent decade core city growth, r= 0.39;

1970-80: core cities growth with subsequent decade suburban growth, r= 0.13; suburban growth with subsequent decade core city growth, r= 0.28;

1980-90: core cities growth with subsequent decade suburban growth, r= -0.01; suburban growth with subsequent decade core city growth, r = 0.17.

For each pairing, I italicize the larger value.  Strong suburban growth does a better job predicting strong core growth than the other way around.  These are mostly positive; growth in one part of the metropolitan area is not at the expense of the other. And core areas do well if their suburbs have been doing well.

Paul Krugman reports that “sprawl killed Detroit.” But strong suburbs usually have the opposite effect.

ADDED

Wendell Cox has more to say about this. 

Local screwdriver

Resource allocation is not simple.  It is especially difficult when limited land is available for the various plausible land uses.  Markets (with the possibility of failure) is all we have.  In my walkable neighborhood, there is considerable turnover among retail vendors. Smart people (and their financial backers) often guess wrong re my neighbors' fickle tastes and/or fail to deliver an appealing package of goods, service, price, etc.  They have to go.

The standard textbook objection involves negative externalities. In my June 26 blog post, I noted that textbooks and teachers once evoked the old example of a glue factory somehow ending up on the corner of Park Ave and 50th in Manhattan.  More subtle examples from the real world are rare.

But there is usually another story. Creative destruction animates a lot of political activity. Losing in the market place may still leave the option of winning by other means.  This morning's LA Times includes "Malibu residents complain of becoming Rodeo Drive by the Sea ... Malibu residents are weighing whether to regulate the influx of upscale chains that are driving quaint mom-and-pop stores out of business. ... A few years ago, actor Dick Van Dyke complained in a local newspaper that for all the fancy boutiques, he could not buy a screwdriver within the city limits."

If the land market cannot accommodate Van Dyke, the Planning Department might.  Trouble is that no one will have an inkling of what it will cost to solve Van Dyke's screwdriver problem.    

When in doubt

I had thought that David Neumark and colleagues have the last word on the minimum wage debate.  Yes, there is a Law of Demand. Yes, people respond to incentives. Yes, we assume ceteris paribus and therefore must do more than take a first glance. Yes, we can measure what is seen, but know very little of the unseen (Bastiat), those who never enter the labor force if/when job creation slows. The New York Times and others celebrate the former, those whose wages did go up after a wage hike mandate, but they usually stop there.

Not mincing words, James Buchanan (cited here) famously referred to economists who find that minimum wage effects are benign as "camp following whores."

This morning's WSJ reports "The Shift to Part-Time ... Many Restaurants Avoid Hiring Full-Time Workers Due to Health-Care Rule."  When/if in doubt go with the incentive effects.

"Wild West Texas"

Planners and many others like urban "density".  The 1974 Costs of Sprawl report and hundreds of sympathetic tomes (look at the Sierra Club's "Ten Reasons Why Sprawl is Hazardous to Your Health") provided a focus for various antipathies, particularly those focused on auto travel and personal mobility (and choice). This is an old story. People keep making choices their betters disapprove of.

But the plot thickens. Most urban and regional plans are full of policies to reverse "sprawl" and promote densification. More public transit ("light" rail is the current favorite), more transit-oriented development. More investments in old downtowns, etc.  A 2006 Brookings Institution study sought to classify and categorize all of the planning approaches.

Have they worked?  Look at U.S. urbanized area density trends. They do not line up with the policies.  The Brookings study itemized the many types of measures that planners throughout the U.S. have adopted. The last column of Table 3 of the urbanized area data link indicates thirteen urbanized areas which experienced increased population densities in the most recent decade, the period during which the policies studied should have had an effect. There is not observable connection between increased population densities and regulatory approaches as identified by the Brookings study (Table 3 of their study and their Appendix).

Th researchers surveyed 1,800 jurisdictions which reported planning efforts in six broad areas of land use regulation (zoning, comprehensive planning, containment, infrastructure regulation, growth control, affordable housing). These were represented by twelve policy measures. Factor analysis was applied to classify the metropolitan areas in terms of their dominant regulatory approach, e.g., twelve "clusters" of  policies. The study authors then arrayed the clusters into four "typologies of land use regulations" ("Traditional," "Exclusion," "Wild West Texas," "Reform").  But the Demographia density report (Table 3) shows that very few urbanized areas experienced increased average densities. The few that did were scattered across the four typologies.  Houston, (as in no traditional zoning and as in "Wild West Texas") was one of the few. Houston, do we have a problem?

Many settings

Paul Romer asks whether Detroit is Denser than Denver. It's a set up because Romer is calling attention to the widespread silliness of referring to city-wide overall densities. Readers of this blog have heard it many times. Romer mentions that we have to look at local maps and consider small area peculiarities.

Researchers at the Santa Fe Institute are doing interesting cross-sectional work on cities. They report finding scalability over a large international set of cities. But we know that definitions and boundaries     vary considerably from place to place. There are local economies (labor markets) everywhere, to be sure. Do the definitions of spatial units used in the SFI sample match these?

 Zipf-rule rank-size distributions apparently describe all sorts of artifacts.  SFI researchers often cite the example of gas stations.  But we can bet that the density of these artifacts does not scale.

What matters most is the networking opportunities -- in Detroit or Denver or any place. We prosper when we can exchange goods and ideas at acceptable costs.  We apparently do this in all sorts of densities and settings.

Those human tragedies

What I knew about wiretaps, I got from The Wire.

I knew more about South Asian immigrants to the U.S., having encountered many through their academic contributions -- mostly via their writings but also many as high-achieving students and colleagues. The immigration debates highlight the latter; keeping out large numbers of talented and hard working South Asians is just one of the flaws in current immigration policy that should be remedied ASAP.

But having read Anita's Raghavan's The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund, I know a bit more about wiretaps as well as about elite Indian-Americans. They appear on both sides of the story. I am glad the author had the good sense to cite the David Ben-Gurion quip that the new Israel will have achieved real nationhood once it has its own burglars and hookers. South Asian immigrants, the author shows, are now more than simply a "model minority."  They pass the Ben-Gurion test.

The story is chilling on many fronts. Seeing the prosecutors, the defendants and the bit players (all through Rachavan's eyes), I did not encounter many "good guys". Prosecutors can  now use wire taps when investigating financial crimes and everyone knows it. But it is amazing how much the smart guys involved in illicit trades gab while on the phone.

The rise and fall of Rajat Gupta are the most fascinating parts of the story. Gupta rose about as far as anyone can. McKinsey CEO and Boards of Directors of top schools, corporations and charities. So why did he break the law on insider trading? (Why did he do it in a stupid way, caught by a phone tap?)  His net worth of $100-plus million was not enough. Spoiler alert. When he finally moved to New York (having made it a point to work from Chicago and Scandinavia offices of groups he was attached to), he perceived a new ball game.  He  now wanted to join those who bankroll the causes that he had previously (successfully) collected checks for (p. 401). He could have progressed towards his goal of ending malaria in the world either way, but that was apparently not satisfying enough

He wanted to keep up with the Rajaratnam's, referring to the hedge fund billionaire for whom Gupta played the apprentice.  It is the human tragedies that keep us turning the pages.

Coordination problems all the way down

Aggregation in economics presents problems. In fact, a case can be made that aggregation contradicts and even undermines our understanding of  markets. See Christopher Coyne's "Economics as the study of coordination and exchange" in Boettke's Handbook on Contemporary Austrian Economics.

We study markets because decentralized exchange is the only way we know to solve the immensely difficult and complex problem of getting uncountable scarce resources to where they are most valued. Coyne argues we have to focus on exchange rather than pose mechanical "allocation" problems which can be solved via aggregation and modeling.

Think about the idea of "capital".  Das Kapital denotes a nefarious thing that is accumulated solely for the sake of profiteers -- and at the expense of everyone else. But neo-classical economists also aggregate to get the "capital" that we see in their models.

But these approaches ignore and obscure the interesting problem.  Society provisions itself for a better future if and only if some of today's consumption is deferred in the service of worthy projects that will pay off (be rewarding and rewarded) at some future date. These simple words do not do evoke the scope and the difficulty of the task.  Tremendous risk-raking and coordination are involved.

Readers of this blog know that I view cities the same way.  The managers of firms are part of various supply chains.  In each case, they must decide how much of the supply chain is within vs beyond the firm.  Many of them locate their firm in cities and make the concurrent decision of how much of the supply chain (within as well as beyond the firm) takes place nearby or not (in the vicinity or not, in the same city or not, etc.). Attending to and forming any supply chain is also a coordination problem.  In fact, I often note that there are supply chains for ideas as well as things.  Expanding useful knowledge is a key part of the problem. This complicates matters even further.

We have to think of coordination problems that involve fine-grained spatial as well as temporal dimensions. Markets (always "imperfect" as in straw man) are the only game in town.

But this is not the way most analysts approach the problem.  Google scholar comes up with only 14,500 hits for "coordination problem" entered along with "markets". "Keynesian" gets 169,000.  "Cities" along with "coordination problem" gets 6,160.  "Marx" and "cities" gets 212,000.

These are crude measures, but cities' role in the coordination problem is, in my view, much more interesting than the cities' role in whatever Marxists write about these days.

Off topic: Three recent films

Here are three excellent films that cover the same theme. How do the children of monstrous parents make their way in the world?  Lore is fiction. Inheritance and Hitler's Children are documentaries.  All three cover the same ground and all three are chilling in their own way.

We have trouble understanding evil. We have trouble understanding advanced and seemingly enlightened societies (in this case 20th-century Germany and friends) marching into the abyss.  The educated middle classes caved.

The three movies are about the children and grandchildren of perpetrators who encounter an added difficulty: they decide that they cannot follow the injunction to honor father and mother.

But in all three films, notably the two documentaries, we also see that bad people can have decent offspring.

There are many very bad movies about historical events.  These three are very good.