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.