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.