Exceptionalism and legacy

For all we know, most people at some time think about their legacy. Will I be remembered? By whom? For how long? For what?  This thinking has to occupy political leaders, especially in the late innings. And what if you are the first mixed race leader of a major power? Speculation over Barak Obama's thinking on this question will only grow as he gets closer to leaving office.

Can legacy-mindedness co-exist with electoral and party politics? Churchill saw job #1 as defeating Hitler; he seemingly paid less attention to his re-election prospects. Lincoln focused on saving the Union and finally making it a non-slavery nation; he seemingly was less focused on his own survival.

President Obama may not be listening but I have an idea how he can enter the pantheon of former leaders who have left a legacy. But and it will cost his party politically.

Lead the charge for serious immigration reform. Get your party (many kicking and screaming) to follow you; get enough of the opposition (also kicking and screaming) to your side. We are talking about real legacy and real leadership and real change here.

We hear that inequality is the "defining issue" of our time. Let's recognize that the greatest inequalities are across international borders. Many millions are born in civil war-torn hell holes. Others find themselves in penitentiary societies. What can be done about the real injustices and inequalities?  Poor people abroad know the answer: find a way to get into the U.S. or another advanced Western nation. Pathetic stories of unsuccessful border crossings, drownings, kidnappings are everywhere -- lately focusing on young kids at the U.S. southern border.

Paul Collier Exodus: How Migration is Changing Our World does a good job of convincing us that none of this is simple. Bryan Caplan at Econlog.com does a fine job making the moral argument, as do the people at openborders.info. Expanding the talent pool is the economic no-brainer.

None of this is simple. Borders will have to be "secured" in the sense that entry is orderly and monitored to screen the inevitable trouble-makers. But the immigration status quo makes no sense (and satisfies no one). We have the pretense of border control side-by-side with smuggling, violence and great suffering. The way forward involves leadership and risk-taking like we have not seen in some years. Perhaps the huge gap between the expectations of the Obama campaign and the performance of the Obama team suggests to them that there is also a huge opportunity to finally rise to the occasion.

American exceptionalism can mean that unprecedented generosity and tolerance gain from and, in turn, fortify economic strength.

Last resort

Timothy Taylor rightly takes on stagnationist Larry Summers. Summers points to a slow U.S. economy and suggests more public sector infrastructure projects. This looks fine in the textbooks but what about the reality? What kind of projects do our leaders come up with?

Mary Anastasia O'Grady writes about "Maryland's Incredible Purple People Mover" in today's WSJ. Stuff like this really goes on in the real world. Pure pork projects are easy to find. Marginal Revolution points us to Washington Post coverage of the new Washington Convention Hotel.

Examples like this are everywhere and not at all new. They are not aberrations but they remain magnificently unnoticed by economists and politicians of the left when at their most serious.

If it's a Bootleggers and Baptists world, where does one place the stagnationist economists?  It's hard to be sure but the human capital of most economists is tied up in their intellectual capital -- which many have tied up in Keynesian models of aggregate demand. The sunk costs argument seemingly does not come into play when it comes to one's own intellectual positions.

If private investment is lagging (which it has been for some years), it is because of high levels of uncertainty and anxiety among risk takers.  What to do?  Fewer rather than more pork projects is a good place to start.

If infrastructure is in bad shape, anything that can be metered can be privatized. Metering is now better than ever. The projects that Summers seems to like would be the last resort.

Networks and densities

In 2012, The Freeman featured discussions of Seasteading. "What would it take to get you to move to a seastead?" I liked this response by Arthur Breitman:

A very large community with millions of people and a thriving economy. I am a radical libertarian, and yet, right now my best option is to live in New York City, one of the most highly taxed and regulated places in the U.S. The sheer value of the social networks in NYC makes up for the taxation. I would be much freer in a place like New Hampshire, and yet it is too provincial for me.

In California, we explain political dysfunctionality as a "sun tax" (not a tax on solar panels). In NYC it would be a "networking" tax. In an exit-voice-loyalty context, some places elicit plausible loyalties. Where there is any sort of immovable amenity, it will be exploited in this way by the local pols. Talk about "exploitation."

In a previous post, I cited Edmund Phelps' discussion of cities and the economic benefits of density.  In his JEL review of Phelps, Joel Mokyr also cites the density discussion: "By that logic. the densely populated and heavily urbanized Netherlands should have outperformed Scotland and France and should have dominated England (leaving aside the problems with reverse causation)." p. 193. They are seemingly talking about the population densities of whole countries. I have often criticized the use of metropolitan area-wide average densities as a poor proxy for networking opportunities; national population densities are a far worse proxy.

Networking is important and, yes, most people find advantageous ways to network in all sorts of cities. They have not yet chosen to network from isolated mountain tops. Even where they can get a satellite connection, they want to manage the many networks in their lives -- including the ones they access on foot, by car and via the nearest airport.

Walkable LA?

Tyler Cowen points us to a study which claims that LA is "on the cusp" of becoming a major walkable city.  Two points should be added.

First, the report compares large metropolitan areas. These places have many distinct neighborhoods which are hard to shove into a single category. I have lived in walkable neighborhoods of LA for most of my life.

The reason that large metropolitan areas survive (continue to compete well for labor and capital) is that they offer a variety of opportunities. Yet, analysts are prone to affixing general labels to them -- which inevitably do a poor job of describing the complexity.

Second, large-area averages can mislead. Los Angeles (the urbanized area) has been the densest in the U.S. since before 1990 -- 6,999 persons per square mile in 2010 vs. New York's 5319.This is an overall average and not very useful.

On a related note, Census data show that the LA metropolitan (even larger than the census' urbanized area) is not anywhere near the top as far as walking or bicycling to work go. The champions of walking and bicycling often see these as important parts of their efforts toward reducing commuting by private auto.

Creepy

I decided to link to Megan McArdle's discussion of the "lost" Lois Lerner emails (H/T Craig Newamark) because:

1. The episode is creepy, jarring and depressing. The people who have the power to hound us should be kept to a higher standard. An even higher standard was advertised by the "We're the ones we've been waiting for" crowd.

2. There should never even be the appearance of IRS politicization.

3. McArdle tries to be charitable and sees incredible IRS incompetence -- as the politest possible explanation. Read her piece. 

4. The high-minded mainstream media have done a good job of not covering the story. I checked the LA Times website moments ago. In the last month, there were 106 published stories on Donald Sterling. There has been one re the missing emails -- and that has been their obligatory run of syndicated conservative columnist Jonah Goldberg ("Where's the Outrage?"). Indeed.

5. The advocates of a big federal government depend on tax collections and, therefore, depend on the public's (wary) cooperation with the tax collectors. Less trust means more evasion means more audits and enforcement challenges, etc.

6. Mistrust of the IRS is easily transferred to mistrust of other government institutions.

7. Selective media outrage further reduces their already diminished credibility. This is not the way Richard Nixon's dodging and weaving were covered. 40+ years ago.

8. As people learn not to trust political leaders and officials, will they also become less trusting of each other?

9. The role of the IRS is slated to grow in entirely new directions -- to administer healthcare, for example.Can that ever work with so much of the agency's dirty laundry revealed?

10. Those who live by the politics of envy will come up with ever more redistribution schemes -- many of these will involve and enlist a tainted IRS.

That's my top ten at this moment.

Which way?

Suggesting the end of history or progress or innovation or growth or anything is a huge stretch. But stagnation theses in economics are not new. This morning's WSJ puts the Robert Gordon (no relation)-Joel Mokyr debate over this topic on the front page "Has All the Important Stuff Already Been Invented?"

It's always hard to get beyond our predispositions to be either pessimist or optimist as we listen to both sides.  I have two simple points to make here. First, conventional data are not adequate and are ever less useful as we move forward. Consumer surplus is an ever larger component of our welfare and not measured via standard statistics or reporting.  The WSJ story includes the well known graphic that shows near-150 year constant U.S. real GDP per capita growth. What will happen to this trend? Conventional measures will understate it.

A related point has to do with amazing progress in improved longevity. In the article, Gordon scoffs at that, saying that more years but with an addled brain are not worth it. Have we come to the end of the road in our understanding of neurological conditions?

Yes, we are stuck with crony capitalism and its evil twin, rational ignorance. The real question is whether the market's natural growth impulses -- resulting from consumption-smoothing desires of savers and investors reconciled on capital markets -- will overcome the natural political impulses of the cronies (of both political parties). Will resources freed by automation be put to work by markets led by savvy entrepreneurs? Will the creative part of creative destruction remain vital?

Stagnation or non-stagnation are the consequences of actions by large numbers of people. Wittingly or unwittingly, their actions weigh in on either side of the question. I had posted previously that no less an authority than  Edmund Phelps is downbeat on this question. I disagree -- and I do watch the news.

Inequality

The political Left feasts on self-anointed moral superiority. "Inequality" is on the lips of pundits and politicians all over the U.S. Runners up (and not unrelated) are the importance of a good education as well as the non-performance of many public schools -- and how that stymies the advancement possibilities for many of the poorest.

But when it comes to the question of what to do, positions are all over the place and moral superiority is strained. Many of those who wear their "fairness" concerns on their sleeves also owe their careers to support from the education establishment. This week's Vergara v. California ruling knocks down California's bizarre legal protections for incompetent public school teachers.  Even the L.A. Times opined "Vergara ruling offers California an opportunity to change a broken system" (gated). California's two teachers' unions will appeal and it remains to be seen which of their Sacramento allies will join. Hoover's Carson Bruno notes, "While it’s unlikely that Vergara v. California will become a household name along the lines of Brown v. Board of Education, it nevertheless could be just as consequential in leading to education reforms."

There is a mountain to climb and whatever reforms follow this ruling (if any) are just the start. But the gold standard research on the matter is by Eric Hanushek.  Here is the summary:

Most analyses of teacher quality end without any assessment of the economic value of altered teacher quality. This paper combines information about teacher effectiveness with the economic impact of higher achievement. It begins with an overview of what is known about the relationship between teacher quality and student achievement. This provides the basis for consideration of the derived demand for teachers that comes from their impact on economic outcomes. Alternative valuation methods are based on the impact of increased achievement on individual earnings and on the impact of low teacher effectiveness on economic growth through aggregate achievement. A teacher one standard deviation above the mean effectiveness annually generates marginal gains of over $400,000 in present value of student future earnings with a class size of 20 and proportionately higher with larger class sizes. Alternatively, replacing the bottom 5-8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings with a present value of $100 trillion. 

Hanushek chimes in re Vergara here. If he is right (and I presume he is), the California tenure rules that are finally being challenged are poison.

Industrial org is spatial org

We can date "modern" economics to the work of Adam Smith and note that for most of its time "the firm" was treated as a black box that existed to equate marginal this to marginal that to marginal something else. For many years this approach presented interesting problems to a relatively small band of economic thinkers but was pretty useless to most others. A huge improvement occurred relatively late in the life of the field when (from Ronald Coase's work and on) some economic thinkers began to consider what goes on inside the black box. This is what we now call the sub-field industrial organization (IO).  A clear and concise statement is by Alchian and Demsetz (1972).

Production occurs because of the interaction of specialists. Call it a supply chain. These specialists discover and execute the terms of trade (and contracts) that link them. Alternatively they could be managed "under one roof."  The latter introduces management and monitoring costs. The economic problem, then, is a matter of comparing the savings in transactions costs vs the extra monitoring costs of putting selected parts of the supply chain under one roof -- or in one shell. The entrepreneur who successfully oversees all this gets the rewards that accrue to a residual claimant.

A more recent (and surprisingly separate) literature adds location and space to the mix. Call it "urban economics" or call it spatial organization (SO). Clusters of selected activities form to economize on transactions costs -- including the possibility of internalizing externality benefits and also avoiding some externality costs.

Textbook discussions cite the original Disneyland (Anaheim, 1950s) which was developed in a rural area – and soon enriched nearby landowners. The company learned a valuable lesson and  Disney World (1970s) was developed in light of the experience; the corporation bought surrounding land (or options to buy) so that the benefits of adjacency would accrue to it. Simple economics suggests that decisions on how big the newer park should be would have been affected.

The story is succinctly described in my favorite journalistic allusion, from The Economist (March 1, 1977).

“In many economics textbooks, the presence of externalities is invoked as a justification for government intervention in the marketplace. Yet the private sector often finds its own solutions to externality problems. This is the secret of the shopping mall’s success. Because a property developer owns the entire shopping complex, its profits depend on the entire mall, not on any particular shop. By choosing the right mix of tenants and charging rents that reflect each store’s contribution to the mall’s overall revenues – including the business it brings to other stores – the developer can ‘internalize’ the externality and maximize its profits.” Eric Gould et al (as well as others) eventually introduced these ideas to an academic audience.

In this example, various potential external costs between locators can be avoided by propitious spatial arrangements; various external benefits can be reaped; various transactions costs can be reduced. The mall's developer seeks the rent-maximizing (profit-maximizing) spatial arrangement by strategic choice of site rents – which can include rent subsidies to “anchor” stores -- and also charging rent premiums to nearby tenants. Foot traffic benefits as shoppers economize on search costs are noted and included. Visitors to modern shopping malls do more than shop. They may also value opportunities to mingle and hone social capital.  Finally, mall land use and infrastructure plans are necessarily integrated.

Just as the firm described by Alchian and Demsetz has size and scope limits, there are size and scope limits for the mall or any similar cluster. Land assembly costs that are subject to local rules and politics come to mind.

Finally, what difference does it make?  The IO and SO problems are not independent. There is the problem of determining what goes on inside vs outside the firm -- and there is the concurrent problem of determining what goes on inside vs outside the cluster. Looking at it this way, it is hard to imagine the two problems as ever separate or independent. Land consumption cannot be assumed away; spatial arrangements, not simply "density," are involved. Among the many coordination problems to be solved include the internalization of various externalities -- which can thereby be removed from the slate of problems with which we burden zoning and public policy discussions.

As a matter of public policy, make land assembly easy. The many land use rules (often adopted with an eye to controlling externalities) we have are top-heavy because the economic forces involved are misunderstood.

Networking or agglomerating?

Here are two views from the urban economics literature that might be seen as dueling 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.”  (p. 1, “Introduction” Agglomeration Economics, E.L. Glaeser, ed. 2010, U. of Chicago Press)

“When co-location is infeasible, networks may substitute for agglomeration. This possibility of substitution means that small regions may survive and prosper …” (p. 11, “Agglomeration and networks in spatial economies” B. Johansson and J.M. Quigley, Papers in Regional Science (2004) 83, 1-12)

But perhaps we can agglomerate and network at the same time. Perhaps many like some of their networking to be face-to-face. I say all this because this morning's WSJ includes "This is the Boardroom of the 'Virtual' Biotech ... They Have No Lab Space, Few Employees but Lofty Goals ..." The accompanying story shows meetings by biotech start-up people in empty MIT classrooms as well as in a nearby coffee shop.

Which will it be?

Here is Nate Baum-Snow discussing why cities will become more dense. Here are data indicating more cell phones than people in the world -- and counting.  Here are Kate Lister and Tom Hamish discussing the rise of telecommuting ("telework") in the U.S. Here is Pengyu Zhu citing his work which shows that most of those who telecommute choose a longer journey-to-work -- on the days that they go to a workplace. Here is Wendell Cox citing recent U.S. data that indicate continuing suburbanization.

So which will it be? Substitutes or complements? The short answer is that no one knows. The long answer is that it would be a huge stretch to bet against techno-optimism and the continuation of powerful and almost universal suburbanization trends.

Re the former, I loved this from  Andrew McAfee in this week's econtalk:

... I read in the press once in a while that Moore's Law is running out of steam. Don't believe it. I've been reading that as long as I've been reading about technology, and the best I ever heard it summarized was, I cold-called a really good AI (Artificial Intelligence) researcher at a session like this--his name is Andrew Ng, he teaches at Stanford--and said, 'Andrew, how much more time do we have with Moore's Law?' And he said, 'Five more years, same as the last 30 years.'