Category Archives: Growth Causes and Consequences

Four Forces and Urbanism

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Justin Fox writes,

Basically, urban life is becoming a luxury good in much of the U.S., in part because there isn’t enough of it to go around.

Pointer from Mark Thoma.

I think of this in terms of the four forces. The New Commanding Heights of education and health care tend to concentrate in inner cities. This helps draw affluent professionals to cities, leading to gentrification. Then you get the sorts of amenities that affluent professionals like–bike lanes, sushi restaurants, yoga studios. The urban-suburban demographics becomes sorted by taste as well as by occupation.

Idiosyncratic Housing Market Perspective

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Kevin Erdmann, whose comments on this blog are much appreciated, wrote

There wasn’t even a housing boom. We all just decided to freak out about the one type of homebuilding that was growing – single family units for sale – and ignore every single other category of housing supply, which included homes built by owner, multi-unit homes, and manufactured homes. All of those categories had been in decline. Of course, it was the decline that created the illusion of a boom, because it was precisely those cities where we can’t build, yet where income opportunities are available, where home prices were skyrocketing, because households were bidding up the stagnant pool of homes in those cities in an attempt at economic opportunity in a country that has become inflexible.

What I think he is saying is this (and I could be wrong in my characterization):

1. Because of natural and artificial constraints on supply in cities like SF, the housing stock stays just about fixed, so any increase in demand shows up in price.

2. People have to live somewhere. When supply is fixed in some places, some households get pushed to other places. However, the rise in supply in those other places was never much ahead of demand.

3. If there were excess supply, we would expect rents to fall, and they have not.

4. The sharp fall in house prices came from tightening mortgage credit by much more than was necessary.

My own thoughts:

1. A fact that is salient to me is that the share of mortgages for non-owner-occupied homes went from about 5 percent before 2004 to at least 15 percent in 2006. To me, this says that at the margin there was some demand that was not driven by housing needs. Also, I believe that in housing the marginal supplies and demands exert big effects on prices, even though those marginal Q’s are small relative to the stock of housing and the total number of household.

2. Another salient fact is that the average price-to-rent ratio also shot up over this period.

3. This suggests to me that something other than “pure” supply and demand was at work in driving up house prices. I am inclined to see some combination of looser credit and (unrealistic) expectations for house price increases.

4. I think that Kevin is right to stress that the characteristics of housing markets differ in different locations. In SF or DC, rapid gentrification combined with restricted supply gives you one dynamic. (I don’t think I would pin it all on people bidding for “an attempt at economic opportunity,” as if these cities offer better jobs to people of every skill, which is what Enrico Moretti has claimed. Instead, I see a shift in economic opportunity inside cities away from low-skilled workers and toward professionals in the New Commanding Heights sectors.) In rural Ohio, a long decline in economic opportunity gives you another dynamic. In Texas, a big population inflow with more elastic supply gives you yet another dynamic. I could imagine that national averages, including the national averages I tout as “salient facts,” could be quite deceiving. Perhaps to understand the whole you need to study the parts.

Scott Alexander Puts Me in His Corner

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On the subject of poverty, he offers a two-by-two matrix to classify viewpoints.

On one axis, you can think that the capitalist system is basically competitive or basically cooperative. The former view is that it creates winners and losers. The latter view is that it is a rising tide that lifts all boats.

On the other axis, you can be optimistic or pessimistic. If you are optimistic, you think that a bit of social change can take care of poverty. If you are pessimistic, then if you think of the system as competitive you want revolution. If you think of the system as cooperative, you end up like this:

we’re all in this together, but that helping the poor is really hard. . .capitalism is more the solution than the problem, and that we should think of this in terms of complicated impersonal social and educational factors preventing poor people from fitting into the economy. . .worry school lunches won’t be enough. Maybe even hiring great teachers, giving everybody free health care, ending racism, and giving generous vocational training to people in need wouldn’t be enough. If we held a communist revolution, it wouldn’t do a thing: you can’t hold a revolution against skill mismatch. This is a very gloomy quadrant, and I don’t blame people for not wanting to be in it. But it’s where I spend most of my time.

Me, too. Except note that over the past two hundred years the tide has lifted more and more boats, quite dramatically. It is still lifting more and more boats, but those boats are more likely to be in China, India, or Africa than in the rural United States. And places like St. Louis.

Norway and Denmark

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I did not try to delve into economic issues there, but here are a few thoughts:

1. Food costs at least three times what it does in the U.S., and hotels everywhere seem comparable to Manhattan in cost. Using airbnb helps cut expenses. Mass transit is efficient but not cheap. Overall, if you want a place where your dollars stretch far, go somewhere else.

2. People in Norway seemed to be very well off. We saw lots of high-end baby strollers, of the brands that cost close to one thousand dollars in the U.S. They cost about the same there. And we were told that many parents own more than one baby stroller, because the one that works best in snow is not the one that you prefer in nice weather. Restaurants in Oslo and Bergen seemed jammed with locals, although perhaps unusually good weather played a part in that. The oil slump dims the outlook for Norway somewhat, and we met someone with a son who is an oil engineer who had recently lost his job.

3. Denmark was a bit harder to read. We saw a lot of for-sale signs on homes on bucolic Bornholm Island, but does that indicate excess supply or the typical churn of a vacation/beach area? Copenhagen’s restaurants were bustling, which suggested affluence. Traditional Danish cuisine, like traditional English cuisine, is honored more in theory than in practice. Ethnic food seems dominant, especially if you include hamburgers as (American) ethnic food.

4. In other countries, governments like to subsidize specific products, such as bread or milk. I did not see much evidence of that in Norway or Denmark. I believe that the subsidies that people get are more general cash payments, such as pensions or paid family leave. This is probably a lot less distortionary.

5. On a day-to-day basis, these are very much market economies. There are credit-card readers everywhere, including the kiosks for purchasing subway tickets. I do not think that anyone misses an opportunity to charge money for something. We were happily using our credit card that does not charge a fee for currency conversion, only to discover late in the trip that establishments routinely add a 3 to 5 percent surcharge for “foreign cards.”

6. These are also very open economies. Everyone learns English. Many also speak other non-native languages. Ports and shipping are major industries.

7. Norway reminded me of eastern Canada in many ways, with abundant water and forest. My guess is that it took a long time for railroads and paved roads to emerge in Norway, because of mountains and other topographic challenges. I can imagine that until as recently as the late 19th century there were many parts of the country that were isolated. That would suggest a historical political structure based more on local clans than on central government, but I do not know if that was the case.

Why Fewer Publicly Traded Firms?

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Alex Tabarrok writes,

The total number of firms has dropped far less than the number of publicly traded firms, so in part this is probably due to laws affecting publicly traded firms in particular such as Sarbanes-Oxley. But there has also been a drop in the total number of firms. As a result, concentration ratios have increased which suggests that competition might have fallen.

Some possible stories.

1. The number of manufacturing firms declines as manufacturing declines as a share of GDP. Meanwhile, in the growing sectors of health care and education, government creates huge barriers to entry. It seems to actively encourage consolidation in health care.

2. The Internet and globalization create winners-take-most markets in several categories. Think of how many department stores were killed off by Wal-mart.

3. Lots of consolidation in finance. Remember that as recently as the 1970s banks were not allowed to cross state lines, so we probably had more banks than was efficient well into the 1990s.

I am not ready to buy the story that competition has fallen across the board. One of the big stories of the past couple decades is the big rise in prices in education and health care and the much slower rise in prices for manufactured goods. To me, that goes along more with a story of government policies to subsidize demand and restrict supply in the former sectors.

Tyler Cowen on Trends in Leisure and Work

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The video is here. Recommended.

I agree with most of what he says, and to the extent that I differ I am probably wrong.

He frames the question in terms of Keynes’ prediction that by 2030 we would see a work week of about 15 hours. My thoughts:

1. As William Gibson said, the future is here, it is just not evenly distributed. Tyler says, correctly, that the elderly have grabbed a huge share of any increase in leisure. But “elderly” is not some different social class. It is us when we get to be that age.

2. Suppose that the median adult male in 1930 started working at age 16 and worked until he died, and that the median adult male today starts working at age 20, retires at age 60, and dies at age 80. Take those 20 years of leisure and spread them across the working ages of 20-60, and that amounts to 1/3 of a year of leisure. If you think that you have about 100 hours a week to allocate (otherwise you are engaged in required activities like sleeping), 1/3 of a week is about 33 hours. So maybe you can say that we’ve taken about 33 hours off the typical work week, but we’ve decided to save those 33 hours for when we’re old. So if you worked 60 hours in Keynes’ day, now in effect you work 27 hours, and he is not so far off.

3. Note that the natural distribution of leisure might be quite different, but the eligibility rules for Medicare and Social Security are a major influence.

4. Another point Tyler makes that I would have made also is that the disutility of work has fallen. My guess is that Keynes did not foresee this or take it into account.

5. In fact, one of Tyler’s claims, which I do not dispute, is that for many people the utility of work is actually positive. In any event, if you gave people the wealth they have in 2016 but they faced the composition of jobs that existed in 1930, I bet a lot fewer people would choose to work full time.

6. Tyler points out that one factor increasing reported work hours is women substituting market work for home production. Again, I agree. In a variation on (5), suppose you offered a modern working woman a chance to earn her current wage for doing housework and child care as it was done in 1930. How many women would take you up on that? I’m guessing not many.

7. Tyler predicts that more people will work more hours going forward. His reasoning is that in cross-section, we observe the highest earners tending to work more hours. If that same pattern holds in time series, and earnings go up, then we should see more hours of work.

I think that is a dubious inference. The “one percent” are different not just in terms of ability but also in terms of preferences. They choose wealth-maximization with more gusto than the rest of us.

There are plenty of reasons to choose something other than the wealth-maximizing career path. In my case, I have inexpensive tastes. I also have a low tolerance for interpersonal stress. Others may have a low tolerance for risk. Some may have a strong attachment to living in a location that does not offer the highest nominal salary.

There are many margins along which people can adjust to higher wealth. I do not think that we can extrapolate from the behavior of the “one percent” to predict how the rest of us will choose.

Related: Timothy Taylor on what is a good job.

A good job has what economists have called an element of “gift exchange,” which means that a motivated worker stands ready to offer some extra effort and energy beyond the bare minimum, while a motivated employer stands ready to offer their workers at all skill levels some extra pay, training, and support beyond the bare minimum.

Quantifying Consumers’ Surplus

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Tim Kane writes,

Simply put, the WTA value of modern things is vastly higher than older, more tangible, more commoditized goods. I have conducted some preliminary, not-ready-for-peer-review research and discovered a huge gap differential

WTA stands for “willingness to accept,” as in how much money would you be willing to accept to have only the medical care available in 1970? As Kane points out, measuring this is very important if we are going to make well-grounded statements about how economic welfare is distributed and how it is changing over time.

Unfortunately, this research probably will not definitively answer the question of whether there were more welfare gains in 1900-1950 than in 1965-2015. We cannot go back and find the WTAs for automobiles and air travel back then.

Why Did Saint Louis Decline?

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Brian S. Feldman writes,

The Wheeler-Rayburn Act of 1935 prohibited electricity, gas, and water utilities from speculating in unregulated businesses with ratepayers’ money and ensured that companies like Union Electric would remain locally headquartered and focused. The Robinson-Patman Act of 1936 protected small retailers by prohibiting manufacturers from giving larger discounts to chain stores, and the Miller-Tydings Act of 1937 did the same by permitting manufacturers to set a minimum price at which their goods could be sold. These laws safeguarded local-area retailers like Central Hardware and Bettendorf-Rapp supermarkets, as well as neighborhood pharmacies, bakeries, restaurants, clothing stores, and grocers—including those servicing the city’s predominant minority and African-American communities

These sorts of restrictions on competition were repealed in the 1980s, and subsequently many local St.Louis businesses were bought out or were driven out of business.

Pointer from Tyler Cowen. My remarks:

1. I thought that Phil Longman was planning to write this article.

2. As a St. Louisan, I remembered all the advertising slogans in the article. It never occurred to me that “I’m a meat man, and a meat man knows, the finest meats m’am are, Mayrose.” The one slogan that they author forgot to include is “Earn 4-1/14 on each dollar you own, at Community Federal Savings and Loan.”

3. The fact that some St. Louis businesses are no longer headquartered in St. Louis or no longer are in business is not some grand tragedy. It is part of what happens in a dynamic economy.

4. Why did the St. Louis advertising and PR industries lose their prominence? I doubt that public policy was the main factor.

Four Forces Watch

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Shelly Lundberg, Robert A. Pollak, and Jenna E. Stearns write,

We argue that college graduate parents use marriage as a commitment device to facilitate intensive joint investments in their children. For less educated couples for whom such investments are less desirable or less feasible, commitment and, hence, marriage has less value relative to cohabitation. The resulting socioeconomic divergence has implications for children and for future inequality.

American Workers and Substitution

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Raven Molloy and others, in a paper for a Brookings conference, show that there has been a largely unexplained decline in the rate of job switching and other measures of what they call labor market fluidity over the past three decades. Pointer from Nick Bunker via Mark Thoma.

My thoughts turn to the four forces, and in particular to globalization and the rise of the Internet. Think of three margins of substitution:

1. Substitute American workers for other American workers.

2. Substitute foreign workers for American workers.

3. Substitute capital equipment (including computers) for American workers.

If the elasticity of substitution has gone up for (2) and (3), might it not follow that we would see less of (1)? In more concrete terms, if a firm wishes to expand, nowadays it can increase production overseas or use more capital equipment, rather than hire more American workers. That would reduce (domestic) labor fluidity.