Cities as hotels
Earlier this year I posted about India’s private city, Gurgaon. Gurgaon has grown from nothing to a city of 1.5 million people in just 30 years and it has done so based almost entirely on the private provision of public goods, including transportation, utilities, and security. Gurgaon is a desirable place to live in India but it has grown haphazardly as a city of private oases, rather than as an integrated city. As a result, Gurgaon has not enjoyed all the benefits of economies of scale in infrastructure provision or the benefits that come from internalizing externalities–the types of benefits that are possible with a single owner or integrated political system. As Matt Yglesias explained at the time:
Imagine if someone owned all of San Francisco and leased the land and structures out. Well obviously he’d want to have some kind of fire department and building standards to protect his investment. And he’d want to have a security force, since crime would reduce the value of the rent. And he’d want there to be some parks, because people like parks and their presence will increase the rent he can charge. (Indeed, my building includes a small private park). And obviously he’d need schools and really all the rest. …But in order to internalize the benefits of privately provided infrastructure, parks, public safety, etc. the scale of the enterprise would have to be really big. Like the size of a whole city.
Gurgaon, however, is not unique. Private cities are growing throughout the developing world and some of them are quite large.
Renaissance Partners, the investment unit of Moscow-based Renaissance Group, plans to build a 6,400- acre city in the Democratic Republic of Congo as it seeks to benefit from Africa’s urbanization.
The Russian firm is working on a master plan for the new urban center after securing the land outside Lubumbashi, the country’s second-largest city… Renaissance is considering similar projects in Ghana, Nigeria, Senegal and Rwanda, he said.
“The West has peaked in terms of economic growth and the new markets are in Africa,” Meyer, 39, said. “And the main drivers of this growth in Africa are going to be cities.”
Renaissance’s Lubumbashi project will be more than double the size of Tatu City, the $5 billion center that the Russian firm is building from scratch outside the Kenyan capital of Nairobi. The Moscow firm, headed by Stephen Jennings, plans to take advantage of Africa’s economic growth and emergence of a growing urban middle class demanding better infrastructure.
6,400 acres is a small city, about the size of Apple’s home of Cupertino CA (pop: 58,000), but it is big enough that Renaissance partners will have an incentive to build public goods such as city-wide sewage, parks, roads (congestion pricing!), an electric plant and grid and so forth, exactly as Matt argued (see also The Voluntary City).
Private cities are happening now for a reason. Africa, India, and China are urbanizing more rapidly than has ever occurred in human history. In Africa, the number of urban dwellers is projected to increase by nearly 400 million, in India at least 250 million will move to cities and in China more than 400 million will move to cities in just the next 20 years. Not all of these people will move to older cities, which are not always in the right places and which rarely possess anything like the right material let alone the right political infrastructure. The rising middle-class want to live in first-world cities and in many of these countries only the private sector can deliver those cities.
The rapid urbanization of the developing world is an opportunity to remake cities anew. Private cities as hotels on a grand scale.
Is Social Security a Ponzi Scheme?
Matt Yglesias says anyone who thinks social security is a Ponzi scheme is nuts. So let’s take a look at some of these nuts. First up is Nobel prize winner Paul Samuelson who wrote:
The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times (or five times counting employer payments)!
How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.
…A growing nation is the greatest Ponzi game ever contrived.
Samuelson wrote that in 1967 riffing off his classic paper of 1958. By “as far as the eye cannot see” he apparently meant not very far because it soon became clear that the system could not count on waves of youths or rapid productivity growth to generate the actuarially unsound returns that made the program so popular in the early years.
Milton Friedman and Paul Samuelson rarely agreed on much but Friedman also called social security a Ponzi scheme. In fact, he called it The Biggest Ponzi Scheme on Earth but perhaps Yglesias puts Friedman in the nut category so let’s go for a third Nobel prize winner who recognizes the Ponzi like nature of social security, none other than…..Paul Krugman (writing in 1996):
Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in). (ital added, AT)
Of these, I agree the most with Krugman. Social Security is not necessarily a Ponzi scheme but it only generated massive returns in the past because of its Ponzi-like aspects. The Ponzi-like aspects are now over and social security is turning into what is essentially a forced savings/welfare program with, as Krugman recognizes, crummy returns for average workers. Social security is thus a Ponzi scheme which has not gone bust but it has gone flat.
Turnitin: Arming both sides in the Plagiarism War
The internet has made plagiarism much easier and by most accounts plagiarism is increasing rapidly. As a result, over a million instructors now use services like Turnitin, a plagiarism detector that compares submitted manuscripts against a large database of material, including previously submitted manuscripts. What is less well appreciated is that Turnitin also sells its services to students. In fact, students whose professors use Turnitin are encouraged to pre-submit their work to Writecheck which will analyze and “verify” for the students that their paper has “properly quoted, summarized or paraphrased” previous work and it will also relieve students from “worrying that their paper will be recycled without their knowledge.” Uh huh.
In other words, WriteCheck will tell students if their essays will pass Turnitin! David Harrington summarizes nicely:
Turnitin is playing both sides of the fence, helping instructors identify plagiarists while helping plagiarists avoid detection. It is akin to selling security systems to stores while allowing shoplifters to test whether putting tagged goods into bags lined with aluminum thwart the detectors.
A failure to think on the margin
In our textbook, Modern Principles, Tyler and I have “Thinking on the margin” as one of the “big ideas” in economics (I believe that other guy also mentions this concept.) USA Today, in a feature called Math tips for the rest of us, is sadly unclear on the concept of a marginal tax rate:
“That raise actually might not be as good as it looks. The extra money is nice, but it could very well bump you into the next tax bracket, possibly leaving you with less money than you had before the raise.”
As Dean Baker says:
Arghh!!!!!!!! ….No, no and 286,000 times no! The tax system brackets give marginal rates. This means that if the raise bumps you into a higher bracket then you pay more taxes only on the income in the higher bracket. Suppose that the tax bracket for income under $200k is 25 percent, and for income over $200k is 33 percent. If you get a raise that pushes your income from $195,000 to $205,000 then you only pay the higher 33 percent tax rate on the $5,000 that is above the $200k threshold not your whole income. Therefore, there is no (as in none, nada, not any) way that getting more money, and being pushed into a higher tax bracket will leave you with less money after taxes.
The breaking windows fallacy
Paul Krugman argues that the broken windows fallacy is not a fallacy in a liquidity trap:
…the United States is in a liquidity trap:…[t]his puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment.
…And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.
What is interesting about this argument is that Krugman has gone one derivative beyond the broken windows fallacy to create an argument requiring even stronger assumptions, let’s call it the breaking windows fallacy.
Bastiat’s assumption of a one-time, randomly broken window is more likely to be stimulative than an increase in the rate of window breaking. A one-time, window-breaking is a sunk cost that does not affect profit-maximization, at least not according to basic theory. (I say basic theory because once we introduce fixed costs, bankruptcy costs and liquidity constraints a one-time negative shock may cause a firm to shut down even when it would continue to produce without the shock, ala Krugman and Baldwin 1989). Thus a one-time window breaking may cause firms to increase spending. An increase in the rate of window-breaking, however, is a change in the marginal conditions for profit maximization that will cause some firms to exit the industry (reduce output) and thus the net effect on spending is more ambiguous.
Krugman implicitly assumes that a regulation is like a broken window but as far as costs are concerned a regulation (regardless of its ultimate benefits) is worse, it’s more like an increase in the rate of window-breaking. An easy way to see the point is to think of the regulation as a tax where the tax revenues are earmarked for a particular type of spending. Yes, the spending may be stimulative but even in a liquidity trap the taxing is not. Thus, the Keynesian (i.e. stimulus) case for cost-increasing regulations is more difficult to make than the case for increased government spending.
Addendum: See also Bob Murphy on a second, related problem in Krugman’s argument. See also Russ Roberts.
Denser Cities are Smarter Cities
Excellent piece by Ryan Avent in the NYTimes:
The American economy’s famous upward mobility rested in part on middle-class access to rich, entrepreneurial cities. This machinery is breaking down, however, mostly because upward mobility strikes too many residents of rich places as too messy a pursuit to accommodate. During the Industrial Revolution, for instance, millions of workers flooded into fast-growing cities. This produced slums, but it also allowed poor workers to take advantage of opportunities in new industries, a process that helped create the middle class.
Rapid urban growth would mean denser neighborhoods, which makes many Americans uncomfortable. Preventing this density, however, denies workers access to the best opportunities, constraining the mechanism that helps support a strong middle class.
Samuelson and the Birth of the Index Fund
John Bogle has a nice piece in the WSJ on Paul Samuelson and the history of the index fund, a great example of how theory has contributed to practice.
[Samuelson’s] article “Challenge to Judgment” caught me at the perfect moment. Published in the inaugural edition of the Journal of Portfolio Management in the autumn of 1974, it pleaded “that some large foundation set up an in-house portfolio that tracks the S&P 500 Index—if only for the purpose of setting up a naïve model against which their in-house gunslingers can measure their prowess.”
Presented with that challenge, I couldn’t resist….
Bogle launched the First Index Investment Trust but the project was almost stillborn because the initial underwriting was a huge failure. Only $11.3 million was raised, a 93% shortfall from the goal, and not enough to buy [100 shares of ?] all 500 stocks in the S&P 500. The underwriters urged Bogle to cancel but Bogle persevered despite catcalls from Wall Street about “Bogle’s Folly.”
The most enthusiastic media comments about the coming underwriting of the index fund came from Samuelson himself. Writing in his Newsweek column in August 1976, he expressed delight that there had finally been a response to his earlier challenge: “Sooner than I dared expect,” he wrote, “my explicit prayer has been answered. There is coming to market, I see from a crisp new prospectus, something called the First Index Investment Trust,” an index fund available for investors of modest means, “that apes the whole market (S&P 500 Index), requires no load, and keeps commissions, turnover and management fees to the feasible minimum, and . . . best of all, gives the broadest diversification needed to maximize mean return with minimum portfolio variance and volatility.”
…Today, the assets of the Vanguard funds modeled on the S&P 500 Index total $200 billion, together constituting the largest equity fund in the world. (The second largest, at $180 billion, are the Vanguard Total Stock Market Index funds.) Investors have voted for index funds with their wallets, and they continue to do so.
Make Loans, Not War
Bump it up to full screen for best viewing.
Intercontinental Ballistic Microfinance from Kiva Microfunds on Vimeo.
How to annoy Canadians
After almost a decade of rule, Vancouver has been dethroned as the most livable city by The Economist. One of the reasons for the downgrade was “recent intermittent closures of the key Malahat highway [which] resulted in a 0.7 percentage point decline in the Canadian city’s overall livability rating.” The only problem is that the Malahat is on Vancouver island, a 1.5 hour ferry ride and at least an hour or so of driving from Vancouver. Rating agencies, eh?
Hat tip: Monique van Hoek.
Ticket to Ride (Taxes in Everything)
BERLIN (Reuters) – Germany’s first “sex tax meters,” from which prostitutes can purchase a ticket for 6 euros (5.31 pounds) per night, will ensure the tax system is fairly implemented, a city spokeswoman said.
“Inspectors will monitor compliance — not every evening but frequently,” the spokeswoman told Reuters.
If caught without a valid ticket, offenders will first be reprimanded, then face fines and later even a ban.
Hat tip Daniel Lippman.
Assorted Links
1) Budget cuts force Santa Cruz police department to invest in preventing crime before it happens.
2) Dead peasant insurance on Texas teachers encouraged by Rick Perry.
3) Bryan Caplan’s advice on writing a non-fiction book.
5. Austin Frakt will blog a course this semester, Political Dynamics and Policy Dilemmas.
North Korea: The Long Coma
How has the dictatorship in North Korea survived despite mass starvation and economic failure? One factor that comes out of reading Nothing to Envy is that the North Korean iron curtain has been much more impenetrable than that of Eastern Europe. Consider:
In the nearly half a century that elapsed between the end of the Korean War and Mi-ran’s defection in October 1998, only 923 North Koreans had fled to South Korea. It was a minuscule number if you consider that while the Berlin Wall stood an average of 21,000 East Germans fled west every year.
The border with China is longer and more porous than the border with South Korea but until the 1990s there wasn’t much of an incentive to escape in that direction since China wasn’t much better off than North Korea. Moreover, if North Koreans are caught in China then even today they will be sent back,probably to a North Korean gulag; so many defectors try to cross from China to Mongolia through the forbidding Gobi desert. Mongolia will then “deport” them to South Korea.
North Korean propaganda has also been very effective because unlike leaders in Eastern Europe, Kim Il-sung “wasn’t merely the father of their country, their George Washington, their Mao, he was their God.” Here is Nothing to Envy:
Broadcasters would speak of Kim Il-sung or Kim Jong-il breathlessly, in the manner of Pentecostal preachers. North Korean newspapers carried tales of supernatural phenomena. Stormy seas were said to be calmed when sailors clinging to a sinking ship sang songs in praise of Kim Il-sung. When Kim Jong-il went to the DMZ, a mysterious fog descended to protect him from lurking South Korean snipers. He caused trees to bloom and snow to melt. If Kim Il-sung was God, then Kim Jong-il was the son of God. Like Jesus Christ, Kim Jong-il’s birth was said to have been heralded by a radiant star in the sky and the appearance of a beautiful double rainbow. A swallow descended from heaven to sing of the birth of a “general who will rule the world.”
To us this sounds ludicruous but I think Demick is correct when she writes:
…consider that their indoctrination began in infancy, during the fourteen-hour days spent in factory day-care centers, that for the subsequent fifty-years, every song, film, newspaper article, and billboard was designed to deify Kim Il-sung; that the country was hermetically sealed to keep out anything that might cast doubt on Kim Il-sung’s divinity. Who could possibly resist?
When Kim Il-sung dies, Demick describes one woman’s reaction:
Mrs. Song went blank. She felt an electric jolt shoot through her body as though the executioner had just pulled the lever. She’d felt this way only once before, a few years back when she’d been told her mother had died but in that case the death was….This couldn’t be true. She tried to concentrate on what the television broadcaster was saying. His lips were still moving, but the words were incomprehensible. Nothing made sense. She started to scream
“How are we going to live? What are we going to do without our marshal?” The words came tumbling out….She rushed down the staircase and out into the courtyard of her building. Many of her neighbors had done the same. They were on their knees, banging their heads on the pavement. Their wails cut through the air like sirens.
(See also this short video.) FYI, Demick also shows that not everyone believed and preference falsification certainly occurred, although until the regime collapses it is difficult, of course, to say by how many.
All of this works I think to explain the first few decades. Kim il-sung did help to expel the Japanese, and after the Korean war, North Korea was in fact getting better. Without knowledge of the outside world, claims of being the most developed nation on earth could be sustained. But by the 1990s it was clear things were getting worse and as China grew and starvation took hold in North Korea, the North Korean’s could see that the grass was greener on the other side. As a result, defections to China increased tremendously (see my previous post). Moreover, the transfer wasn’t only in one direction, goods and information from China came into North Korea and some North Koreans even traveled back and forth across the Chinese border. Yet, even with this increase in communication and the death of Kim Il-sung the regime held together.
Can North Korea continue to hold together after Kim Jong-il passes? It wasn’t easy to reintegrate Germany after the Berlin Wall fell and the ties there were much greater. North Koreans, it is said, still do not know that a man has walked on the moon let alone that South Korea has a far higher standard of living. What will happen when the regime in North Korea falls and North Koreans awake from their long coma?
Addendum: For more see this National Geographic video with secret footage from inside North Korea. Hat tip on the latter to Dan Klein and Fred Foldvary.
Twin Studies and Beyond
Brian Palmer has a very weak article in Slate trying to make the case that “Twin studies are pretty much useless.” The article is supposed to be about the problem of twin studies as a method but it begins by raising the specter of eugenics. As if that were not enough guilt by association, Palmer then argues that twin studies threaten democracy or at least they would if they were true. (The argument is unclear but seems to rest on the false assumption that if genetics matters then nothing else does. Need I quote the tiresome point that poor eyesight has high heritability but that doesn’t make eyeglasses useless etc.)
After having muddied the waters, the author’s primary argument is this:
Twin studies rest on two fundamental assumptions: 1) Monozygotic twins are genetically identical, and 2) the world treats monozygotic and dizygotic twins equivalently (the so-called “equal environments assumption”). The first is demonstrably and absolutely untrue, while the second has never been proven.
On the first point, the fundamental assumption is not that MZ twins are identical but that they are more identical than fraternal twins. The math is a bit easier if you assume that MZ twins share all of their genes and fraternal twins share 50% on average but this is not necessary. In fact, if you take into account that MZ twins differ genetically this raises the variation that you should ascribe to genetics. If twin one smokes and twin two does not and you assume that they share 100% of their genes then you must conclude that smoking does not vary with genes. If the twins share only 99.99% of their genes then smoking may vary with genes.
On the second point (the equal-environments assumption), Palmer writes as if comparing MZ and DZ twins was the only source of heritability estimates. In fact, heritability estimates are found by looking at twins raised together and twins raised apart, siblings and siblings raised apart, parents and child correlations and so forth and the results from these studies are broadly similar.
Even more important, for an article that goes on about “modern genetics” the author seems completely unaware that it is now possible to do a whole-genome analysis. That is, instead of assuming that siblings share 50% of their genes on average it is possible to estimate, sibling-pair by sibling-pair, how many genes siblings share and then correlate that with various characteristics. Obviously, it takes a lot more data to do a study like this but it has been done. Visscher et al., for example, use data from 3,375 sibling pairs to estimate the heritability of height. Interestingly, they find a heritability of 0.8, very close to that found in traditional studies.
Using whole-genome methods it is not necessary to assume equal environments for MZ and DZ twins. In fact, using these methods you can do genetic studies across unrelated individuals. For example, in Genome-wide association studies establish that human intelligence is highly heritable and polygenic, the authors note:
Data from twin and family studies are consistent with a high heritability of intelligence, but this inference has been controversial. We conducted a genome-wide analysis of 3511 unrelated adults with data on 549 692 single nucleotide polymorphisms (SNPs) and detailed phenotypes on cognitive traits. We estimate that 40% of the variation in crystallized-type intelligence and 51% of the variation in fluid-type intelligence between individuals is accounted for by linkage disequilibrium between genotyped common SNP markers and unknown causal variants. These estimates provide lower bounds for the narrow-sense heritability of the traits.
Twin studies have their problems, just like any method. The thrust of recent advances–advances which have been made to analyze and surmount the kinds of objections that Palmer raises–however, is that the results from twin studies are robust.
Ok, here is a final and telling point. Palmer argues that “Mutations and environmental factors cause measurable changes to the genome as life progresses.” Now that is true but you can judge how eager Palmer is to discredit twin studies regardless of the science by how he quickly concludes from this something which is truly laughable:
By the time a pair of twins reaches middle age, it’s very difficult to make any assumptions whatsoever about the similarity of their genes.
Nothing to Envy
Based on hundreds of interviews with escaped North Koreans, the novel-like Nothing to Envy is a fascinating portrait of North Korea, a sociological investigation of how a totalitarian state operates and a love-story with an O. Henry like ending. Here is one stunning excerpt that describes a defector as she crosses over into China.
Dr. Kim staggered up the riverbank. her legs were numb, encased in frozen trousers. She made her way through the woods until the first light of dawn illuminated the outskirts of a small village.…
Dr. Kim looked down a dirt road that led to farmhouses. Most of them had walls around them with metal gates. She tried one; it turned out to be unlocked. She pushed it open and peered inside. On the ground she saw a small metal bowl with food. She looked closer – it was rice, white rice, mixed with scraps of meat. Dr. Kim couldn’t remember the last time she’d seen a bowl of pure white rice. What was a bowl of rice doing there, just sitting out on the ground? She figured it out just before she heard the dog’s bark.
Up until that moment, a part of her had hoped that China would be just as poor as North Korea. She still wanted to believe that her country was the best place in the world. The beliefs she had cherished for a lifetime would be vindicated. But now she couldn’t deny what was staring her plain in the face; dogs in China ate better than doctors in North Korea.
Highly recommended. I will say more in future posts.
Hat tip: Bryan Caplan.
Republican Tax Increases
If Republicans have their way, taxes will increase next year by $120 billion. Republicans in favor of tax increases? Sadly, yes.
Last year the payroll tax on employees was cut from 6.2% to 4.2%, a policy that President Obama supported. Economists from across the political spectrum have also expressed support for a payroll tax cut including Keynes, Mankiw, Robert Reich, Dani Rodrik, Tyler and myself. The CBO scored a payroll tax cut as among the most effective policies for increasing employment, although it would have been better to cut the employer side of the tax.
The payroll tax cut was temporary, however, and is scheduled to expire next year. So who is in favor of increasing taxes?
Many of the same Republicans who fought hammer-and-tong to keep the George W. Bush-era income tax cuts from expiring on schedule are now saying a different “temporary” tax cut should end as planned. By their own definition, that amounts to a tax increase.
The tax break extension they oppose is sought by President Barack Obama. Unlike proposed changes in the income tax, this policy helps the 46 percent of all Americans who owe no federal income taxes but who pay a “payroll tax” on practically every dime they earn.
House Republicans appear to be most in favor of increasing taxes although some Republican Senators have also said they want to raise taxes. The failure of Republicans on this issue lends credence to Paul Krugman’s arguments:
How can [Repubicans not want to cut the payroll tax], when Republicans love tax cuts? The answer is, they don’t. They love tax cuts for the rich. Tax cuts for ordinary workers, many of whom will be those hated lucky duckies whose incomes are too low to pay income tax, are if anything something Republicans dislike.
Also, the GOP is against any idea that (a) comes from Obama (b) might help the economy before the 2012 election.
To their credit Romney and Gingrich are more supportive:
Former Massachusetts Gov. Mitt Romney did not flatly rule out an extra year for the payroll tax cut, but he “would prefer to see the payroll tax cut on the employer side” to spur job growth, his campaign said.
Former House speaker Newt Gingrich said Republicans will fall under increasing pressure to extend the payroll tax cut. If they refuse, he said in a recent speech, “we’re going to end up in a position where we’re going to raise taxes on the lowest-income Americans the day they go to work.”
Unfortunately, outside of the White House, Democrats are also not pushing for an extension of the tax cut.
Many Democrats also are ambivalent about Obama’s proposed tax cut extension. They are more focused on protecting social programs from deep spending cuts.
It’s a bad idea to raise taxes on working Americans in a weak economy and with interest rates so low the gains from reducing the deficit from current spending are low. Our political system is so dysfunctional, however, that Republicans may fail to support effective tax cuts precisely because a Democratic President regards them as important for economic growth.
Hat tip: Erik Brynjolfsson