Category: Economics
Chicago’s land tax and how the city survives being such a fiscal mess
https://twitter.com/Austan_Goolsbee/status/958696452125024256
But wait, isn’t Chicago a fiscal mess? How about the state of Illinois? It remains the case that living in Chicago is still remarkably affordable, and many of the neighborhoods have wonderful food, buildings, and offer a relatively safe (not always) and walkable environment. You may even hope to find a parking spot.
I would put it this way: there are many ways to impose a Georgist land tax, fiscal insolvency being one of them. Very wealthy people and institutions know that if they relocate to Chicago, they will be required to ante up for the final bill. And so they stay away. For a city of its size and import, Chicago just doesn’t have that many billionaires, nor do I think a rational billionaire should consider moving there.
In other words, there is a pending wealth tax. Either directly or indirectly, this will place fiscal burdens on Chicago land, the immobile factor. And this keeps down rents in Chicago now.
Overall, I do not recommend this fiscal course of action, and Chicago may well become a worse city due to eventual insolvency at the local and state levels. Still, if you are wondering how it is that Chicago is so affordable — and wonderful — right now, this is part of the answer.
I also should note that not every neighborhood in Chicago benefits from this equilibrium, as in some parts gentrification is difficult to come by.
How Do Beavers Make Steel?
David Friedman’s beautiful explanation of trade was made famous by Steven Landsburg in his chapter the Iowa Car Crop from The Armchair Economist.
David’s observation is that there are two technologies for producing automobiles in America.
One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody
knows about the first technology; let me tell you about the second. First you plant seeds, which are the raw material from
which automobiles are constructed. You wait a few months until
wheat appears. Then you harvest the wheat, load it onto ships,
and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.
I learned recently from Robert Allen’s Global Economic History that Friedman’s analysis was preceded by more than three hundred years by an unknown Micmac Indian who at the height of the fur trade observed:
In truth, my brother, the Beaver does everything to perfection. He makes for us kettles, axes, swords, knives and gives us drink and food without the trouble of cultivating the ground.
When is coarse grading better?
(8) Coarse Grades: Informing the Public by Withholding Information, by Rick Harbaugh and Eric Rasmusen
Certifiers of quality often report only coarse grades to the public despite having measured quality more finely, e.g., “Pass” or “Certified” instead of “73 out of 100.” Why? We show that coarse grades result in more information being provided to the public because the coarseness encourages those of middling quality to apply for certification. Dropping exact grading in favor of the best coarse grading scheme reduces public uncertainty because the extra participation outweighs the coarser reporting. In some circumstances, the coarsest meaningful grading scheme, pass-fail grading, results in the most information.
Here is the link to American Economic Journal: Microeconomics. Of course another mechanism favoring coarse grading is that corrupt grades are easier to spot. If too many one-star Michelin restaurants are slid up to three stars, it is obvious something is going on. But if on a scale of one hundred a restaurant that ought to be a 67 is given a 73, who is really to say what those numbers are supposed to mean? There are many market settings where the coarser grading scheme is preferred over the finer alternative.
Will truckers be automated? (from the comments)
Dan Hanson writes:
I wonder how many of the people making predictions about the future of truck drivers have ever ridden with one to see what they do?
One of the big failings of high-level analyses of future trends is that in general they either ignore or seriously underestimate the complexity of the job at a detailed level. Lots of jobs look simple or rote from a think tank or government office, but turn out to be quite complex when you dive into the details.
For example, truck drivers don’t just drive trucks. They also secure loads, including determining what to load first and last and how to tie it all down securely. They act as agents for the trunking company. They verify that what they are picking up is what is on the manifest. They are the early warning system for vehicle maintenance. They deal with the government and others at weighing stations. When sleeping in the cab, they act as security for the load. If the vehicle breaks down, they set up road flares and contact authorities. If the vehicle doesn’t handle correctly, the driver has to stop and analyze what’s wrong – blown tire, shifting load, whatever.
In addition, many truckers are sole proprietors who own their own trucks. This means they also do all the bookwork, preventative maintenance, taxes, etc. These people have local knowledge that is not easily transferable. They know the quirks of the routes, they have relationships with customers, they learn how best to navigate through certain areas, they understand how to optimize by splitting loads or arranging for return loads at their destination, etc. They also learn which customers pay promptly, which ones provide their loads in a way that’s easy to get on the truck, which ones generally have their paperwork in order, etc. Loading docks are not all equal. Some are very ad-hoc and require serious judgement to be able to manoever large trucks around them. Never underestimate the importance of local knowledge.
I’ve been working in automation for 20 years. When you see how hard it is to simply digitize a paper process inside a single plant (often a multi-year project), you start to roll your eyes at ivory tower claims of entire industries being totally transformed by automation in a few years. One thing I’ve learned is a fundamentally Hayekian insight: When it comes to large scale activities, nothing about change is easy, and top-down change generally fails. Just figuring out the requirements for computerizing a job is a laborious process full of potential errors. Many automation projects fail because the people at the high levels who plan them simply do not understand the needs of the people who have to live with the results.
Take factory automation. This is the simplest environment to automate, because factories are local, closed environments that can be modified to make things simpler. A lot of the activities that go on in a factory are extremely well defined and repetitive. Factory robots are readily available that can be trained to do just about anything physically a person can do. And yet, many factories have not automated simply because there are little details about how they work that are hard to define and automate, or because they aren’t organized enough in terms of information flow, paperwork, processes, etc. It can take a team of engineers many man years to just figure out exactly what a factory needs to do to make itself ready to be automated. Often that requires changes to the physical plant, digitization of manual processes, Statistical analysis of variance in output to determine where the process is not being defined correctly, etc.
A lot of pundits have a sense that automation is accelerating in replacing jobs. In fact, I predict it will slow down, because we have been picking the low hanging fruit first. That has given us an unrealistic idea of how hard it is to fully automate a job.
Will self-driving trucks increase the demand for truck drivers?
For that reason, Woodrow says that he saw their version of self-driving trucks as complementing humans, not replacing them. To make their case, Uber created a model of the industry’s labor market based on Bureau of Labor Statistics data. Then, they created scenarios that looked at a range of self-driving-truck adoption rates and how often those autonomous trucks would be on the road in comparison to human-driven vehicles.
Their numbers for autonomous-truck adoption are intentionally very aggressive, Woodrow says, corresponding to 25, 50, and 70 percent of today’s trucks being self-driven. These do not reflect an Uber prediction that between 500,000 and 1.5 million self-driving trucks will be on the road by 2028, but rather they allow the model to show the dynamics in the labor market that might result from widespread adoption. “Imagine that self-driving trucks are incredibly successful and impactful,” he says. “What would that mean?”
The other set of numbers in the model—the utilization rate of the self-driving trucks—is the component that leads Uber to a different analysis of the effect that these vehicles will have on truckers. Basically, if the self-driving trucks are used far more efficiently, it would drive down the cost of freight, which would stimulate demand, leading to more business. And, if more freight is out on the roads, and humans are required to run it around local areas, then there will be a greater, not lesser, need for truck drivers.
New issue of Econ Journal Watch
Professional Ethics 101: In the Journal of Economic Literature, Anne Krueger reviewed The Oxford Handbook of Professional Economic Ethics. The volume’s editors George DeMartino and Deirdre McCloskey reply, suggesting that Krueger’s review emblematizes the very concern of the book, the ethical competence of the economics profession.
The Progressive Legacy Rolls On: Also in the Journal of Economic Literature, Marshall Steinbaum and Bernard Weisberger reviewed Thomas Leonard’s Illiberal Reformers: Race, Eugenics, and American Economics in the Progressive Era. Phillip Magness arguesthat Steinbaum and Weisberger treat Leonard unjustly and that they fail in their attempt to excuse the progressive legacy of some of its disgraces.
Will the Real Specification Please Stand Up? Alex Young reports on mysteries in how specification description varies between a working paper and its published form in The Accounting Review, mysteries that data release would resolve. The authors Andrew Bird and Stephen Karolyi respond.
Guns and crime: The right-to-carry debate carries on, with emphasis on the handling of state trends and the crack-cocaine period, with Carlisle Moody and Thomas Marvell criticizing recent work, and lead author John Donohue firing back.
New entries extend the Classical Liberalism in Econ, by Country series to 17 articles:
- Ukraine: Mykola Bunyk and Leonid Krasnozhon treat liberalism in the country’s intellectual and political history and its scene today.
- Ecuador: Pedro Romero, Fergus Hodgson, and María Paz Gómez describe the country’s political fortunes and the role of liberal ideas, notably in dollarization.
EJW moves to the Fraser Institute.
EJW thanks its referees and others who contribute to its mission.
EJW Audio:
Land value capture is an idea whose time has come
That is the topic of my latest Bloomberg column, here is one excerpt:
Using land value capture for New York City subway improvements makes sense because other funding methods have failed politically. Earmarking some of the state income tax to the subway might be better, but people who don’t use the subway — the majority in New York State — just don’t want to pay. So the state must look elsewhere.
In the meantime, new subway lines are rare, even though the population and economic output of the city have grown substantially. The new Second Avenue line opened only last year, though construction started in 1972 and had to overcome numerous fiscal and political obstacles. On the older lines, delays are frequent and the system lacks modern technology. It is not unusual for signal switches to date from the 1930s. By one estimate, a much-needed revamp of the New York City subway system would cost more than $100 billion.
It is also good practice to consider when one’s argument doesn’t hold:
My own locality, Fairfax County in northern Virginia, treats landowners and real estate developers pretty favorably. They have been a dominant special interest group with many state and local politicians. That might not sound ideal, but those individuals have strongly supported the building out of the community, creating jobs and keeping down home prices. If landowners had been asked to foot more of the bill, the local political pressures for pro-growth policies probably would have been less strong and a NIMBY mentality would have prevailed. Unlike with the New York City subway, here the local interests have much greater sway, and thus land value capture could clog up politics rather than inducing new construction.
Recently I spent a day at a conference discussing Henry George’s “Progress and Poverty,” a late 19th century work that is perhaps the best-selling economics book in U.S. history. George spent much of his life campaigning for a relatively high tax on land and thus landlords, developing the fairness and efficiency arguments I mentioned above. By the end of the conference, I concluded that George had some good economic arguments, but also that he was politically naive. At the margin we should move in George’s direction, but ultimately landowners have to be part of the building coalitions rather than pure victims.
Do read the whole thing.
Ben Thompson on the Amazon consortium and health care
What would make more sense to me is that, having first built an interface for its employees, and then a standardized infrastructure for its health care suppliers, is that Amazon converts the latter into a marketplace where PBMs, insurance administrators, distributors, and pharmacies have to compete to serve employees. And then, once that marketplace is functioning, Amazon will open the floodgates on the demand side, offering that standard interface to every large employer in America…
This is certainly ambitious enough — basically intermediating U.S. employers and the U.S. healthcare industry — but in fact this only sets the stage for the wholesale disruption of American healthcare. First, Amazon could not only open up its standard interface to other large employers, but small-and-medium sized businesses, and even individuals; in this way the Amazon Health Marketplace could aggregate by far the most demand for healthcare.
And to close the piece:
My expectation, then, is not that the Internet methodically disrupts industry after industry in some sort of chronological order, but rather that the entire edifice lasts far longer than technologists think, only to one day collapse far quicker than anyone expected.
The ultimate winners of this shakeout, then, are not only companies that are building businesses predicated on the Internet, but just as importantly, are willing and able to build those businesses with the patience that will be necessary to wait for the old order to collapse, particularly if that collapse happens years or decades after the underlying business models are rotten.
Here is more, and I do hope you are all subscribing to Stratechery, which is one of the very best regular reads, worth the money.
My Conversation with Charles C. Mann
Here is the audio and transcript, Charles was in superb form. We talked about air pollution (carbon and otherwise), environmental pessimism, whether millions will ever starve and are there ultimate limits to growth, how the Spaniards took over the Aztecs, where is the best food in Mexico, whether hunter-gatherer society is overrated, Jackie Chan, topsoil, Emily Dickinson, James C. Scott, the most underrated trip in the Americas, Zardoz, and much much more.
Here is one excerpt:
COWEN: But if you had to pick a leading candidate to be the fixed factor, I’m not saying you have to endorse it, but what’s the most likely fixed factor if there is one?
MANN: Well, water is certainly a big candidate. There just really isn’t that much fresh water.
COWEN: But we can price it more, and since we have growing wealth — global economy grows at 4 percent a year — we can subsidize those who need subsidies…
MANN: You’re right. But water’s obviously one of them. But hovering over it is these questions about whether these natural cycles . . . is kind of a fundamental question about life itself. Is an ecosystem an actual system with an integrity of its own, with rules of its own that you violate at your peril? Which is the fundamental premise of the environmental movement. Or is an ecosystem more like an apartment building in which it is just a bunch of people who happen to live in the same space and share a few common necessities?
I don’t think ecology really has settled on this. There’s a guy in Florida, Dan Simberloff, who is a wonderful ecologist who has kind of made a career out of destroying all these models, these elegant models, one after another. So that’s the fundamental guess.
If it turns out that it’s just a collection of factors that we can shift around, that nature’s purely instrumental and we can do with it what we want, then we have a lot more breathing room. If it turns out that there really are these overarching cycles, which seems to be the intuition of the ecologists who study this, then we have less room than we think.
And:
COWEN: Jared Diamond.
MANN: I think an interesting guy who really should learn more about social sciences.
COWEN: Economics in particular.
MANN: Yes.
COWEN: Theory of common property resources.
MANN: Yeah.
And finally:
MANN: …What I think is the underrated factor is that Cortez was much less a military genius than he was a political genius. He was quite a remarkable politician, really deft. And what he did is . . . The Aztecs were an empire, the Triple Alliance, and they were not nice people. They were rough customers. And there was a lot of people whom they had subjugated, and people whom they were warring on who really detested them. And Cortez was able to knit them together into an enormous army, lead that army in there, have all these people do all that, and then hijack the result. This is an act of political genius worthy of Napoleon.
Self-recommending, and I am delighted to again express my enthusiasm for Charles’s new The Wizard and the Prophet: Two Remarkable Scientists and Their Dueling Visions to Shape Tomorrow’s World. Here is Bill Easterly’s enthusiastic WSJ review of the book.
Skyscrapers, Slums, and the Floor Space Index
Rent control is not the only problem plaguing housing in Mumbai, India. Mumbai also makes it very costly to build skyscrapers. In this video, I discuss the floor space index (FSI), a regulatory tool used around the world to tradeoff plot size and height. Higher FSI lets builders economize on land, reduces sprawl, and increases the value of public transportation. The lessons in urban economics go well beyond Mumbai. Check out the video. It’s one of the best in MRUniversity‘s India series.
My personal moonshot
That is a short piece I wrote for the inauguration of a new Mercatus website The Bridge. The focus of the piece is how I think about my own career and “moat”, excerpt:
My view, or at least hope, is that these diverse outputs [listed at the link] exploit two synergies. First, my work in any one of these areas publicizes what I am doing in the others. Second, what I learn from each task boosts my productivity in the others. Overall, I think of these activities as a kind of collective intellectual blitzkrieg.
I will step out of my modest demeanor for a moment and suggest that relatively few people can construct and manage such a broad portfolio, and so this gives me some kind of competitive advantage or “moat” in the world of ideas. My moonshoot, in essence, is trying to push as hard as possible on that advantage with this blitzkrieg.
And:
By the way, I love it when people describe writing a blog, or writing on the internet, as “popularizing” economics or something similar. That is a sign they don’t understand what is going on, that they don’t understand there is such a thing as “internet economics,” and also a sign they will not be effective competition. It’s really about “the internet way of writing and communicating” vs. non-internet methods. The internet methods may or may not be popular, and may or may not be geared toward a wide audience, so they are not the same as popularizing. One point of the internet is to find an outlet for super-unpopular material. What’s important right now is to develop internet methods of thinking and communicating, and not to obsess over reaching the largest possible numbers of people.
I would note that tylercowensethnicdiningguide.com fits into the picture too, although this essay was too short to explain the larger schema with that one.
Police Union Privileges, Officer Misconduct and Systems Thinking
In Police Union Privileges I explained how union contracts and police bill of rights give police officers privileges not afforded to regular people. What differences do these privileges make? A new paper, The Effect of Collective Bargaining Rights on Law Enforcement: Evidence from Florida, suggests that police union privileges significantly increase the rate of officer misconduct:
Growing controversy surrounds the impact of labor unions on law enforcement behavior. Critics allege that unions impede organizational reform and insulate officers from discipline for misconduct. The only evidence of these effects, however, is anecdotal. We exploit a quasi-experiment in Florida to estimate the effects of collective bargaining rights on law enforcement misconduct and other outcomes of public concern. In 2003, the Florida Supreme Court’s Williams decision extended to county deputy sheriffs collective bargaining rights that municipal police officers had possessed for decades. We construct a comprehensive panel dataset of Florida law enforcement agencies starting in 1997, and employ a difference-in-difference approach that compares sheriffs’ offices and police departments before and after Williams. Our primary result is that collective bargaining rights lead to about a 27% increase in complaints of officer misconduct for the typical sheriff’s office. This result is robust to the inclusion of a variety of controls. The time pattern of the estimated effect, along with an analysis using agency-specific trends, suggests that it is not attributable to preexisting trends. The estimated effect of Williams is not robustly significant for other potential outcomes of interest, however, including the racial and gender composition of agencies and training and educational requirements.
This is important research but although I’m not surprised that collective bargaining rights lead to more misconduct I do find the size of the effect implausibly large. One reason is that police union privileges are only one brick in the blue wall. Juries, for example, often fail to convict police even when faced with video evidence that would be overwhelming in any other context [e.g. Philando Castile]. Police union privileges are unjust and should be abolished but solving the problems with policing requires more than a change in naked incentives.
To solve this problem we need to adopt the same kind of systems wide thinking that has led to large reductions in fatal accidents in anesthesiology, airplane crashes, and nuclear accidents. Criminologist Lawrence Sherman writes:
The central point Perrow (1984) made in defining the concept of system accidents is that the urge to blame individuals often obstructs the search for organizational solutions. If a system-crash perspective can help build a consensus that many dimensions of police systems need to be changed to reduce unnecessary deaths (not just but certainly including firing or prosecuting culpable shooting officers), police and their constituencies might start a dialog over the details of which system changes to make. That dialog could begin by describing Perrow’s central hypothesis that the interactive complexity of modern systems is the main target for reform. From the 1979 nuclear power plant near-meltdown at Three Mile Island in Pennsylvania to airplane and shipping accidents, Perrow shows how the post-incident reviews rarely identify the true culprit: It is the complexity of the high-risk systems that causes extreme harm. Similarly, fatal police shootings shine the spotlight on the shooter rather than on the complex organizational processes that recruited, hired, trained, supervised, disciplined, assigned, and dispatched the shooter before anyone faced a split-second decision to shoot.
More on talent optimization and where it is weak and strong
Hi Tyler, one point you didn’t mention in your talent optimization post was career path dependence. Getting an assistant professorship might require some of the skills required to being a great professor, but it absolutely does not require any degree of interest in or talent at management, even though (at least in STEM) managing a lab, including people management, attraction of talent, administration, etc., is the critical skill.
One generalization is that any sort of administrative job that selects among a highly filtered group (senior medical administration at a hospital that mostly fall to MDs, executives within technical organizations such as CTOs) is likely forced to ignore the best talent.
Nick_L in the comment section provides another interesting example: “Talent selection in the Armed Forces is in an interesting category. The only way to achieve the rank of General (in G7 forces, at least), is by entry as a 2nd lieutenant. Due to the (understandable) narrowing of opportunities the higher you go in the armed forces, the best talent frequently leaves around the time they make Colonel.” Note that that comment assumes that the skills that make a great 2nd lieutenant or colonel are the same skills that make a great general.
That is from an email by John McDonnell.
Eliminating the mortgage tax deduction could boost homeownership
(3) Implications of US Tax Policy for House Prices, Rents, and Homeownership
Kamila Sommer and Paul Sullivan
This paper studies the impact of the mortgage interest tax deduction on equilibrium house prices, rents, homeownership, and welfare. We build a dynamic model of the housing market that features a realistic progressive tax system in which owner-occupied housing services are tax-exempt and mortgage interest payments are tax-deductible. We simulate the effect of tax reform on the housing market. Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare. Our findings challenge the widely held view that repealing the preferential tax treatment of mortgages would depress homeownership.
Here is the link to the AER piece.
The Return of Henry George?
NYTimes: Today, with the subway in precipitous decline and the city enjoying an economic boom, some policymakers think the time has come for the subway to profit from the financial benefits it provides, including its considerable contribution to property values.
…In Manhattan’s main business corridors, from 60th Street south, the benefit of being near a subway adds $3.85 per square foot to the value of commercial property, according to calculations by two New York University economists.
The notion that property owners should pay extra for their proximity to the subway is called “value capture” and has long been debated in urban planning circles. Now Gov. Andrew M. Cuomo, a Democrat, has made value capture a prominent part of his plan to salvage the subway system by proposing to give the Metropolitan Transportation Authority the power to designate “transit improvement subdistricts” and impose taxes.
..The Cuomo proposal calls for before and after assessments in neighborhoods where a new transportation project, like the extension of a subway line, raises property values. Officials would determine the difference between the previous assessment and the new, higher one.
Of the tax on that difference, 75 percent would go to the transit agency and 25 percent to the city.