Paul Romer has posted an important blog post on the urbanization process.  In the case of the nation of Colombia, he seeks to help the leaders of this urbanizing nation to create the necessary conditions to have productive and "livable" future cities.  Rather than embracing a "Soviet Style" deterministic plan, he advocates setting up rules of the game that permit many development paths as individual cities discover their industrial comparative advantage and the needs and desires of their growing urban middle class.

Here is a direct quote:

Q:  What do you think are the items that a “quality city” should have?

Romer quote "In the beginning, all you can do is make an allocation of public space. But a quality city needs a substantial amount of public space if it is eventually to support high density. For example, in mid-town Manhattan, the roads and the sidewalks alone take up about 30% of the surface area of the land. This was the allocation that was specified in the plan that drawn up in 1811, when what is now mid-town was rural farm area. Informal development will typically devote far less land than this for mobility. And remember, in 1811, when this plan was drawn up, people had no idea how we would be using this land today. They did not know what a bicycle was, much less what a bus or car was. But they knew that in the future, this generous allocation of public space would give the city the flexibility to take advantage of new opportunities."

Do you see the implicit discussion of "option value" here.  In a world with countless unknowns, where we know that we will learn about our changing environment, only a fool locks himself into a pre-determined path.

MORE from Paul Romer

How should the cities confront the fast urban population growth and the continuous industrial and business development?

There is great wisdom in the general advice that economists give: let the market guide most decisions. The important exception is that only a government can establish the division between urban public space and urban private land. The difficulty arises because the only affordable way to get this allocation right is to do it before urban development takes place. It is economically expensive to try to do what Haussmann did in Paris under Napoleon III, destroy many buildings and create new public space. Politically, I suspect that this kind of reallocation will never again be feasible. If a city gets the allocation of public and private space right, then the market can guide the development of urban floor-space for housing, industrial, and commercial use. In the beginning the process may look messy. Manhattan had shantytowns and informal development as it grew. But over time, the buildings can change. What won’t change is the quantity of public space.

What is the Urbanization Project proposal for developing cities with quality and long-term outlook?

We tell officials in rapidly growing cities that they have to set aside now the public space in the area where the city is likely to expand. To stay ahead of rapid growth, the city needs to look far into the future. We encourage cities today to plan for the expansion that will take place between now and 2050 under a fast growth scenario. If the city is growing rapidly, this can require a plan that could accommodate a 10-fold increase in the city’s built area. The land can continue to be farmed until the expansion comes. If there is less growth and the city does not need all this land for urban expansion, there is virtually no cost to having planned for too much. In contrast, if a city does not plan for enough and it suffers from disorganized informal development, the cost is very high.


This is fascinating stuff and I much prefer engaging on this subject matter rather than rehashing the recent economic growth debates.   Urban economists who seek to work on Romer's Agenda must think harder about what are the theory and empirical questions that need to be answered.

Here let me pose a couple;

1.  As Paul Romer presents his ideas to urban leaders, which urban leaders want to hear these ideas?  Ideally, such a selection equation could be estimated. Do younger , more educated leaders want to engage with Romer?  Are those with a "free market" perspective more likely to do so?   Which mayors in the developing world are willing to experiment with new ideas and why?

2.  If in a nation such as Colombia a few cities listen to Paul Romer and improve their public goods, will these cities grow faster in the medium term or will their populations swell as the rural poor increasingly move there? In an open system of cities featuring easy within nation migration, if a subset is well governed while others are not, do the incumbent land owners gain or lose?  

3.  For urbanites in LDCs, what are their key local quality of life desires?  Health care, good nutrition, employment, education for their kids? Street safety?  How does the urbanization process affect each of these?  One pathway would be that urbanization raises incomes and higher incomes permit (through Engel curve consumption paths) the ability to improve one's quality of life along all of the dimensions I just listed.

4.  As urbanization takes place in LDC cities, does income inequality rise or fall?  One could imagine a "great compression" similar to Goldin and Margo's findings for the U.S in the 1950s as the manufacturing sector's growth helps the less educated.  If income inequality increases, does this raise civic unrest?   Have improvements in policing (due to information technology) helped to mitigate the challenge of urbanization and crime in the developing world?

5.  Do mayors learn in networks?  Which mayors learn from the experience of which other cities?  When Mike Bloomberg experimented in NYC, which mayors were watching and imitated his "good ideas"?   Or, is it the case that it takes so long for a field experiment to be implemented and then be evaluated that mayors stop paying attention?

The Risky Business Project is not a Tom Cruise vehicle.  Instead, it is a group of talented people who are deeply worried about the consequences that climate change will pose. This group has now released a new book.  Here is its Amazon webpage.    The authors provide a real service highlighting the challenges we are likely to face if we take no actions to protect ourselves from the serious threat of climate change.

In this sense, the authors provide a blueprint for how entrepreneurs can make money by developing new products (whether they are electric vehicles, floating homes, well functioning air conditioners, Apps that highlight emerging threats) that will help us to adapt.

This type of project implicitly assumes that people form myopic expectations of the future and that they expect that "tomorrow will be like yesterday". In such a "Homer Simpson" world, then the Risky Business Project is important because it hopes to "wake people up".    Such a project is a pinch elitist as it implicitly assumes that most people are idiots who are unaware of the risks we face while only a few "enlightened individuals" recognize the upcoming risks.

But, are we Homer?

In my more nuanced model of people, we are a mixture of types of people.  We are probably 5% Mr. Spocks and 40% Homer Simpsons and 55% distracted suburbanites who recognize that climate change is a challenge but have other short term worries.  In such a setting, climate change won't be a major focus of attention but don't forget the 5% Mr. Spocks. Elon Musk is one of them. This group through their venture capital and entrepreneurial spirit will build the next generation of products that will allow your kids to continue to prosper in tomorrow's cities.   Crisis creates opportunity and capitalism (just as it gave you your cell phone) will create the products you need to adapt to our hotter future.  This is free market adaptation.

Since the Risky Business Project seeks to shift the political equilibrium it must convince the median voter to get active but the 5% of Spocks are already thinking about how to make money and to invest to make more money in our hotter future.Since ideas are public goods, their entrepreneurship will broadly benefit all of us.

For some specific readings on this subject, read my NBER paper:

While this blog post has focused on how entrepreneurs respond to future anticipated business opportunities, but risk averse people will see out short run self protection measures to reduce their risk exposure.   Read my air pollution mask paper set in China today. This paper provides a simple credible story of investments households will make to protect themselves. Such adaptation isn't costless but it is much cheaper than what the doom and gloomers claim it is.

Social learning is an important and interesting research and policy subject.  Suppose a big city mayor implements road pricing to mitigate the traffic congestion externality. Once this policy succeeds, do other mayors notice?  Does this success story nudge the other mayors to imitate the first mayor and introduce this pareto improving policy?  Or, do the other mayors convince themselves that you can't extrapolate from the first success story to predict that the same policy would succeed in another city?  

The AEA has posted a new 8 minute video making the case that a career in economics is both intellectually challenging and perhaps offers the prospect of having a job.  You can watch it here. 

A few thoughts;

1.  Unintended Consequences --- you don't have to be Sam Peltzman to recognize that almost all government policies have unintended consequences.   Since microeconomists can model substitution effects we are the right people to anticipate such consequences before well intended policies are implemented.

2. Big Data --- Economics offers better applied data analysis skills than any other field. Our courses are not watered down. They don't spend a lot of time "motivating" material. Instead, the professors get down to business explaining how to do applied econometrics for answering both "reduced form" and "structural" questions.  It is no accident that some of the best applied researchers such as Pat Bajari are such major stars at billion dollar companies such as Amazon.

3. Good Public Policy --- See point #1 above. Many young people are passionate about public policy. Well, what is "good" public policy?  After you start to think about Arrow's Impossibility Theorem and you think about Hicksian Pareto Improvements, you immediately see that economics is crucial here.  Example; How much would Los Angeles gain from introducing road pricing?  Given that the answer is huge, why hasn't LA already adopted this policy?  There is much to be done researching  urban political economy.  Researchers who are able and willing to implement field experiments live an exciting life as they actually can identify potentially valuable policies by piloting them to test if they are effective.  Policies that appear to be effective can then be scaled up.

4. Only Nixon can go to China (source)   -- What do I mean?    Economists have credibility (relative to other academics) because we have earned it through the rigor of our training and because our subject is transparent. Other researchers can (and should) replicate one's findings.  This potential for having one's work debunked through a failure to replicate creates strong incentives to get things right.

5.  Economics merges math, stats, and social science ----  Researchers such as Acemoglu and Glaeser have a wide toolkit that spans history, stats, basic math, econ and political science.  The ability to see the connections between fields is both exciting and really pays off.  By highlighting the synergies across fields, economics represents "Liberal Arts" at its best. No we don't spend any time discussing Plato but we get down to business and the profession rewards the Reese's Peanut Butter Cup!  (recall that company is built on the synergy between salt, chocolate and peanut butter).

6.  While economists differ with respect to their political ideologies, we are more transparent about how such a worldview influences how we cook our cakes.   Two examples;

A macro economist who introduces frictions into her model is likely to find that the equilibrium is not a pareto optimum and Chicago guys such as me will scratch our heads but this then starts an honest discussion of why the frictions exist and whether capitalist entrepreneurs are taking any steps (because of the profit they could earn) to shrink these frictions. A real world example are internet websites that match workers to jobs (Monster?)  such innovations chip away at Diamond-Pissaderedes-Mortensen style search models as the matching converges to a Walrasian equilibrium.

A micro economist who seeks to "prove" that raising the minimum wage does not cause unemployment must be transparent about his econometric model and about the sources of variation that identify the model. If a city raises its minimum wage during a boom, the city may experience a reduction in its unemployment rate (not because the new law achieved this but because during a boom a leader can get away with inefficient policies).  Basic econometrics would allow the researcher to disentangle these various effects.

These two examples highlight that economists are more honest than scholars from other fields concerning our "biases". We are more explicit about our modeling assumptions and you can't hide when you write down your math.  Other fields use "big words" that mask what they are really saying as they write using code words.

For a finite price, I tried to sell Thomas Piketty but I can't find a buyer.  Economists of the world sign up for REPEC Fantasy Economics. 

Matthew Edwin Kahn's IDEAS fantasy league portal

Messages

To dismiss the dated system messages, either make a change to your roster 

1. 2015-08-25 13:32:02: You sold Marianne Baxter for 5. Congratulations!
2. 2015-08-25 13:32:02: You sold Laurence Ball for 25. Congratulations!
3. 2015-08-25 13:32:02: János Kornai's auction has expired and attracted no bid.
4. 2015-08-25 13:42:02: Thomas Piketty's auction has expired and attracted no bid.

USC's fall semester has just started and I have already taught for 4 hours, met with students and colleagues, attended lunches, seminars and cracked jokes and tried to teach the power of price theory applied to environmental and urban topics.   My undergraduate class has an enrollment of 24 students and USC has been kind enough to assign me a high quality TA who has already double checked my algebra for our first calculus based homework assignment.   The Department has already agreed to pay for my student lunches with my students.  This is a different experience than what I have been used to when I taught at that other Los Angeles university.

In a small classroom of 24 students, I can watch the whole room. I know who is paying attention and who is sleeping --- I know exactly what is going and this real time feedback is quite useful.  Like a quarterback in football who calls an audible if he doesn't like the defense he sees, I change gears and talk about new things if I sense that the room is bored.  

USC's Economics Department is small in terms of the count of faculty but it is a very high quality group of scholars.  The U.S REPEC rank for USC Econ (throwing out 2 business school departments) is #27 and that is not its steady state.   I predict it will be top 20 in 5 years and top 15 in 12 to 15 years.   USC takes great pride with respect to its professional schools and there are very strong economists at the Price School and Marshall School (such as Dana Goldman's health group).

Eduardo Porter makes some bold predictions in today's NY Times.  He writes;   "A totalitarian regime may be good at deploying capital and labor to deliver raw economic growth. Yet autocracies are not good at fostering innovation and creativity, which rarely flourish where there is no freedom of thought or speech. While “make the economy grow and don’t have demonstrations” might have worked in the past, a bureaucratic command and control structure will have a hard time handling the more complex demands of citizens in countries that reach middle-income status."

I believe that Mr. Porter underestimates the short term potential for innovation and creativity from young, educated and internationally savvy Chinese urbanites.    Walk UCLA's and USC's campuses and you will see many Chinese students. These students are not in Los Angeles simply to memorize and bring home everything they have seen and photographed. Instead, I believe that a more complex learning process is taking place.  China's leading universities are becoming more serious as more and more of their faculty are trained by leading Western Universities.  Even scholars who have done their graduate work in China have spent at least a year in the U.S learning our intellectual approach to research.

How will this diffusion of ideas affect China's medium term growth? Mr. Porter appears to believe that the Chinese government "controls" the economy.  Of course, the government influences the economy but the ultimate wealth of nations (both in the United States and China) is created based on human capital.  China's cities are transitioning from heavy industry to the mind and this will mean that "blue skies" will become a productive input in helping China to grow.

This was a key theme of my 2013 Journal of Economic Literature paper (joint with Siqi Zheng) and our forthcoming 2016 Princeton University Press book.

The NY Times should be honest and simply state that it wants a bloodless revolution to take place in China.  How much richer would China be in the long run if this occurs?  Daron Acemoglu and his co-authors continue to study the causal link between democracy and income.  

Returning to China's nascent entrepreneurship, take a look at this. Do you smell a future Uber or Snapchat?  This is the tip of the iceberg.

Back in 2005, Ed Glaeser and Joe Gyourko published an important paper on the asymmetric implications of durable housing.  Detroit was their favorite example. During the 1950s as the car industry boomed in Detroit, developers built houses that could last for 75 years. Flash forward to the 1980s and the jobs were gone but the houses were still there. From basic supply and demand, the price of these homes plummeted and Detroit became a poverty magnet in part because it had so much low quality housing.  This process fed on itself.

This process may now play out in the Tokyo Suburbs. This article provides the facts.    Japan is an aging society and this nation has built up much more housing than it now needs.  The article does a great job sketching the sources of the problem. The obvious "cure" for the problem would be to allow Chinese investors to buy this suburban housing but that is unlikely to occur in the short run.

To an economist, there are several interesting issues here.  Housing markets are interconnected because homes are substitutes for each other.   For young people starting their careers in Tokyo, how much cheaper will apartments in downtown Tokyo become because housing is basically free at the fringe?  This cheap housing (combined with bullet train access) helps to put pressure on rents in more desirable areas.  Similar to Detroit, the government should think about paying for demolishing the excess vacated homes.  How quickly will government engage in this activity?   For homes surrounded by vacant decaying homes, what is the negative externality on their home prices?   Japan has fewer drug and gang problems than in the United States.  Will this negative externality be smaller there than what occurred in the U.S when homes went into foreclosure during the Great Recession of 2008?

The article tells a "Richard Florida" story that artists and other hipsters who do not need to be in the Big City on a daily basis are seeking out the fringe cheap housing. This is a nice example of heterogeneity and arbitrage. According to Florida, such artists can jumpstart an area. The Japan case study will offer a nice test of his optimistic hypothesis.

Columbia University celebrates the contributions of Ken Arrow (a PhD graduate of the program). This video is worth watching.   You will see three Nobel Laureates and other superstars discuss his influence.

How much do urbanites value "green space"? Do they value it less if it is very hot outside?  This article argues that Singapore's high daily heat reduces the joy that their urbanites gain from proximity to green space.   Given the impending challenge of climate change, I find this an interesting topic but I have several questions.

1.  The authors of the academic study rely on a survey rather than studying home prices close to green space. Does their survey responses suffer from "cheap talk"?

2.  Having lived in Singapore for a month of my life, I know that because of good public transit that everyone has pretty good access to "green space" in Singapore.  So, what is the control group?

3.  Singapore really comes to life at night when the temperature falls to merely 75 degrees to 80 degrees F.  At 10pm at night you can see vigorous kendo fighting and thousands of people walking along the river near the Marina Bay Sands Resort to see the evening fireworks.    Take a look at this picture to get a sense of the spectacle.

Yes, it is 90 degrees each day and people stay inside but at night this safe efficient city comes to life.  This is our future and Singapore shows how we will continue to thrive as urbanites.

If you seek to stimulate the local Singapore economy, then you should stay at this hotel.