Very good questions to ask

The real question was whether low-income residents moved away from “gentrifying” neighborhoods at a higher rate than they did from nongentrifying neighborhoods.

That's from an excellent piece in Slate about the vagueness and questionable utility of the concept of gentrification. Of course the opposite of gentrification--neighborhoods that stagnate and decline--is a much bigger problem that doesn't always attract enough media attention. I agree with mostly everything in the article, although the idea of community value in neighborhoods not being priced into the property exchange markets doesn't really come up.

A cultural stickiness approach to gender inequality

Project Syndicate has an interesting short essay about the economics of gender:

The finding suggests that in plough-using societies, patriarchal values circumscribed female mobility, and allowed men – as a result of their greater economic contribution – to undermine women’s autonomy. Remarkably, these values, shaped many centuries ago, when certain physical attributes might have been important, have survived in modern societies, in which such attributes have become largely irrelevant.

Climate change adaptation

Old Dominion University in Norfolk, Virginia has opened the country's first academic institution focusing on climate change adaptation. The hope is that by locating in a city that's very exposed to climate change risks, the institute will have opportunities to work with government and economic stakeholders free of political strife.

A core mantra of climate change adaptation is competition between places: if certain regions or cities are struggling with costs associated with climate change, labor and capital will naturally flow away to find safer harbor (so to speak). Norfolk is betting that investing now in resilience strategies will pay off in the future by reducing the costs of adaptation. Preemptively measuring the effectiveness of various interventions may be possible by comparing things like insurance premiums along coastal cities, although the massive Navy base (and the implicit government guarantee it represents) could pose a methodological problem.

An electricity sharing economy

Matthew Crosby of the Rocky Mountain Institute says rooftop solar and other emerging technologies will enable peer-to-peer electricity markets:

For more than a century, the electric grid has relied almost exclusively on centralized infrastructure, such as large power plants and long-distance transmission lines. But distributed energy resources (DERs) -- and the customers buying, installing, and using them -- are changing the economic landscape for the power sector. Energy efficiency, demand response, distributed generation such as rooftop solar, distributed storage such as batteries, smart thermostats, and more are poised to become the front lines of a sharing economy revolution for the grid. Shared economy solutions will help to increase asset utilization rates and improve consumer and overall system economics, just as they have for other sectors.

The Knowledge Problem has further commentary on the idea, and Brad Plumer at Vox has been following the solar beat, most recently with a good article on trends in financing mechanisms for rooftop solar. The environmental and economic resilience aspects of transitioning to a more distributed electricity market are clear. With current interest rates so low, now is the time for governments to encourage investments in enabling infrastructure like smart grids--instead of speculating big on high-speed rail megaprojects with uncertain return on investment potential.

San Francisco's housing market is really screwed up

A few months ago Tech Crunch ran this fascinating, epically-long analysis of San Francisco's housing disaster. A taste:

Rent control is a naturally divisive topic in the tech community. Progressives view it as a sacred right that protects the remnants of a working- and middle-class in the city. “It’s a non-renewable resource,” Erin McElroy, who is part of the Anti-Eviction Mapping Project, explained to me. 

But the tech community is both socially liberal and market-oriented, with more than 90 percent of political donations from Apple and Google employees going to Barack Obama in the last election. So price controls in the name of community stability and equity just makes people’s brains explode.

There are numerous interesting nuggets and concepts packed into the report, but a big takeaway for me is just how strange the politics of land use are in most cities. Most cities are overwhelmingly dominated by Democrats, but there seems to be a huge opportunity for Republicans to naturally extend their governing philosophy and take a strong market urbanist position on these issues. The policy solutions are just waiting collecting dust.

The unseen costs of globalization

The Ebola situation in West Africa has brought to light an interesting fact about our modern, globalized economy: though massive trade has enabled incredible increases in human welfare, it has dramatically increased the potential for contagious diseases to spread to scales unprecedented in history. Other costs associated with globalization--environmental destruction, cultural flux--are more visible and generate more sustained political salience.

And interesting fact about pandemic risk is that the best way to defend against it is more of the very thing that creates it: trade and development. Richer individuals and economies are more resilient to disruptions caused by disease, and higher-quality political institutions can better cope with potential outbreaks through public health and law & order efforts.

Keep dynamic pricing details private and anything is possible

James Surowiecki has a great article about the psychology of Uber's dynamic pricing model:

The basic reality of Uber’s business model is that when people want a ride the most, it’s likely to be the most expensive. This will always be irritating, just as exorbitant prices for last-minute airline tickets are irritating. But over time, surge pricing will also become more familiar and less surprising.

From a customer-relations and marketing perspective, I've never really understood why Uber has insisted on making its 'surge pricing' multipliers so public and in-your-face. Most products that use dynamic pricing keep the sausage-making in the kitchen, and simply provide a price without additional context. Most consumers accept the vast majority of product prices on a take-it-or-leave-it basis, and aren't too concerned about why a price is what it is.

If for whatever reason Uber can't rid itself of the self-damaging public surge multiplier, I suggest implementing a loyalty scheme whereby frequent users could sign up for some amount of future rides at a locked-in price. Uber would cover the difference to the driver to ensure the demand-response function of dynamic pricing stays intact. Uber's ability to pool risk opens up tremendous potential. You could even imagine a service where Uber prices become cheaper the more you use it (again, with drivers collecting full prices and Uber making up the difference).

Self-Checkout Technology is Destroying Our Culture

I read a great book a few years ago called Identity Economics, basically arguing that a productive avenue for economic analysis is to incorporate 'identity' costs and benefits into individuals' utility functions. Identity costs and benefits are largely determined by culture and social interaction. It focused a lot on workplace issues, but the most interesting application of the approach is in consumption habits.

For example, more and more restaurants and convenience stores are offering self-checkout services and online ordering. It seems intuitively true that these innovations, designed mostly with an eye towards reducing employers' costs (labor in the case of self-checkout kiosks) have really interesting effects on consumers' consumption habits.

These technologies insulate consumers from the effects of social and cultural norms over buying patterns. Higher levels of anonymity when buying stuff reduces the costs--or benefits--associated with personal identity. The key empirical question is about magnitudes: does CVS see an increase in sales of embarrassing or socially-undesirable goods after installing self-checkout machines? What about a reduction in 'filler' items designed to mask the conspicuousness of purchasing these items?

On a macro-level, the question is whether these changes result in better or worse outcomes relative to your big policy goals. Are taboos against bingeing on unhealthy food (presumably a beneficial function of culture) becoming less effective? That's bad. Is the awkwardness of purchasing condoms or certain medical products reduced? That's good. Social and cultural norms have benefits and costs. Anonymous consumption shields a massive aspect of modern life from them. We'll see what happens.

Environmental Gentrification

CityLab has an interesting piece covering some new research into the effects of brownfield reclamation on nearby housing prices. Establishing causation in environmental areas like this is notoriously difficult, but if there is a real effect here it leads to an interesting question about the process of gentrification: will proposed environmental improvements come to be seen as threats to low-income communities, just like new condos or transit links? I sort of doubt it. But why?

Typically anti-gentrification groups fight a new development because they see it as having the potential to raise housing costs, pushing existing residents out and destroying embedded community value. Via the process of public reasoning, some projects are seen to have benefits that outweigh these risks, while others are not and are opposed. In this framing, residents might accept environmental improvements simply because the benefits of reducing exposure to environmental hazards are seen as a worthwhile tradeoff compared to gentrification risks.

An interesting feature of this is the large overlap between environmental justice coalitions and anti-gentrification coalitions. Whether environmental improvements are projects that might split these two groups is a really interesting question. More fundamentally, to what degree does the ideal of environmental justice conflict with the ideal that residents should be free to make their own personal decisions regarding the tradeoffs between environmental quality and housing price?

A Few Thoughts on the Sharing Economy

Medium has a pretty interesting article that purports to be a general critique of the new sharing economy concept. A few thoughts:

1. What is the sharing economy? Simply put, it is the increased variabalizeability of services driven by a reduction in transaction costs. This is essentially the service and flow economy described in the seminal book Natural Capitalism.

2. Although the sharing economy might have a cultural and marketing affiliation with anti-capitalists wishing for a "righteous return to human society's true nature of trust and village-building that will save the planet and our souls", the sharing economy is still very much a market by and for massive-scale urban populations.

3. The sharing economy drives resource efficiency on the intensive margin, which probably encourages some level of rebound effect. It seems to me that one of the greatest avenues for a sharp critique of the sharing economy is the potential for the rebound effect magnitudes to outweigh any resource savings in an absolute sense in some socially undesirable service.

4. Another possibly powerful critique (also absent from the article) concerns rent-seeking. The increased ability of owners of service-producing goods to derive income from leasing out their goods might reduce their incentive to engage in economically productive behavior.

5. The resentful undercurrent in the article about how the sharing economy is being driven by poverty and unemployment--and therefore is somehow blameworthy--is totally incoherent.

6. The argument that the sharing economy supports and continues existing institutions and systems of racism, classism, and social inequality--and is therefore bad--is weak. Just because a new technology doesn't solve your particular moral hobbyhorse doesn't say anything about its potential effects in other areas.

7. That said, I suspect the sharing economy would actually help in this regard relative to the current status quo. The market mechanism and competition are powerful tools for eliminating discrimination. The sharing economy, by reducing the transaction costs and fixed costs associated with obtaining and selling services, will probably widen the circle of people and activities participating in markets.

Is Small Urban Manufacturing Really Manufacturing?

I often hear vague talk of a new manufacturing renaissance in cities, one driven by technologies like 3D printing and robotics and sometimes grouped with various hipster-bobo artisanal products. But how similar is this new class of manufacturing to traditional categories like automobiles in terms of positive spillover effects? A few thoughts:

1. The stated promise of this new sector is to radically increase productivity in manufactured goods by lowering initial capital expenditures, increasing customizeability (thus increasing potential aggregate market), reducing inventory costs (thus reducing short-term financing demands), increasing responsiveness to changes in market demand, and reducing transportation and infrastructure costs by producing close to market.


2. Manufacturing has historically been advantageous in growth and development because using machines to make stuff has allowed big productivity gains without big education and skill gains. Factories can employ low-skill/low-education workers, and teach them how to operate equipment. 


3. But much of the hot new manufacturing in rich cities is more like the service or tech sectors--it requires high existing levels of skills and education (creativity, computer skills, etc.). This makes me very skeptical about claims regarding the race/class/employment benefits of any urban manufacturing renaissance. These businesses will draw their workforce away from existing high-skill/high-education jobs instead of hiring from low-skill/low-education labor pools. In fact, fast food restaurant jobs share more similarities to the urban manufacturing/factory jobs of old in terms of skill requirements and advancement opportunities.


4. These new industries aren't geared as much around trading. That's one of the biggest advantages of traditional capital-intensive manufacturing: the barriers to trade are low compared to other sectors like services. Focusing more towards home markets reduces the need for firms to develop flexible marketing and supply-chain systems, limiting knowledge learning and the ability to scale up.


5. I worry that if local urban manufacturing really takes off the reduced demand for imported goods will put developing nations at a disadvantage because they won't be able to rely as much on manufacturing for export as a development path.


6. The fact that expensive high-rent cities like New York have so much primo land (on the water, near retail hubs, etc.) still devoted to comically-low-value uses like warehouse storage and parking is a sad reflection of how screwed-up the land market is (zoning restrictions, excessive veto power over new construction by local residents etc.). Maybe the urban manufacturing renaissance can use these spaces and get the land closer to its highest and best use. This to me seems like the most undervalued benefit of small urban manufacturing. But never forget, these low-productivity spaces shouldn't even be there any more! By far a more optimal use would be to change zoning and building restrictions to allow developers to just demolish all the warehouses and old blighted factories and build housing and office towers and stuff.

Baby Steps Towards Restroom Reform

A new startup is planning a pay-for-access washroom in Manhattan that basically sounds like a capsule hotel. As I've previously noted, the supply of public restrooms in most big US cities is pathetically low. Many cities, such as Tokyo, have publicly-funded restrooms. Other cities have privately-supplied restrooms that charge small fees. The US has neither, with most public restrooms provided as a complementary service by private businesses selling other stuff. This system worked okay because overuse of these free restrooms was curbed by norms--polite "for customers only" signs etc.

For whatever reason these norms are breaking down and businesses are decreasing the quantity and accessibility of their restrooms. This Manhattan experiment is nice because it can help shift the way people think about restrooms: as a valuable good that people should be willing to pay for. Smuggling this idea into a business model that bundles a bunch of products together (storage lockers, showers, a quiet space, etc.) is both clever and disappointing. It's clever because it emphasizes the positional value of the package by appealing to rich folks. It's disappointing because it fails to target the low-value customers, like tourists, who's willingness-to-pay for a public restroom might fall below the membership fee. 

Does Dynamic Pricing Have a Speed Limit? Should It?

On the heels of the big Uber flap over its dynamic pricing model, and Matt Yglesias exploring alternatives to explicit dynamic pricing schemes in the restaurant industry, there's been a lot of discussion over the variability of prices lately. The reasons are pretty clear: technology and the internet have crashed the costs associated with setting up transactions down to essentially zero. A corollary of this is that with an algorithm (or the click of a button) you can change prices constantly. Input commodities have had rapidly-changing prices for a long time, but front-end dynamic pricing has been limited in the customer service domain (hotels, lobster shacks, etc.) Clearly we're seeing the conflict that arises when people's norms and expectations don't keep pace with technological change.

Dynamic pricing seems to be mostly a good thing. It uses resources more efficiently (along the intensive margin), allows more price discrimination (charging people what they're willing to pay), and incentivizes new supply during peak times. But in some areas there are probably limits to the social gains to be had from ever-faster price changes. The best example of this is high-speed trading in financial markets, which now operate at speeds far exceeding what their supposed capital-allocation function requires.

As parts of the economy become more "service-and-flow"-oriented (also called the "sharing economy") and less ownership-based, the moral implications of constantly-shifting prices become apparent. If few people own cars and simply order the service of road transportation (from self-driving cars, or cheap ride-sharing programs), everyone becomes very exposed the uncertainty of changing prices. Certain groups (like those with money!) will be better able to cope with the added uncertainty. If you can't say for certain how much your parking meter is going to cost before you leave the house, maybe you'll just stay home.

Perhaps everyone will simply adapt and routinize price-checking in the morning alongside their coffee and newspaper, but for people who's mental bandwidth is already stretched this could be a problem. Lifestyle complexity is regressive. From this perspective, certain forms of regulation can be justified on the grounds of limiting the adoption of dynamic pricing. I've tended to be a big supporter of eliminating building and rental/housing restrictions, but imagine what a truly efficient housing sector would mean in sellers-market conditions: would renters have to pay different amounts every month? Every week?

We're already seeing business trying to reduce the stickiness of their labor costs by rebalancing to more part-time and temporary workers. While the macroeconomic effects of this trend might be nice (for GDP growth at least, not so much for unemployment), more and more dynamic pricing in key sectors could also have worrying pro-cyclical implications. The effects of demand shortfalls could more easily (and more quickly) ripple through previously isolated areas of the economy. How these competing effects of faster price changes actually compare in the data is a underexplored topic for researchers.

Hypothesis About Chinese Takeout and Christmas

Many readers might be aware of a somewhat tongue-and-cheek, possibly mythical tradition among Jews to order Chinese food for dinner on Christmas. Presumably its origins lie in the idea that most places serving Western cuisine are closed. Without having any data available, or really taking the time to look for any evidence whatsoever, it seems highly unlikely that this tradition, if it exists, would generate any offsetting bump in sales.

Even assuming the tradition is real and substantial, I'd guess that there's some big substitution effects and selection bias at play. It seems likely that the type of person who is going to: A) know about the tradition, and B) observe the tradition, is also the type of person who likes Chinese takeout a lot and eats Chinese takeout regularly. This means eating Chinese food on Christmas probably just substitutes with some other day of the week where it would have been ordered, resulting in no net sales increase.

The Planet Money T-Shirt is Going to Have a Huge Black Market

Planet Money, a fantastic radio show/podcast/blog popularizing economics has recently been working on a cool project following the complete supply chain of a simple branded cotton t-shirt. The idea is an extension of the book Travels of a T-Shirt by Pietra Rivoli that many of us probably read in an introductory macroeconomics class.

Delivery of the shirts is fast approaching, and naturally the coverage and publicity of the endeavor is increasing. Strangely, however, only people who pre-ordered the shirts months ago during the very earliest phase of the project will be able to purchase them. If you've recently been turned on the the show, or are just now hearing about these t-shirts, you're out of luck. My prediction is that the buzz surrounding these shirts will generate considerably more demand than the fixed pre-ordered stock, creating a financial incentive for certain enterprising econ nerds to resell them on a secondary market.

I suspect that encouraging this behavior may have been the Planet Money team's plan all along, and covering the secondary market would be a great opportunity to do a show on price discovery and the role that prices play in revealing information about consumers.

Unionization is Tough at the Low End

Wonkblog has an interesting and somewhat rambling discussion of the various troubles at one of the nation's biggest unions, IAM. The end contains an interesting nugget about some of the underlying dynamics of decreasing unionization in the US:

"If you're trying to organize a new group, it's usually a low-paid group, and how are you going to tell them they have to pay $70 a month, and they don't know what for?" Asuncion said in an interview. "It's the dues structure that's killing us."

I often hear liberals talk about the failure of workers at the low-end of the skill/wage spectrum to unionize and how it's an error of short-term thinking, but I think this quote is telling. Although low-wage jobs have less turnover than one might expect, not supporting unionization may very well be a rational economic calculation. Unions provide economic benefits to their workers in a less concrete, more long-term way. Dues, on the other hand, are paid monthly and take a greater share of total wages the lower you slide on the income scale. Add to this that the primary weapon of unions--the strike--is a potentially devastating strategy for low-wage workers who are struggling to get by each month. If employers know that strike threats have no teeth, the bargaining position of unions (and the benefits they can promise) becomes shakier. Additionally, an increased emphasis on organizational culture and employee engagement by business undercuts some non-economic functions of unionization, such as establishing a shared identity, improving workplace conditions, and aggregating information from lower organizational levels.

On a semi-related note, many professional athlete unions have difficulty bargaining with owners because their strike threats are equally romantic: if nearly all of your total lifetime income is made within just a few years as a sports star, losing just half a season is potentially very costly.

5 Pointz is Being Demolished to Make Way For Condos, and That's Okay

Photo Credit: deathandtaxesmag.com

In a long-awaited move, the owners of the iconic graffiti space 5 Pointz have finally cleared the last regulatory hurdles required to tear down the building. The land will be replaced with high-rise condos and some affordable housing units.

Undoubtedly some groups are upset. 5Pointz is an amazing example of skilled artists collaborating semi-spontaneously to create a beautiful amalgamation of art. But the disruptive logic and churn of urban evolution and growth is ultimately a greater boon to society, and I see this development as positive for New York, and the graffiti movement.

For one, the Long Island City neighborhood has seen tremendous gentrification and associated housing cost increases. LIC desperately needs new units to relieve this stress, and for all its amenity value, 5 Pointz is ultimately a fairly passive block of unused space. Additionally, dealmaking seems to have ensured that many individual surfaces will be preserved and displayed.

Rules that limit development, such as height caps and historic preservation designations, clearly have an important role in creating great cities. But often these powers are excessively utilized by incumbent residents and landowners to block changes, muddling the clarity of property rights. If a site like 5 Pointz is truly valued as an artistic work, artists and appreciators should "vote with their pocketbook" and pool their money to buy the land for preservation. If preservationists can't compete in an open bidding process, there's a strong prima facie case that preservation isn't the socially optimal use of the space. Market outcomes tend to allocate land efficiently, and overriding this useful mechanism should require exceptional social consensus.

On another note, excessive preservationism seems quite intellectually opposed to the essential character of graffiti culture. Part of what makes the graffiti enterprise subversive and exciting is its outsider perspective: artists critique the establishment by abusing written rules in adherence to deeper social norms about freedom and public acceptance. Aggressively employing institutional tools to preserve in amber artwork that revels in its own impermanence and material resourcefulness reeks of contradiction. Graffiti is about supplementing the artistic and public spirit in cities, which often gets undersupplied by capitalist land use and architecture. This works best on marginally productive surfaces, and once higher-value uses get identified and implemented, artists should gracefully step aside and move on.

Besides, I suspect the developers will face a massive onslaught of protest graffiti for some time as attached artists mourn 5 Pointz's destruction. Perhaps that's a healthy informal punishment for destroying such an impressive artistic site.

Studying the Economic Lives of Poor People is Important

This week's Economist has a fascinating article about the economic logic of owning cows in rural, poor India that everyone should check out. The findings are a great example of the continuing the trend, popularized by Abhijit Bannerjee and Esther Duflo in their book Poor Economics, of looking at the actual fine-grained details of the economic decisions poor people make every day, and how they differ from those of rich-world consumers. Often these findings are counter-intuitive, but have big implications for development and aid (such as the preference for fewer tastier calories over bags of cheap rice). This approach contrasts with the top-down "big push" idea (promoted by Jeffrey Sachs most notably), which has seen its popularity wane in the face of powerful critiques emphasizing "Big Aid's" planning and public choice problems.

While it's possible these small-scale studies (and associated policy recommendations) will someday aggregate into a larger theory, the epistemic humility is actually a strength--interventions are more assuredly useful, and unforeseen consequences have limited scope for causing damage.

Happiness is a Side Effect, Not an Outcome to Pursue

Adbusters Magazine must be spinning in its grave vegan-powered washing machine. That was my first reaction when I saw that the tiny country of Bhutan is scrapping its emphasis on "gross national happiness" as an alternative to GDP. Bhutan has gained a strange notoriety in various leftist circles for fully embracing this weird and subjective measure, but it never quite lived up to its intellectual appeal.

The idea that GDP doesn't measure everything a country (and its citizens) cares about is self evident. Measures of environmental quality, capabilities, inequality, and the millennium development goals are all attempts correct for this basic fact. And clearly happiness is good and countries should want their citizens to be happy. But focusing on happiness is a bit like cheating: it ignores a lot of necessary complexity by trying to skip directly to the end of the game.

For one, making interpersonal comparisons of happiness is tricky. For example, the conventional wisdom that the richer people get the more leisure they enjoy is not always what we observe. As incomes go up, the opportunity cost of not working increases, making leisure more costly. Decisions individuals make about how best to pursue a good life are often idiosyncratic and counter-intuitive.

Most generally, actively pursuing end goals is often not the most effective way of achieving them. In situations with high causal density, simple intermediate goals inform decisions about process much better. A nice example might be the values caring parents try to instill in their children. Constantly emphasizing happiness or "doing what you love" is very likely less effective at promoting long-run flourishing than an intermediate process goal like "try your absolute hardest at whatever you do" or "never give up". Nobody would suggest that "grit" should be the goal of life, yet those who have it in spades invariably have better life outcomes.

Similarly, GDP seems to work pretty well as this sort of intermediate process goal for countries. Nobody truly believes GDP is an end in itself, but because it sits at a nexus of many causal factors, it's a natural concept for public policy to prioritize.

Towards a Value-Free Development Assistance Paradigm

The Planet Money podcast had an amazing episode last week interviewing a Good Samaritan who decided to build a new school building in a poverty-stricken village in Haiti. The episode stands out because the man, Tim Meyers, basically admits that his well-intentioned efforts were meaningless to the lives of the children he wanted to help, and possibly counter-productive for the broader development of Haiti due to perverse incentive effects. This comes on the heels of some new research showing the potential benefits of direct cash transfers to individuals as a development assistance program, as well as a new trend in charity of simply maximizing income and giving lots of it away (versus choosing a lower-paying job affiliated with the perception of moral virtue).

Underlying these three related stories is a strong emphasis on epistemic humility: social scientists and policymakers are increasingly aware of their inability to predict how interventions will play out in the real-world, which is filled with people and institutions all pushing their own agendas. The recognition that foreign aid is an issue with high "causal density" (i.e. lots of complicated factors interacting in often unforeseen ways) isn't new, but the identification of straight cash as an effective way to cut through much of the complexity that confounds the operationalization problem of development assistance is very exciting.

We'd all like to think that our pet theory of charity is the cleverest, but acknowledging that everyone has biases that muddle the connection between aid money and the lives of the people we're ultimately trying to help represents an important step in the history of global development.