Tuesday, August 2, 2016

The path to shared prosperity is lavender.

Recently, the New York Times ran an op-ed by two political scientists, titled "The Path to Prosperity is Blue". (HT: EV)

The main point:
HOW can America’s leaders foster broad prosperity? For most Republicans — including Donald J. Trump — the main answer is to “cut and extract”: Cut taxes and business regulations, including pesky restrictions on the extraction of natural resources, and the economy will boom.
...Red states dominated by Republicans embrace cut and extract. Blue states dominated by Democrats do much more to maintain their investments in education, infrastructure, urban quality of life and human services — investments typically financed through more progressive state and local taxes. And despite what you may have heard, blue states are generally doing better.
The authors go on to show that the 18 states they identify as "blue" have higher taxes on the "1%", higher median incomes (even adjusted for regional costs), higher educational attainment, higher patent issuance, and higher life expectancy at birth.

They point out:
Why are red states no longer consistently gaining ground? An important reason is that modern knowledge economies increase the rewards for education, research and development and urban hubs that promote the exchange of ideas and development of talent. This has made local conditions more important even in this age of globalization. And the places where these effects have been most successfully promoted are overwhelmingly blue.
And they end with:
And blue states have higher average inequality than red states do (in part because of their success in promoting high-paying jobs), and their dense urban economies continue to harbor troublingly deep pockets of disadvantage.
Local restrictions that stymie construction of new affordable housing play a big role. These policies not only hurt less affluent residents; they also make these states poorer because the most innovative cities are less dense and hence less productive than they could be.
We should tackle these problems. But we should remember that the key drivers of growth are science, education and innovation, not low taxes, lax regulations or greater exploitation of natural resources.

 This all sort of touches on the housing thesis I have been building.  It's interesting that the authors see some of the problems that are creating economic stress.  But, because their observations are contained within a partisan filter obsessed with targeted public dispensation, the obvious solutions are unable to bubble to the surface.

Take this paragraph, as an example:
Our reddest region, the South, has long been the poorest part, too. The gap between today’s red and blue states was enormous for much of the 20th century. It then narrowed substantially, thanks in part to huge federal transfers to the poorest states to raise them toward the national level.
They do use the modifier "in part", so this is not technically false.  But, notice how the only source of convergence they see fit to mention is federal transfers.  The same pattern happens regarding taxation, which is discussed with no regard for tax incidence.  It is the first order act of taking that motivates this point of view.  The illusion of logic is maintained through selective observation, like only mentioning federal transfer payments as a source of 20th century geographic income convergence.

Science, education, and innovation are listed as the "blue" solutions.  We are meant to think of public funding.  But, are the LA, New York City, and Washington DC public schools the reason the blue states are economic centers?  Or is it Stanford, MIT, and Harvard?

The authors mention that some growth comparisons make Red states look better than they really are by not factoring in population growth.  Isn't that strange, though?  Why are populations shifting to places that are failing?  It's one thing to believe that people are too dumb to vote in their own interests, but are we to believe that people, by the millions, are so incapable of knowing their own needs that they pick up and move to places that will systematically make them worse off?  This seems like the most important, yet rarely asked, question of our time.  Why should we emulate the policies of places with high net domestic out-migration?

The blue states work well for the well-off.  The high levels of education and income are partly due to the fact that those incomes and educations are imported through the persistent flow of highly educated people into the blue states and the flow of less educated people out of them.  Doesn't this flow tell us something about what part of the populace those policies favor?

Those policies simply set the table for economic balances, and the transfers and economic rents are captured indirectly through private acts - private decisions to relocate, privately negotiated incomes, private returns to the patents that are enabled through private elite schools and the networks of human capital that have developed around them.  These flows overwhelm the first order effects of public transfers.

They notice the key problem of housing.  Isn't this a problem of too much regulation?  Would they say that housing regulation in Atlanta and Dallas is "lax"?  Isn't that what low income households who would like to live in New York City and Massachusetts, and California need?  "Lax" housing regulation?  In those cities, the conversation tends to revolve around using taxes, fees, and mandates to fund "affordable" housing, because private dispensation of capital can't be trusted - it can't be noticed.  The millions of households moving to places where low cost housing is built for them are not an acknowledged observation, precisely because those homes were not built to satisfy a public mandate.  Liberal private marketplaces don't solve problems in the set of acceptable observations.  They will not be a part of "blue" solutions.  (Honestly, think about all the reasons that are used to excuse the housing problem in the blue cities.  How many of those problems can honestly explain the difference between housing in Los Angeles and Houston?  This tends to use motte and bailey fallacy.  The fact that San Francisco is on a peninsula somehow serves as a proxy to explain why low income households in Los Angeles have to move to Riverside to find rents less than 50% of their incomes.)

So we end up with strange op-eds like this, where within column inches of wisely recognizing the housing shortage as a source of instability and inequality, the authors deride "lax" regulation as just one more part of the "cut and extract" mentality.

I think North, Wallis, and Weingast really key in on the core problem here.  Abundance and broad justice can only emerge in open access orders - places where rights are universally applied.  A paradigm focused on public dispensation is a limited access order.  It is a system where well-being is defined by negotiations over subsidies and limited supply.  Social justice cannot be achieved from within that context.  Limited access orders benefit the powerful.  And, this is clear from the migration patterns our red/blue divide have created.  The powerful move to blue cities where they prosper, and the less powerful move to the red states, which, for all their flaws, are generally open access orders - places where capital and labor enjoy some level of freedom.

The Republican party is not particularly aligned with this ethic.  The nationwide ongoing collapse in homeownership is one sign of the broad lack of support for open access.  The nationally growing list of occupations that require certification is another.  The Trump candidacy is another.

We desperately need a voice for open access order in this country.  Arguing over false dichotomies like "cut and extract" vs. public investment is not going to get us there.  I would say that the path to shared prosperity is purple, but that's not quite right.  It's lavender.  There is a broad problem throughout the country, from country bumpkins to Ivory Tower idealists, of theory through attribution error.  Until we remove the darkness from our publicly shared mythology, we will not progress.  If we are not willing to trust others with rights, with all the imperfections that follow - whether they are wealthy bankers selling mortgages, developers building "market rate" condos, or poor immigrants engaged in the search of the American dream that most of our ancestors took for granted - we are not worthy of the birthright we presume for ourselves.

Colors in graph don't correspond
to "red" and "blue" cities.
Until the migration flow out of the blue cities reverses, these "blue" solutions don't deserve our ear.  Until those cities embrace open access again, of course their outcasts will embrace populist resentment.  Net domestic migration from New York City, San Francisco, and Boston looks like Detroit.  This should be a national embarrassment.  The solution is access.  Can "blue" solutions accommodate that?  We need some lavender.

Part II.


  1. Excellent blogging.

    I think the real solution is an end to property zoning. Everywhere!

    The study in question is another that makes me believe macroeconomics (as practiced) is just politics in drag.

    1. Really insightful Kevin. I think this should be the Preface to your book. I cuts across all the pre-conceived notions of the factions. Benjamin, you're right, but I don't know how we can reverse the NIMBY in most people.

    2. Really insightful Kevin. I think this should be the Preface to your book. I cuts across all the pre-conceived notions of the factions. Benjamin, you're right, but I don't know how we can reverse the NIMBY in most people.

  2. You cannot underestimate the quality of schools in some parts of LA, that lead to enrollment in the Stanfords', Claremonts', Cal Techs', etc. My son is engaged in determining that very thing for my grandchildren, and moving to the exact city that stands above the others in his local. It is becoming very competitive in the closed access cities. That does not mean that there are not high levels of education in open access cities, but if you can't get the higher property taxes, you can't afford to hire the best teachers.

    1. And if more than 3% of educational outcome variation was at the school district level, that would make sense. (90% demographic, 7% teachers, 3% school district, because the teachers seem to vary between district).

      /Now using "Good schools" to mean "All the other upper-middle-class people are also looking for good schools, so if I look for good schools, I end up with good neighbors" is another thing entirely.

  3. Schools are rated where he lives, town to town. I think he looks at sites like greatschools dot org under "Los Angeles". So there is a rating system. It is widely used. He doesn't care whether the chicken or the egg came first. He just wants the best rated schools. :)

  4. I think that to make the point the authors are trying to make you would have to look at changes in tax rates, public investment, and regulations over time to even test their hypothesis. Just comparing locations says little or nothing, as there is a reverse causality problem: the wealthier a city or state is, the more they can 'get away' with passing unnecessary regulations and raising taxes. The principle of declining marginal utility applies to taxes to (that is, the higher the concentration of wealthy citizens, the more willing the citizenry will be to relinquish some of their money to the state).

    This issue does present a fascinating political quandary though. On one hand you have the progressive arguing that "red states" with lots of in-migration (and immigration, for that matter) are doing poorly, and the 'evidence' for this is largely a statistical artifact of the migration of poor people (and probably poor immigrants abroad, mainly from Latin America) to those areas. A conservative might then respond by noting (or gloating about) the migration as evidence of the red states' prosperity even while he opposes much or even most of that migration, particularly from across the border.

    I find that talking about immigration and income inequality together is a great way to get everyone to hate me, because I like to make the point that progressives overestimate the extent of income inequality by failing to take into account the effect poor immigrants coming here en masse continuously has on the numbers; the immigration is a net positive for the economy, but it creates the illusion of worsening income inequality in the numbers. By noting this one can successfully render oneself a pariah at cocktail parties of all kinds.