Cities as markets—markets as cities

Over at Market Urbanism (one of my favourite sites) economist Sandy Ikeda has a post on the links between markets and cities. In it he references a bunch of recent writing on the links between markets and cities: "Cities aren’t merely convenient locations for markets; a living city (which I’ll define in a moment) is a market, and the first cities probably originated as markets."

He points to Jane Jacobs' view that cities' strength is in their diversity: both in terms of land use—Le Corbusier look away—and in terms of their inhabitants. With different tastes, opinions, skills, abilities, and so on individuals can satisfy each other's demands and preferences. But it goes further:

Now, standard economics teaches us that the differences among economic actors allow them to specialize and trade for mutual gain. This principle is called “comparative advantage,” which is the idea that people should choose those lines of production in which they are the most efficient. That’s fine as far as it goes.

But more importantly Jacobs, and indeed most Austrian economists, see the essence of markets as not merely places that promote efficiency, but as places in which entrepreneurial competition spurs the discovery of new things. That discovery process entails fundamental changes in culture as well as in economic development. Joseph Schumpeter’s phrase “gales of creative destruction” better captures the essence both of living cities and of markets than the standard economic notions of efficiency, comparative advantage, and low-cost production, as important as those are in their limited context.

Living cites and successful markets bring intellectually and culturally diverse people together to their mutual advantage, but they also create conditions in which vast amounts of novel information—about science, technology, religion, music, the arts, and lifestyles—get dispersed very rapidly. That in turn allows all kinds of people, the ordinary and the extraordinary, to experiment and to make new connections among all that information, generating even more diversity and attracting even more people. In this way, cities become “incubators of ideas” and economic growth. The process is highly dynamic, but also very messy and, yes, in a sense inefficient. Most experiments fail. But someone who fails in a city, unlike her counterpart in less-urbanized cultures, need not starve as a result, and there is more likely to be some new opportunity just around the corner.  We see the successes that drive innovation, but the failures are important, too.

Read the whole thing!

Obama right and wrong

In the November issue of Wired, the Frontiers Issue, President Barack Obama contributes an editorial that shows him much more in tune with our outlook and our world view than we had supposed. 

Firstly, he is optimistic about the present and the future. "The truth is," he says, "if you had to choose any time in the course of human history to be alive, you’d choose this one."  Agreed.  The world is better than it has been.  "A smaller share of humans know chronic hunger or live in extreme poverty."  Yes, indeed, and the future will be better still because we will make it so by doing more of what it took to achieve that. 

"Humans—through our ingenuity, our commitment to fact and reason, and ultimately our faith in each other—can science the heck out of just about any problem."  Well said.  Human creativity can devise solutions to overcome challenges and improve the world.  Technology can solve problems better, we think, than wishful thinking or pious resolutions.  It can enhance and enrich the lives that future people will live.

Where we part company with him is on the methodology that can bring this about.  He clearly thinks in terms of political action to solve pressing problems. "To clear these hurdles we’re going to need everyone—policy makers and community leaders, teachers and workers and grassroots activists."  Actually some of the groups he mentions are going to be opposing the innovations that can solve problems, a brake on progress rather than a spur to it.  What it is going to need is space for human creativity and ingenuity to develop and flourish.  It is going to need entrepreneurs, and conditions that favour their talents. 

Instead of big projects developed and orchestrated by governments, it is going to need a large measure of the personal liberty that allows people to break out from the norm and seek new things and new ways.  It is going to need property rights, low taxes and regulations to foster growth and innovation.  It is going to need a culture that esteems and rewards innovative problem-solving. 

Governments have a role to play, of course.  But it will not be one of restricting and confining the lives people live and of limiting their choices and their chances.  It will be one of embracing new technologies and allowing those who discover and develop them to be rewarded for doing so.  It will be one that flows with the tide of an unbounded and spontaneous future rather than one that seeks to confine it to preconceived and pre-planned channels.

Marks for attitude, Mr President, but not for methodology.

See the full Wired article here.

Will the Liberal Hillary Clinton Please Stand Up?

Last Sunday's debate showcased attempts by Hillary Clinton and Donald Trump to outdo one another in their commitments to winning at trade, and punishing China for its inadvertent subsidisation of the American construction industry.

The universal acceptance of trade as a zero-sum game was both unexpected, and difficult to stomach. While Trump has promoted protectionism since the 1980s, fearful back then of unchecked Japanese growth, Clinton has long championed trade liberalisation. She supported NAFTA as both First Lady and Senator, contending that “everybody is in favour of free and fair trade. I think NAFTA is proving its worth," and later deeming the Trans Pacific Partnership the “gold standard” of trade deals. 

In a reversal of her earlier positions, Clinton has publicly embraced protectionism during her current presidential campaign, disavowing past support for TPP and NAFTA. During Sunday’s debate, she announced her intent to empower a trade prosecutor to hold China accountable for “illegally dumping steel in the United States” and “putting steelworkers and American steel plants out of business”. While this commitment would seem to put her squarely at odds with her past beliefs, recently leaked excepts from private speeches given to bank executives call her commitment to protectionism into question. 

Addressing the Brazilian Banco Itaú, Clinton expressed her desire for “a hemispheric common market, with open trade and open borders”, and went on to describe the tremendous effort and cooperation required to advance pro-trade policy. Another leaked email, written by campaign pollster Joel Benenson, evidences that Clinton’s decision to oppose TTP was motivated by political, rather than ideological, concerns. Benenson writes; “I accept the position we’re taking but she has generally been more pro-trade than anti and we get (sic) we need politically by opposing this”.

Her public positions are therefore a far cry from those she’s willing to support with friends in the privacy of her living room. While John Cassidy, writing for the New Yorker, describes Clinton’s revealed positions as those of a “hard-headed centrist”, they are effectively neoliberal; removing restrictions on the international exchange of goods and services helps the global poor while providing for the more efficient use of scarce resources. 

During a speech in Cincinnati, Clinton reiterated the protectionist themes presented in her debate speech, telling supporters she would “say no to bad trade deals like the Trans-Pacific Partnership and unfair trade practices like when China dumps cheap steel in our markets”. Leaving aside the fact that anti-dumping laws harm consumers far more than they help producers, or that WTO dispute panels have judged current duties to be illegally anticompetitive, Clinton’s stated opposition to free trade is electorally unsustainable in the long term. 

While Trump may have been able to attract support by getting on TV and letting loose on foreign competition and trade deficits, Hillary can’t. She is supported by a coalition of beneficiaries of trade and immigration. While Podesta’s emails draw focus to the financial sector’s membership in this group, they are hardly the only pro-globalization group upon which Hillary relies. The tech sector requires a steady supply of highly skilled foreign workers, and while republican voters increasingly support protectionism, support for free trade among rank-and-file democrats has increased from sixty to seventy-four percent over the past decade.
While most democrats believe that globalization reduces domestic job security, they consider this an acceptable price to pay for increased standards of living, politicians don’t need to sugarcoat the tradeoffs at all.

Even Bernie Sanders’ supporters expressed skepticism at his claim that open borders were “a Koch brothers plot”. Just imitating conservative protectionism will bring diminishing returns as the gap between democrat and republican support of free trade continues to widen, and tariff-happy democratic politicians may find themselves facing primary challenges from free-traders unencumbered by Trump’s regressive social views. Hillary Clinton has expressed continuing private support for free trade, coming out about her beliefs will bring her in line with the majority of her supporters, and push her party toward a sustainable future. 

Shelter's latest - the Living Home Standard

Shelter has assaulted the airwaves and front pages today with an insistence that four in ten British homes are not up to standard. There is something of a problem with this claim:

More than four in 10 homes in Britain do not reach acceptable standards in areas such as cleanliness, safety and space, housing charity Shelter says.

Shelter's Living Home Standard covers affordability, decent conditions, stability, space and neighbourhood.

The problem being that this standard is a newly invented one by Shelter:

A new standard for housing designed to be the equivalent of the living wage has been launched by the charity Shelter – and it said four out of 10 homes in Britain were failing to meet it.

The “living home standard” gives 39 criteria that flats and houses have to meet in order to provide an acceptable home that secures the occupants’ wellbeing. It was drawn up during nine months of consultation with the public, who came up with the criteria in five areas: affordability, decent conditions, space, stability and neighbourhood.

The underlying method of creating this standard is fine of course, based as it is upon Adam Smith's linen shirt example. Not being able to afford a linen shirt does not make you poor. But if you live in a society where not being able to afford a linen shirt is taken as a signifier of poverty then not being able to afford one will see you being regarded as poor in that society.

So, as with the living wage calculation, what is it that people think you should be able to do in order not to be poor? Or as here, what do we all think makes decent housing? As a basic idea it's obviously fine but then as with the living wage we do go rather overboard. The latest calculation of that starts to claim that a four person household not paying higher rate tax is in poverty or damn near it.

This is the problem that Shelter has fallen headlong in love with the creation of this standard. The full report is here. It's an aspiration of what would be nice for all to enjoy. It is not a description of anything like the minimum that we should be expecting people to gain.

For example, it is possible to read the statement about space and sleeping.living arrangements to insist that no bedsit can possibly meet these desired standards. For the definition of a bedsit is that the sleeping and living spaces are the same place and the report insists that separate areas should be available.

In reality the vast majority of what is being talked about here is simply that housing is too expensive in Britain. Something we've been known to shout about ourselves. Of the 43% of homes that fail this new "standard" 27% do so because it's simply too expensive. A further 18% don't have decent conditions and 11% not enough space. All of which are again about the cost of housing.

Or, as we repeatedly insist, the price of the permission to allow housing to be built upon a piece of land. That thing which is bureaucratically limited to the impoverishment of us all. For, clearly, if land to build upon is gargantuanly expensive then small dwellings will be built without decent conditions and they will be eyewateringly expensive. The solution to this being to increase the supply of land which may be built upon and allow (as, again, current law does not) larger dwellings to be built.

One way of looking at this report is in fact that the general public, when asked about what people should be able to live in, insist upon rather larger homes than current building regulations insist must be built.

The solution therefore is as we've been saying for some time now. We must blow up the Town and Country Planning Acts and once again allow the market to build the homes that Britons both want to live in and which Britons think Britons should be able to live in.

Oddly, Shelter's report doesn't mention that but no doubt they'll get around to it, eh?

But what if subsidies to pharmacies should be cut?

Much rhubarb, rhubarb being chuntered as the government considers cutting the amount of subsidy going to pharmacies. We have, of course, the usual suspects in the form of those currently getting the subsidies complaining that they might not do so in the future: 

More than 1,600 pharmacies in rural areas face closure because they will not benefit from a promised government financial package, leaked documents indicate.

Ministers are expected to unveil a large cut in the annual subsidy for community chemists in the next few days.

The cuts have proved highly controversial, with a record 2.2 million people – one in 30 of the population of Britain – signing a petition against them.

This is the essential problem with political subsidies to favoured groups. The problem coming in two forms. That the government is considering spending £170 million less on these subsidies is a very minor matter for almost all of us. Two or three quid a year out of our total tax bill is not something most of us will go to the barricades for. But the recipients of this cash are intensely interested in seeing it continue to pour in. This concentrated interest and dispersed disinterest is the political explanation for why such favouritism continues.

The other flavour of this problem is that where market forces are operating then these changes occur gradually. Technology changes say, as technology always does. Perhaps Uber has made getting to a chemist cheaper, perhaps Deliveroo means that the housebound don't need to get to a chemist. The specific changes aren't the point - but that there always are changes is. And in markets the marginal supplier fades away and the marginal suppliers fade away gradually over time. This is how we adapt to technological change. But when we've these politically favoured subsidies we must make a positive effort to change the system. This is of course harder - and also means that we've got to wait until it's a large problem before we do. Thus ensuring that the concentrated interest opposing change is larger.

All of which means that we do in fact have to continually revisit such schemes in the light of other changes in the economy and technology. We must, if you like, careen the ship of state more than just occasionally.

And the specific change here doesn't seem to onerous: 

“Pharmacies that are a mile or more from another pharmacy will be automatically eligible” for average payments worth between £8,500 and £19,500 each, it says.

The scheme is likely to cost £12 million a year, rising to £27 million in 2017-18. Chemists which do not meet the criteria will not qualify for the grant money.

Society is rather more mobile than it was in the past. And now we're asking that people travel no more than a mile to their state supported pharmacist - this is the implication of only one pharmacist per mile getting the subsidy - to gain access to their state subsidised drugs? In order to save some perhaps £140 million, £150 million a year? 

It really doesn't sound like the sort of onerous condition that one in thirty of the population should be protesting about, does it? Rather more just a little necessary scraping off of the odd barnacle really.

We'd better get fracking then, hadn't we?

Apparently this process of leaving the European Union is going to leave us all at the risk of freezing in the next cold winter. We do not think that this is a reasonable description of likely events if we're to be honest about it:

A hard Brexit deal with the European Union could leave the UK vulnerable to a gas crisis, MPs have warned.

In a report, the Commons’ Energy and Climate Change Committee said Britain was “heavily reliant on Europe” for imports of gas and electricity.

The EU is expected to agree a “solidarity principle” between member states, which essentially means they would help one another in event of a shortage of supply or major price increases.

The MPs warned that if the UK was excluded from this pact the Government “must urgently investigate alternative back-up arrangements”.

The North of England appears to be floating on a veritable ocean of natural gas. The oceans are dotted with LNG cargoes sniffing hopefully for some hint of a home.

The European Union has a bureaucratic committee willing to allocate natural gas to favoured recipients in a time of dearth.

At which point we really do have to remind everyone of the best manner of achieving security of supply. Which is to have multiple suppliers of whatever it is from multiple geographic (and political perhaps) areas. Rather than have one centralised bureaucracy making allocation decisions.

Thus the correct decision here, Brexit or no Brexit, would be to develop those alternative supplies - we should get fracking therefore. After all, as that report into the effects of Cuadrilla's test drillings pointed out - just the extra gas found by the one test well could lower European gas prices by 4%. We might well find ourselves sweetly enquiring of said bureaucratic committee whether we might help out with their shortness of supply?

As we've been saying the solution is to blow up the Town and Country Planning Acts

Britain does not have any shortage of land upon which houses could be built. Britain does have a shortage of land upon which houses are allowed to be built. The solution to ever rising prices for land upon which houses may be allowed to be built is therefore to allow more land to have houses built upon it.

But this is not just a matter of house prices. The problem is sufficiently severe that it is distorting the capital allocation process, even what income is available and who is getting it. We're all aware of Piketty's point that capital is both becoming a higher multiple of GDP and also that capital income is becoming a larger share of national income.

These are the same problem in fact. For the rise in capital income, the rise in capital compared to GDP, is almost entirely a function of the rise in the price of land which may be built upon. As a new paper points out:

This investigation reveals three things about the rise in the US housing capital income share in recent decades. First, it has occurred due to an increasing share of income accruing to owner-occupiers through imputed rent. Second, it is concentrated in states that are constrained in terms of new housing supply. Finally, it is closely associated with the long-run decline in real interest rates and inflation.

My results suggest that the ‘rise of housing’ is intimately linked to the same factors that underpin ‘secular stagnation’ (Summers 2014) – that is, the gradual decline in real (and nominal) interest rates since the 1980s has contributed to a gradual run-up in housing prices, and led to household wealth and income being increasingly concentrated in the hands of landowners. This in turn may have implications for intergenerational inequality, given that the home is a key mechanism through which wealth and income are transferred across generations.

The paper does indeed note that this is not restricted to the US - it is happening wherever there are those restrictions on land being built upon. It is almost entirely about imputed rent to owner occupiers - the cries about it being the finance capitalists who are getting more of the money are simply not true.

The answer is also obvious. Do away with the constraints upon building land and all of these problems solve themselves.

That is, as we've been saying for some time now, we should blow up the Town and Country Planning Acts.

Donald Tusk makes things remarkably easy for us here

We can't help feeling that the federasts aren't quite getting their negotiating stance right here. For they think they're making us face up to the full horrors of Brexit. We instead find that they're making the decision easier:  

The UK faces the stark choice of either a hard Brexit or no Brexit, the president of the European council has said – the first time he has taken such a clear line on the likely outcome of the UK’s exit talks.

Just hours after the foreign secretary, Boris Johnson, had told a committee of MPs he was confident Britain could strike a better trade deal with the EU after Brexit,Donald Tusk used a speech in Brussels to scotch the idea that Britain can “have its cake and eat it”.

Speaking to an audience of policymakers in Brussels on Thursday, Tusk – who chairs EU leaders’ summits – said it was useless to speculate about a soft Brexit, in which the UK remained a member of the single market. “The only real alternative to a hard Brexit is no Brexit, even if today hardly anyone believes in such a possibility.”

There is much prattling about whether we can do a "soft" Brexit, can maintain certain privileges or not. But if we really do face just this binary choice, of a clean break or no break at all then that choice is very simple indeed, isn't it? 

We've even had a referendum to confirm it. We definitely and definitively want a break of some form. The only one on offer is that clean break - so a clean break it will be.

It really is that simple, isn't it?

A summary departure

Scraps about soft and hard Brexit smack of punch-ups between cartoon-strip antagonists more or less keen on the referendum outcome . But this masks a more subtle distinction between judgements about risk. Let us put the best face on the arguments for a gradual, possibly staged departure from the EU, including those on this site led by my good friend, Sam Bowman. These are

• a summary departure would hurt industry and finance; 
• our relations with the EU are too complex for a rapid departure ;
• Northern Ireland, Scotland and the 48% would be mollified by a halfway house.

Unfortunately, however, I fear this halfway house is a pipe-dream. Brussels can’t offer a better deal on sovereignty, the number one objective of Leavers, as any concession would be demanded by other countries. And the EEA doesn’t give border security, the Leavers’ second objective, no matter how we may feel personally. In this light, the highest priority for the government becomes reducing the level of Brexit insecurity all round.

• In the nature of things, industry and finance adjust to new conditions but both run the risk of freezing (eg hiring and investment decisions) in the face of prolonged uncertainty. 
• The European s themselves will welcome being let off prolonged Brexit negotiation so they can turn to their many other problems.
• A definitive outcome offers a similar balance of benefits to Northern Ireland, Scotland and the 48%. 

HMG can achieve this with a childishly simple negotiating position – a no-fault quickie divorce, by way of time-limited offers of the status quo ante

• on goods, or failing which unilateral zero tariffs (subject to reservations for antidumping etc). The latter would make it imperative upon Brussels to reciprocate. If it were bonkers enough to fail to do so, the EU would break up as its leading members would not tolerate losing their single largest external trading partner; and
• on services, failing which reciprocity, reminding (eg) the Quai d'Orsay of the benefits of access to the UK’s service markets for AXA, BNP, EDF, RATP and Veolia.

plus a couple of financial offers

• a one-time only sum (in the billions) for the UK’s share of the net of pension obligations etc less tangible assets; and
• a periodical sum (in the tens or low hundreds of millions) for Erasmus and other such motherhood and apple pie. 

The time-limited aspect of HMG’s offer should be sustained by a clause in the Great Repeal Bill empowering HMG to exercise its rights under the Vienna Convention on Treaties to bring negotiations to a summary conclusion for lack of a serious intent to negotiate by the other side. As this would leave the financial offers unaccepted, HMG would throw in payment to an escrow lodged with the BIS or the like.

HMG should be briefing international firms (American banks, the big Anglo-Dutch players, French, German and Dutch state-owned transport outfits, French quoted government contractors, Japanese carmakers etc) to the effect that if they value their operations in the UK, it is up to them to lobby the EU to respond positively. So too European exporters to the UK. Overall, however, HMG would be after an abbreviated negotiating period to minimise uncertainty and bring on dealings with third parties.

Miles Saltiel has just published a collection of thirty-odd blogs circulated to insiders during and after the referendum campaign, as “The Brexit Blogs” a Kindle e-book.

The Sunday Times' bizarre witch hunt against Airbnb

Over the past month or so, Airbnb have been the victim of a rather bizarre witch hunt led by The Sunday Times.

First, back in mid-September they accused Airbnb of engaging in underhand lobbying tactics – "Airbnb’s underhand lobbying tactics exposed - The Times, September 17". The headline sounds worrying certainly, but if you read past it, you'll notice this underhanded lobbying consists of inviting Airbnb hosts to an evening of free food and drink asking them to list a few good experiences they've had using the website. At some point in the future, they might even ask their hosts to let a few politicians know that they quite enjoy having the right to use their private property as they wish, and tell would-be regulators to get lost. It's hardly cash for questions.

Now they've gone after them again. This Sunday they published an investigation claiming "widespread abuse of planning laws by Airbnb users, allowing them to take properties out of the already squeezed housing market and turn them into money-making holiday rentals." 

Now, obviously we should enforce all of our laws consistently and predictably. But many of these rules shouldn't be on the books in the first place. They say:

"For anyone planning a trip to London, the Airbnb website offers a striking range of furnished flats, spare rooms and, in at least one case in the north London suburb of Golders Green, a converted garden shed.

Last week The Sunday Times visited the studio-shed and nine other holiday rentals in the same property listed on Airbnb. The shed, deemed unsuitable for accommodation by the local council, was on the market for £50 a night."

Now, if this shed was unsafe and unpleasant, the host would likely get a bad rating and while £50 a night is relatively cheap for London there are certainly other options for would-be travellers. What I suspect has actually gone on is that the host has built something perfectly liveable, but not bothered to get the requisite sign-off from the council. Rather than crackdown on the host, we should follow the lead of Sweden where small houses (no bigger than 15sq m) can be built without planning permission.

So we're left with two supposed "problems". First, that Airbnbs are taking housing stock off the market making housing more unaffordable. And second, that Airbnb guests are somewhat more unpleasant to live next to than regular residents. Fortunately, neither hypothesised problem survives contact with reality.

First, Airbnb hardly makes up enough of the London housing stock to have a noticeable impact. As the article points out "all the listings on the site account for less than 0.7% of the housing stock in greater London." Of course, for this to reduce the supply of "affordable" housing it would require that in the absence of Airbnb, that most hosts would instead put their place out on the market as long-term lets, something that's far from guaranteed.

Of course, high rents aren't caused by a small fraction of homeowners renting their properties out. Rather they're caused by a planning policy that prioritises protecting intensive farmland  over homes for the rest of us. Research from Christian Hilber at the LSE suggests that if the most regulated region in the UK (South-East) was deregulated to level of the least regulated region (North-East) then house prices would 25% lower. 

Jim Pagels in a witty Medium post, points out the intellectual bankruptcy of blaming Airbnb for high housing costs.

Here’s a thought exercise: Imagine the U.S. had very restrictive laws regarding smartphone production. If a new Apple factory wanted to produce more iPhones, each phone would have to go through a long, onerous, and costly approval process by the local government and regulatory agencies. In addition, nearby established phone factories or incumbent phone owners in many areas could successfully pressure the local government to prohibit the new factory from producing phones. Because of these burdens, the supply of phones rises only very slowly (far less than the growth in phone demand), and many people have to go about sharing a phone with family or friends or diverting huge portions of their monthly budget to owning/renting a scarce phone.

In this alternative phone regulation reality, the criticism that “some tiny portion of phones are used for leisure like social media and games rather than important things like work or talking to your family!” as a major cause the phone shortage and high prices would seem obviously wrongheaded.

Quite.

The Sunday Times' other objection is that Airbnbs (as opposed to long-term lets) impose additional costs (noise mainly) on nearby residents. This is what we economists call a negative externality. An extra cost borne by a third party that's not priced in to the trade taking place. But it's not clear that one exists here.

The excellent Michael Lewyn at the excellent Market Urbanism blog looks at the data and finds this argument wanting. One way to test whether something causes a negative externality are its effects on nearby property prices. For example, if a coal plant opened next-door to an apartment block, flats in that block would probably sharply fall in value. He tests the claim that commercial uses (as opposed residential uses) lower nearby property values by using a proxy for mixed-use areas (Walkscore) and found that high Walkscores correlated with high property values. If Airbnbs imposed costs on others then you'd expect areas with bars, restaurants and hotels in walking distance to have lower property values.*

The Sunday Times should switch targets. Instead of Airbnb they should shift their focus to the outdated planning laws that mean so many spend 50% of their income on rent.

*On Twitter, The Guardian's Alex Hern objects to this line of reasoning. Pointing out that hotels might better contain negative externalities than Airbnbs. Perhaps, he's right that not all commercial uses are equal.

Thankfully, for the sake of my argument, Michael Lewyn has a second test of whether Airbnbs impose costs. He finds that areas with a higher number of Airbnbs experience faster price growth than the citywide (LA in this case) average.

Obviously, it's going to be hard to untangle cause and effect here. So perhaps a better solution is for local authorities to better police noise complaints. Adequate punishments for excessive noise should deter hosts from taking noisy guests in.