The Best of Times or the Worst of Times?

Part I: Peter Gordon, USCPart II: Harry W. Richardson, USC

American Dream CoalitionSeattle, April 17-19, 2009

TOPICS

I. Would you rather be alive today or 100 years ago? Spontaneous orders and virtuous cycles

II. Spontaneous order in citiesIII. Bad policies bring bad times and bad times

prompt bad policies. This vicious cycle challenges the virtuous cycle

Is it the best of times or the worst of times? ~2% ave. annual real growth for over 100 years is not bad

“The 20th century’s oscillation between perfect market theory and market failure theory, both of which take as the terms of the debate the formal model of generally competitive equilibrium, will inevitably be won by the theorists of market failure. It is obvious that the economic world is not perfectly competitive … Hence the triumph of the interventionism Hayek forecast – not because economic theory has been rejected but because it has been misconceived … Since Hayek’s argument did not depend on the achievement of static equilibrium, the deviations of real market forces from the model did not constitute rebuttals to him. Indeed, deviations from the model were Hayek’s starting point.” … P. Boettke, Critical Issues, Winter, 1997

World History of GDP/Capita Trends

YearYear PopulationPopulationin millionsin millions

GDP per person in GDP per person in year-2000 dollarsyear-2000 dollars

5000 BC5000 BC 55 130130

1000 BC1000 BC 5050 160160

1AD1AD 170170 135135

1000AD1000AD 265265 165165

1500 AD1500 AD 425425 175175

1800 AD1800 AD 900900 250250

1900 AD1900 AD 16251625 850850

1950 AD1950 AD 25152515 20302030

1975 AD1975 AD 40804080 46404640

2000 AD2000 AD 61206120 81758175

Source: Brad DeLong

The most auspicious economic development in modern history is the stunning improvement in the material condition of humanity – trend from 200-300 years ago – finally proving Malthus is no longer relevant.

People have lived at subsistence levels for 99.5% of their 50,000 years.

Do we have big ideas that match big phenomena?

Political Institutions vs. Economic Development

y = 1.0107x + 1.5923

R2 = 0.6524

2

3

4

5

6

7

8

9

10

11

2 3 4 5 6 7 8 9

Political Institutions

Eco

nom

ic D

evel

opm

ent

Economic freedom and economic development

Two significant facts:

(i) World’s population between 1800 and 2000 grew by a factor of 6; and (ii) Goods and services consumed by the average person have not fallen, but are mostly up.

But (real) dollar comparisons understate the good news.-- Find a 25-year old mail-order catalog, correct (roughly triple) prices -- and compare to what we routinely expect today. Look at a 2001 electronics catalog.

-- Compare medical treatments and capabilities (W.M. Cox and R. Alm).

Perennial Doomsday forecasts look silly (J. Simon).

“How we feel about the evolving future tells us who we are as individuals and as a civilization: Do we search for statis – a regulated, engineered world? Or do we embrace dynamism – a world of constant creation discovery and competition? Do we value stability and control or evolution and learning? Do we think that progress requires a central blueprint, or do we see it as a decentralized, evolutionary process. Do we consider mistakes permanent disasters, or correctable by-product of experimentation? Do we crave predictability, or relish surprise? These two poles, stasis and dynamism, increasingly define our political and intellectual and cultural landscape The central question of our time is what to do about the future. And that question creates a deep divide.”

…Virginia Postrel, The Future and Its Enemies, 1998

“I have never before written a fan letter to a professional colleague, but to discover that you have … provided the empirical evidence for what with me is the result of a lifetime of theoretical speculation, is too exciting an experience not to share it with you.”

… F.A. Hayek in a letter to Julian Simon.

“… [e]ven with conservative assumptions about future growth, someone born in 1995 can expect to enjoy four times the lifetime income of someone born in 1970. The fact of the matter is that the record of the last quarter century demonstrates two points: Aggregate economic growth benefits most of the people most of the time; and it is usually associated with progress in other, social dimensions of development.”

…Joseph E. Stiglitz and Lyn Squire Foreign Policy, Spring, 1998

“It is remarkable that the fall in the proportion of people starving in the world should have come at the same time as the population of developing countries doubled. What is more astounding is that the actual number of people starving in the Third World has fallen. While in 1971 almost 920 million people were starving, the total fell below 792 million in 1997 ... In 2010 it is expected to fall to 680 million.”

… Bjorn Lomborg, The Skeptical Environmentalist Cambridge University Press, 2001

“… The greatest achievement of the twentieth century is that the majority of the poor people of the world have shared in the improvements in well being made possible by the advancement of knowledge.”

… D. Gale Johnson, Journal of Asian Economics, 2004

“Economic growth – meaning a rising standard of living for the clear majority of citizens – more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy. … Even societies that have already made great advances in these very dimensions, for example most of today’s Western democracies, are more likely to make still further progress when their living standards rise. But when living standards stagnate or decline, most societies make little if any progress towards any of these goals, and in all too many instances they plainly retrogress.”

… Benjamin M. Friedman, The Moral Consequences of Economic Growth

Economic Growth and Per Capita Income Growth of the Poorest

Source: David Dollar and Art Kraay, Growth Is Food for the Poor, The World Bank, Washington, DC, 2001, p.45

“The poor do not usually win when there is a struggle over redistribution of the existing pie. They only win when the pie grows larger for everybody …”

… William Easterly, Challenge, 2002

“Many people blame globalization for poverty and injustice in the developing world. Yet it is the absence of globalization – or an insufficient does of it that is truly to blame for iniquities.”

… Ricardo Hausmann , Foreign Policy, Jan/Feb, 2001

“Over the centuries those who have been blessed with wealth have developed many remarkably ingenious and persuasive justifications for their good fortune. The instinct of the liberal is to look at these explanations with a rather unyielding eye. Yet in this case the facts are inescapable. It is the increase in output in recent years, not the redistribution of income, which has brought the greatest material increase to the well-being of the average man. And, however suspiciously, the liberal has come to accept the fact.”

… J.K. Galbraith The Affluent Society, pp 96-97

Caveat: “Standard economic prescriptions, such as letting the incentives of free markets operate, are only part of the answer. Free markets are not particularly helpful in maintaining a work ethic. However, without a public service ethic, governments will undermine property rights rather than protect them. Without a learning ethic, economic activity in agriculture, manufacturing, and services will stagnate rather than evolve.”

… Arnold Kling, Learning Economics, Xlibris Corp. 2004

“It is evident from the experience of the countries that have successfully reformed policies that the payoff for shifting to a virtuous circle can be enormous. Better understanding of the political-economic interactions that can enable this to happen is therefore of major importance for improving the development prospects of those countries still mired in the ‘stop-go’ cycle of detailed controls and intervention and gradually decelerating economic performance.”

… Anne Krueger, The American Economist (1994).

Evidence for a Virtuous Cycle Very roughly speaking, people with secure property rights, including legal infrastructure to enforce property rights (“economic freedom”), become prosperous

Prosperous people demand more economic freedoms (www.freetheworld.com, R. Levine, D. North)

Recently elaborated via legal origins investigations

Is there evidence of spontaneous order in the development of cities?

Webster and Lai (2004) suggest that there is spatial order – even in a world of second-best.

Share of Change in PopulationShare of Change in Population

  SincSincee

Areas Areas CoreCore SuburbsSuburbs ClassificationClassification

United StatesUnited States 19501950 3939 7.3%7.3% 92.7%92.7% Urbanized areas over Urbanized areas over 1,000,000 1,000,000

               any census since 1950any census since 1950

CanadaCanada 19511951 44 5.3%5.3% 94.7%94.7% Metropolitan areas over Metropolitan areas over 1,000,0001,000,000

Western EuropeWestern Europe 19651965 4242 -14.2%-14.2% 114.2%114.2% Metropolitan areas over Metropolitan areas over 1,000,0001,000,000

JapanJapan 19651965 88 7.6%7.6% 92.4%92.4% Metropolitan areas over Metropolitan areas over 1,000,0001,000,000

Australia & New Australia & New ZealandZealand

19651965 66 7.2%7.2% 92.8%92.8% Metropolitan areas over Metropolitan areas over 1,000,0001,000,000

Hong KongHong Kong 19651965 11 -1.6%-1.6% 101.6%101.6% Metropolitan areas over Metropolitan areas over 1,000,0001,000,000

IsraelIsrael 19651965 11 -1.6%-1.6% 101.6%101.6% Metropolitan areas over Metropolitan areas over 1,000,0001,000,000

   

TotalTotal   101101 4.4%4.4% 95.6%95.6%  

   

South Korea South Korea 19661966 22 59.7%59.7% 40.3%40.3%Metropolitan areas over Metropolitan areas over

4,000,0004,000,000

SeoulSeoul       55.2%55.2% 44.8%44.8%   

BusanBusan       85.1%85.1% 14.9%14.9%   

Suburbanization Around the World

Source: http://www.demographia.com/db-highmetro.htm1) For Seoul metropolitan area, Incheon Metropolitan City (excluding Ganghwa-gun and Ongjin-gun) is also considered as a central city.

2) Four cities and counties (Jinhae-si, Yangsan-si, Gimhae-si, and Gijang-gun) are considered as the suburbs of Busan metropolitan area.

Populations and Shares of Largest U.S. Cities, 1900-2000 

Source: U.S. Census

  1900 1920 1940 1950 1960 1980 1990 2000

NYC 3 5.62 7.455 7.892 7.782 7.072 8.008

Top 20 11.971 19.487 25.026 27.516 28.092 27.304 30.944

Top 75 16.766 28.101 36.178 40.748 43.977 44.645 53.467

US 76.094 106.461 131.954 151.325 179.979 227.225 282.224

               

NYC Share 4.52% 5.28% 5.65% 5.22% 4.32% 3.11% 2.84%

20 Share 15.73% 18.30% 18.97% 18.18% 15.61% 12.02% 10.96

75 Share 22.03% 26.40% 27.42% 26.93% 24.43% 19.65% 18.24%

Minimum density methodMSANAME Pop Pop Emp No. of

2000 Growth 2000 Sub-'90-'00 Metro Main Sub- Dis- Main Sub- Dis- centers

(%) center centers persed center centers persed3 millions and plus* 18.2 27.8 35.2 29.8 26.3 17.6 14.3 68.1 13New York 21199865 8.4 28.5 52.8 34.6 26.9 9418124 21.2 7.7 71.1 24Los Angeles 16369949 12.7 27.8 34.1 29.6 26.1 6716766 12.2 21.2 66.6 36Chicago 9157540 11.1 28.9 38.3 32.3 27.6 4248475 17.7 5.6 76.8 12Washington 7608070 13.1 30.3 37.8 32.6 28.3 3815240 18.4 16.7 64.9 17San Francisco 7039362 12.6 28.4 35.4 30.8 26.8 3512570 13.8 22.7 63.6 15Philadelphia 6188463 5.0 26.1 34.1 28.3 25.3 2780802 13.4 6.6 80.1 8Boston 5828672 6.7 27.1 37.6 28.2 25.8 2974428 18.3 3.1 78.6 6Detroit 5456428 5.2 26.2 31.0 28.3 25.0 2508594 6.3 25.8 67.9 18Dallas 5221801 29.3 27.4 32.8 28.0 25.4 2565884 19.8 20.5 59.7 8Houston 4669571 25.2 28.1 31.7 29.0 26.5 2076285 24.5 13.0 62.5 9Atlanta 4112198 38.9 30.9 35.6 34.0 29.0 2088215 18.9 12.6 68.4 6Miami 3876380 21.4 27.9 33.0 28.7 26.4 1623892 18.8 10.8 70.4 6Seattle 3554760 19.7 26.2 29.9 27.5 24.7 1745407 20.5 21.8 57.7 11Phoenix 3251876 45.3 25.4 29.3 24.9 24.1 1463581 22.8 11.9 65.2 71 to 3 millions* 17.7 24.1 26.5 24.6 23.4 17.9 9.9 72.2 3half to 1 millions* 13.2 22.3 23.2 22.0 22.2 17.8 6.7 75.5 1

Employment share (%)2000 Commute time byDrive alone mode (min)

Source: Lee, Bumsoo. 2006. Urban spatial structure and commuting in US metropolitan areas. Source: Lee, Bumsoo. 2006. Urban spatial structure and commuting in US metropolitan areas. Western Regional Science Western Regional Science Association 45th Annual MeetingAssociation 45th Annual Meeting. .

Spatial Structure and Commuting, 2000

(billion) (% ) (% ) (% ) (% ) (% ) (% )

All 284,551 100 49,327 17.3 235,224 82.7 366,458 100 60,651 16.6 305,807 83.4

Mon-Thu AM peak 27,272 100 12,227 44.8 15,045 55.2 36,121 100 13,683 37.9 22,438 62.1

Mon-Thu off-peak day 66,526 100 7,906 11.9 58,620 88.1 89,124 100 10,724 12.0 78,400 88.0

Mon-Thu PM peak 42,259 100 10,495 24.8 31,764 75.2 48,367 100 11,712 24.2 36,655 75.8

Mon-Thu off-peak night 32,709 100 6,152 18.8 26,557 81.2 33,750 100 7,818 23.2 25,932 76.8

Friday AM peak 5,068 100 2,536 50.0 2,532 50.0 9,136 100 3,270 35.8 5,866 64.2

Friday off-peak day 14,890 100 1,655 11.1 13,235 88.9 24,927 100 2,712 10.9 22,215 89.1

Friday PM peak 9,094 100 2,032 22.3 7,062 77.7 13,240 100 2,679 20.2 10,561 79.8

Friday off-peak night 8,723 100 1,233 14.1 7,489 85.9 10,180 100 1,815 17.8 8,365 82.2

Saturday all day 39,108 100 2,982 7.6 36,127 92.4 54,218 100 3,786 7.0 50,431 93.0

Sunday all day 38,902 100 2,109 5.4 36,793 94.6 47,395 100 2,452 5.2 44,943 94.8

1990 Adjusted 2001

Non-workAll WorkAll Work Non-work

Growth 1990-2001

(% ) Family/ School/ Social/personal church recreation

All 28.8 23.0 30.0 28.8 35.2 30.2

Mon-Thu AM peak 32.4 11.9 49.1 66.8 19.5 113.1

Mon-Thu off-peak day 34.0 35.6 33.7 32.0 19.5 49.3

Mon-Thu PM peak 14.5 11.6 15.4 2.1 66.0 29.5

Mon-Thu off-peak night 3.2 27.1 -2.4 -9.2 18.9 0.9

Friday AM peak 80.2 28.9 131.7 154.1 82.2 258.9

Friday off-peak day 67.4 63.9 67.9 65.4 53.7 82.5

Friday PM peak 45.6 31.8 49.5 36.8 227.2 56.9

Friday off-peak night 16.7 47.1 11.7 8.0 80.3 11.3

Saturday all day 38.6 27.0 39.6 39.6 124.3 35.6

Sunday all day 21.8 16.3 22.2 22.9 35.2 16.0

All Work Non-work

Large metros accommodate to growth by dispersing

Commute time outside centers (Dispersed) vs. Metro population

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

13.0 13.5 14.0 14.5 15.0 15.5 16.0 16.5 17.0Ln (pop)

Minute

Metro wide commute time vs. Metro population size

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

13.0 13.5 14.0 14.5 15.0 15.5 16.0 16.5 17.0Ln (pop)

MinuteCBD commute time vs. Metro population

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

13.0 13.5 14.0 14.5 15.0 15.5 16.0 16.5 17.0Ln (pop)

Minute

Subcenter commute time vs. Metro population

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

13.0 13.5 14.0 14.5 15.0 15.5 16.0 16.5 17.0Ln (pop)

Minute

Y = -7.428 + 2.220 X Y = -58.734 + 6.065 X

Y = -18.063 + 2.933 X Y = -4.613 + 2.002 X

Metro

CBD

Subcenter Dispersed

Commute time

by Drive alone

(mins.)

U.S. Public Transport Market Shares

YearYear Public Transport Market SharePublic Transport Market Share

19501950 18.26%18.26%

19601960 7.11%7.11%

19701970 3.63%3.63%

19801980 2.82%2.82%

19901990 2.06%2.06%

Source: http://www.publicpurpose.com/ut-usptshare45.htm

19951995 1.79%1.79%

20002000 1.87%1.87%

20012001 1.84%1.84%

20022002 1.77%1.77%

Without New Without New York CityYork City

1.16%1.16%

“Over $25 billion were spent between 1970 and 2000 in sixteen major cities in the U.S. on the construction of new rail transit lines. Billions more have been spent on maintaining and improving the existing rail transit lines. While the supply of rail transit has increased, the fraction of metropolitan workers commuting using public transit has declined from 12 percent in 1970 to 6 percent in 2000.”

… Matthew Kahn

“Most American anti-sprawl reformers today believe that sprawl is a recent phenomenon caused by specific technological innovations like the automobile and by government policies like single-use zoning or the mortgage interest deduction of the federal income tax. It is important for them to believe this because if sprawl turned out to be a long-standing feature or urban development worldwide, it would suggest that stopping it involves something much more fundamental than correcting some poor American land use policies.”

… R. Brueggman, Sprawl: A Compact History, 2005

“A crisis is a terrible thing to waste …”

Schumpeter’s “Creative Destruction” is indispensable – and trumps “too big to fail”– He would have argued “Let the big banks and the

auto companies fail.” Clean-up by entrepreneurs is the only remedy

– Capitalism without bankruptcy is like Protestantism without hell

– The alternative (regulators and politicians) will do more harm than good

Current Economic Crisis (cont.)Hayek’s Views

– Market prices that are allowed to adjust promptly are essential -- they inform the large numbers of individuals who help to implement the innovations of the Schumpeterian entrepreneur

– Requires rules and norms (e.g. enforcement of contracts, protection of property rights, an oversight legal system) and a degree of private sector regulation.

– These were overwhelmed in the international rush for securitized mortgages – and borrowing with MBS as collateral

Six Pieces of The “Perfect Storm”• Credit cycles are a normal part of the market economy, but

Greenspan FRB engineered a severe boom-bust cycle (in fact, more than one)

• Housing in the U.S. has been subject to increasingly ambitious industrial policy (including mortgage subsidies) – ever since the Hoover administration

• The Economist recently reported 2-billion new bourgeois in the world; they found Wall Street and Wall Street found them

• Moral hazard is real. Bail-outs of the 1980s and the 1990s were not forgotten (e.g., AIG)

• Vernon Smith notes the importance of the 1997 capital gains tax exemption on gains of over $500,000

• Incomes had been rising since early 1990s

CONCLUSIONS

Hayekian spontaneous (emerging) orders explain our economic good fortunes – even in a world of second-best outcomes.

Some authors (Webster-Lai) have suggested these orders are also seen in urban development trends; evidence supports this.

Most “smart growth” (and related) analyses and proposals are dangerously innocent of these ideas and facts.

There is good evidence for a virtuous cycle: economic freedom prompts prosperity and prosperous people demand economic freedom

But there is also evidence for a vicious cycle: bad policies prompt bad times and bad times prompt bad policies

Which one will dominate???