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The Best of Times or the Worst of Times?

The Best of Times or the Worst of Times?. Part I: Peter Gordon, USC Part II: Harry W. Richardson, USC. American Dream Coalition Seattle, April 17-19, 2009. TOPICS. I. Would you rather be alive today or 100 years ago? Spontaneous orders and virtuous cycles

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The Best of Times or the Worst of Times?

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  1. The Best of Times or the Worst of Times? Part I: Peter Gordon, USC Part II: Harry W. Richardson, USC American Dream Coalition Seattle, April 17-19, 2009

  2. TOPICS I. Would you rather be alive today or 100 years ago? Spontaneous orders and virtuous cycles II. Spontaneous order in cities III. Bad policies bring bad times and bad times prompt bad policies. This vicious cycle challenges the virtuous cycle

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

  4. “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

  5. World History of GDP/Capita Trends Population in millions GDP per person in year-2000 dollars Year 5000 BC 5 130 1000 BC 50 160 1AD 170 135 1000AD 265 165 1500 AD 425 175 1800 AD 900 250 1900 AD 1625 850 1950 AD 2515 2030 1975 AD 4080 4640 2000 AD 6120 8175 Source: Brad DeLong

  6. 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?

  7. Political Institutions vs. Economic Development 11 Economic Development 10 y = 1.0107x + 1.5923 R2 = 0.6524 9 8 7 6 5 4 3 2 2 3 4 5 6 7 8 9 Political Institutions Economic freedom and economic development

  8. 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).

  9. “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

  10. “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.

  11. “… [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

  12. “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

  13. “… 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

  14. “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

  15. 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

  16. “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

  17. “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

  18. 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

  19. “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).

  20. 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

  21. 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.

  22. Suburbanization Around the World Share of Change in Population Since Areas Core Suburbs Classification United States 1950 39 7.3% 92.7% Urbanized areas over 1,000,000 any census since 1950 Canada 1951 4 5.3% 94.7% Metropolitan areas over 1,000,000 Western Europe 1965 42 -14.2% 114.2% Metropolitan areas over 1,000,000 Japan 1965 8 7.6% 92.4% Metropolitan areas over 1,000,000 Australia & New Zealand 1965 6 7.2% 92.8% Metropolitan areas over 1,000,000 Hong Kong 1965 1 -1.6% 101.6% Metropolitan areas over 1,000,000 Israel 1965 1 -1.6% 101.6% Metropolitan areas over 1,000,000 Total 101 4.4% 95.6% South Korea 1966 2 59.7% 40.3% Metropolitan areas over 4,000,000 Seoul 55.2% 44.8% Busan 85.1% 14.9% Source: http://www.demographia.com/db-highmetro.htm 1) 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.

  23. Populations and Shares of Largest U.S. Cities, 1900-2000 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% Source: U.S. Census

  24. Spatial Structure and Commuting, 2000 Minimum density method MSANAME Emp 2000 Employment share (%) No. of Sub- centers Pop 2000 Pop Growth '90-'00 (%) 18.2 2000 Commute time by Drive alone mode (min) Main center 17.6 21.2 12.2 17.7 18.4 13.8 13.4 18.3 Sub- centers 14.3 Dis- persed 68.1 71.1 66.6 76.8 64.9 63.6 80.1 78.6 67.9 59.7 62.5 68.4 70.4 57.7 65.2 72.2 75.5 Metro Main center centers 35.2 52.8 34.1 38.3 37.8 35.4 34.1 37.6 31.0 32.8 31.7 35.6 33.0 29.9 29.3 26.5 23.2 Sub- Dis- persed 26.3 26.9 26.1 27.6 28.3 26.8 25.3 25.8 25.0 25.4 26.5 29.0 26.4 24.7 24.1 23.4 22.2 13 24 36 12 17 15 8 6 18 8 9 6 6 11 7 3 1 3 millions and plus* New York Los Angeles Chicago Washington San Francisco Philadelphia Boston Detroit Dallas Houston Atlanta Miami Seattle Phoenix 1 to 3 millions* half to 1 millions* 27.8 28.5 27.8 28.9 30.3 28.4 26.1 27.1 26.2 27.4 28.1 30.9 27.9 26.2 25.4 24.1 22.3 29.8 34.6 29.6 32.3 32.6 30.8 28.3 28.2 28.3 28.0 29.0 34.0 28.7 27.5 24.9 24.6 22.0 9418124 6716766 4248475 3815240 3512570 2780802 2974428 2508594 2565884 2076285 2088215 1623892 1745407 1463581 7.7 21.2 5.6 16.7 22.7 6.6 3.1 25.8 20.5 13.0 12.6 10.8 21.8 11.9 9.9 6.7 21199865 16369949 9157540 7608070 7039362 6188463 5828672 5456428 5221801 4669571 4112198 3876380 3554760 3251876 8.4 12.7 11.1 13.1 12.6 5.0 6.7 5.2 29.3 25.2 38.9 21.4 19.7 45.3 17.7 13.2 6.3 19.8 24.5 18.9 18.8 20.5 22.8 17.9 17.8 Source: Lee, Bumsoo. 2006. Urban spatial structure and commuting in US metropolitan areas. Western Regional Science Association 45th Annual Meeting.

  25. 1990 Adjusted 2001 All Work Non-work All Work Non-work (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

  26. Growth 1990-2001 (%) All Work Non-work Family/ School/ personal church recreation Social/ 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

  27. Large metros accommodate to growth by dispersing Minute Minute Metro wide commute time vs. Metro population size CBD commute time vs. Metro population 60.0 60.0 55.0 55.0 50.0 Y = -7.428 + 2.220 X Metro Y = -58.734 + 6.065 X 50.0 45.0 45.0 40.0 40.0 35.0 35.0 30.0 30.0 Commute time by Drive alone (mins.) CBD 25.0 25.0 20.0 20.0 15.0 15.0 10.0 10.0 13.0 13.5 14.0 14.5 15.0 15.5 16.0 16.5 17.0 13.0 13.5 14.0 14.5 15.0 15.5 16.0 16.5 17.0 Ln (pop) Ln (pop) Minute Commute time outside centers (Dispersed) vs. Metro population Minute Subcenter commute time vs. Metro population 60.0 60.0 55.0 55.0 50.0 Y = -18.063 + 2.933 X Subcenter 50.0 Y = -4.613 + 2.002 X Dispersed 45.0 45.0 40.0 40.0 35.0 35.0 30.0 30.0 25.0 25.0 20.0 20.0 15.0 15.0 10.0 10.0 13.0 13.5 14.0 14.5 15.0 15.5 16.0 16.5 17.0 13.0 13.5 14.0 14.5 15.0 15.5 16.0 16.5 17.0 Ln (pop) Ln (pop)

  28. U.S. Public Transport Market Shares Year 1950 1960 1970 1980 1990 Public Transport Market Share 18.26% 7.11% 3.63% 2.82% 2.06% 1995 2000 2001 2002 Without New York City 1.79% 1.87% 1.84% 1.77% 1.16% Source: http://www.publicpurpose.com/ut-usptshare45.htm

  29. “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

  30. “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

  31. “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

  32. 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

  33. 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

  34. 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.

  35. 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???

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