The Best of Times or the Worst of

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

I. Would you rather be alive today or 100 years ago? Spontaneous orders and virtuous cycles II. Spontaneous orders in cities III. 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% average annual real growth for over 100 years is not bad

“I have now reached the point where I may indicate what to me constitutes the essence of the crisis of our time … The economic anarchy of a capitalist society as it exists today is, in my opinion. , the real source of the evil … Clarity about the aims and problems of socialism is of the greatest significance in our age of transition. ” …A. Einstein, Monthly Review, 1949

“The 20 th 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 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. ”

World History of GDP/Capita Trends Year Population in millions GDP person in year-2000 dollars 5000 BC 5 130 1000 BC 50 160 1 AD 170 135 1000 AD 265 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 De. Long

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 no longer relevant. Humans had lived at subsistence levels for 99. 5% of 50, 000 years.

Economic freedom and economic development

Two amazing 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. 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).

“The theory of property rights offers the following fundamental three-part proposition: “Subject to the costs of transacting, individuals will organize and allocate their rights to maximize their joint wealth. “The level of wealth is enhanced when economic rights are allocated such that individuals bear more of the effects of their actions; that is, they reap higher rewards from inducing gains for others – and conversely suffer heavier penalties from inducing losses.

“Because the costs of transacting are positive, the Pareto conditions are never met. This theory is also operational, capable of yielding predictions about circumstances under which particular wealth-enhancing arrangements will be used. ” … Y. Barzel, Foreword to Property Rights, Planning and Markets, Webster and Lai, 2003

“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 byproduct 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.

“If we didn’t keep finding new ideas, there really would be limits to growth. It’s ideas – the whole process of discovery – that cause growth. ” … Paul Romer, interviewed in Forbes, June 5, 1995

“… [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 its 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

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 wellbeing of the average man. And, however suspiciously, the liberal has come to accept the fact. ” … J. K. Galbraith The Affluent Society, pp 96 -97

“We live in a world of staggering and unprecedented income inequality … Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother.

“This seems to be a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200 -year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor.

“The potential for improving the lives of poor people by finding different ways of redistributing current production is nothing compared to the apparently limitless potential of increasing production. ” … Robert E. Lucas, Jr. , Federal Reserve Bank of Minneapolis, May, 2004

“Globalization is, in essence, a process that creates opportunities for faster growth and more rapid poverty reduction in those poor countries in which the domestic economic and political environment is conducive … The primary challenge for the DCs [developing countries] who have been left out of the globalization process is domestic: how to transform the domestic environment into one that is conducive to globalization. ”. . T. N Srinivasan, Stanford Institute for Economic Policy Research, Dec. , 2002

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,

“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 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)

Is there evidence of spontaneous orders in the development of cities? Webster and Lai (2004) suggest that there is spatial order – even in a world of secondbest.

Suburbanization Around the World Share of Change in Population Since Areas United States 1950 39 Core Suburbs 7. 3% 92. 7% Classification Urbanized areas over 1, 000 any census since 1950 Canada 1951 4 5. 3% 94. 7% Metropolitan areas over 1, 000 Western Europe 1965 42 -14. 2% 114. 2% Metropolitan areas over 1, 000 Japan 1965 8 7. 6% 92. 4% Metropolitan areas over 1, 000 Australia & New Zealand 1965 6 7. 2% 92. 8% Metropolitan areas over 1, 000 Hong Kong 1965 1 -1. 6% 101. 6% Metropolitan areas over 1, 000 Israel 1965 1 -1. 6% 101. 6% Metropolitan areas over 1, 000 Total 101 4. 4% 95. 6% South Korea 1966 2 59. 7% 40. 3% Metropolitan areas over 4, 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.

Population Shares of 75 Largest U. S. Cities, 1900 -2000 1920 1940 1960 1980 2000 3. 000 5. 620 7. 455 7. 782 7. 072 8. 008 Top 20 11. 971 19. 487 25. 026 28. 092 27. 304 30. 944 Top 75 16. 766 28. 101 36. 178 43. 977 44. 645 53. 467 US 76. 094 106. 461 131. 954 179. 979 227. 225 282. 224 NYC Share 4. 52% 5. 28% 5. 65% 4. 32% 3. 11% 2. 84% 20 Share 15. 73% 18. 30% 18. 97% 15. 61% 12. 02% 10. 96 75 Share 22. 03% 26. 4% 27. 42% 24. 43% 19. 65% 18. 24% NYC source: U. S. Census

Spatial Structure and Commuting, 2000 Source: Lee, Bumsoo. 2006. Urban spatial structure and commuting in US metropolitan areas. Western Regional Science Association 45 th Annual Meeting.

• How to explain recent commute time increases (13. 3%) in US metropolitan areas in the latter half of the 1990 s – even though commute times had been remarkably stable through previous decades. • Substantial income growth and subsequent increases in vehicle ownership (Gordon et al. , 2004). More income, more cars, more errands by car – but few more roads. 1985 -2006 VMT grew 100%, but lanemiles grew by 5% http: //www. fhwa. dot. gov/policyinformation/pubs/pl 0802 1/index. cfm

Large metros accommodate to growth by dispersing Y = -7. 428 + 2. 220 X Metro Y = -58. 734 + 6. 065 X CBD Commute time by Drive alone (mins. ) Y = -18. 063 + 2. 933 X Subcenter Y = -4. 613 + 2. 002 X Dispersed

U. S. Public Transport Market Shares Year Public Transport Market Share 1950 18. 26% 1960 7. 11% 1970 3. 63% 1980 2. 82% 1990 2. 06% 1995 1. 79% 2000 1. 87% 2001 1. 84% 2002 1. 77% Without New York City 1. 16% Source: http: //www. publicpurpose. com/ut-usptshare 45. htm

“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,

The Current Economic Crisis … “A crisis is a terrible thing to waste …” • Schumpeter’s “Creative Destruction” – 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 – Regulators and politicians will do more harm than good

The Current Economic Crisis (cont. ) • Hayek’s View – If you read Hayek carefully he did not advocate anarchocapitalism or laissez-faire – Instead, he argued that markets work much better than the alternatives – because market prices prompt and inform the many agents who help to implement the innovations of the Schumpeterian entrepreneur – Require 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

Current Economic Crisis (cont. ) • Greenspan FRB, in effect, engineered a boom-bust cycle (in fact, more than one) • And housing in the U. S. has been subject to industrial policy since the Hoover administration • The Economist recently reported 2 -billion new bourgeois in world; they found Wall Street and Wall Street found them • Moral hazard is real. Bail-outs of the 1980 s and the 1990 s were not forgotten (e. g. , AIG)

CONCLUSIONS Hayekian spontaneous (emerging) orders explain our economic good fortunes – even in a world of second-best outcomes. As some authors (Webster-Lai) have suggested, these orders are also seen in urban development trends. Smart growth (and such) 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?