Pur Autre Vie

I'm not wrong, I'm just an asshole

Thursday, July 31, 2014

Rentier? I Hardly Know Her!

In my previous post I wrote about what a "rentier" is - someone who owns property that is useful and scarce, and therefore earns income from it (which is called "rent," even if it does not literally take the form of money paid by a tenant).  Now I'm going to mangle the concept slightly, in service of a broader point.

I'm going to describe two socially useful things that you can do.  One thing you can do is write insurance policies - that is, you can agree to bear a specified amount of risk in exchange for a specified amount of money (the insurance premium).  This can be beneficial because it involves mutually beneficial exchange - one person, who can stand to bear a lot of risk, relieves a less risk-tolerant person of risk at some price that both parties find attractive.  (There are also cases in which risks cancel out, so that by shifting them to the same person they are eliminated.)  And you don't literally have to write an insurance policy in order to engage in this kind of transaction.  Broadly, any time one person is compensated by another person for bearing risk, he is performing an insurance function.

Another socially useful thing you can do is defer consumption, thereby making your money available for someone else to use today, in exchange for a larger amount of money in the future.  Again, the idea here is to facilitate mutually beneficial transactions, in which people who want to consume at different times can negotiate a price (in this case, a rate of interest) that each finds attractive.

Now in reality you can't loan money without shifting some risk from one person to another.  And more broadly, almost any financial transaction involves both a risk component and a financing component.  If I buy a share of stock, I am both incurring the risk that the issuer of the stock will do poorly and foregoing current consumption in the amount of the purchase price of the stock.  And my return on the stock will be a blend of compensation for these two services I am performing.  Different securities (or more broadly, different financial products) have different blends of the two.  And of course, there are a lot of different kinds of risk - if you buy a Treasury security, you don't bear much credit risk, but you bear inflation risk, interest rate risk, and so on.

Okay, so now we come to the euthanasia of the rentier.  The concept here is that financial capital is not, at our present moment, and maybe for a long time, actually scarce.  This doesn't mean that holders of securities should get no returns.  After all, holders of financial assets are bearing risk, and should be compensated for it.  But there should be very little compensation, if any, for foregoing current consumption.  After all, as we've discussed, policymakers are trying to increase current consumption, so as to bring the economy toward full employment.  If possible, we should actually push interest rates negative (which, in real terms, they are), so that there is actually a negative return to foregoing current consumption.  (The confusion here, at least for me, is that financial capital is not "land" in the traditional sense.  But the concept is so congruent that I think the term makes sense.  Again, we are basically talking about the returns to property-owning, as opposed to the returns to working.  The "foregoing-current-consumption" role is basically the role of a rentier, in this analogy.)

And so we have yet another way to understand the asset boom/bubble.  Returns on financial assets (really, assets of all kinds) are very low because there is no reason to compensate the rentiers.  We are still willing to compensate risk-bearers, but when you strip out the returns from consumption-deferring, the returns on financial assets drop quite a bit.  Historical averages for stock market returns, etc. are no longer to be expected.

So our current situation is natural, in a way, although it is unsettling and has potentially grave implications for young people who are just starting to save.  But as Krugman observed, in the post I linked to above, we are going to get a lot of whining from the rentiers, who are being denied the compensation they think they deserve.

The Rent-Seeking Is Too Damn High

One of the things I really dislike about the way the world works - although I think it is in some ways inevitable, and maybe even defensible (a post for another time) - is that at some point in the educational system people are left to figure things out for themselves.  I don't mean that students are left to draw their own conclusions, or form their own opinions.  I mean that they are not taught the basic terminology and framework necessary to engage with the ideas they will encounter.  Now, as I said, sometimes they figure things out for themselves, but it strikes me as a weird kind of forced autodidacticism.

A good example is the classic distinction in economics among land, labor, and capital.  You can get a decent, if somewhat superficial, idea of the concept here.  In learning economics, you stumble across these ideas, but (at least in my experience) no one bothers to tell you what the terms mean, or what they traditionally meant when classical economics was being developed.  So most econ students can probably tell you what "rent-seeking behavior" is, but a lot of them probably couldn't explain why the phrase uses the term "rent" (which, after all, most people associate with the check that you send to your landlord every month).

So look, I'm an autodidact on this point (as on so many others).  But here's my basic understanding.  "Land" is meant to refer to scarce resources that do not require labor to exist.  You shouldn't take the term too literally - it can refer to fertile farmland or valuable real estate, but it can also refer to gold or iron or sunlight or wind or whatever.  You can see why they used the term "land," though - traditionally that would have been the most obvious example and probably by far the most valuable "land" in the economy.  The returns that stem from owning land are called "rents."

Now the thing about land is that it is valuable by itself, by virtue of its usefulness and its scarcity, and although private ownership probably helps put land to its most valuable use, the owner doesn't generally have to do anything in order to extract rents.  You can develop the land, but remember not to equate "land" with actual land.  If you, say, build a skyscraper on your plot of land in Manhattan, you are mixing land (the real estate itself) with capital (cranes, etc.) and labor.  Or if you plant crops on your farmland, you are again mixing land (the farmland) with capital (tractors etc.) and labor.  But you don't have to do any of these things.  You can rent out your land and enjoy a stream of income without doing any work or employing any capital.

Okay, so to be a rentier is to be someone who earns rents from ownership of scarce resources.  Unlike wages, rents are "unearned" (though of course you may have acquired the "land" with money that you earned from working, and you may have mixed your labor with the land to improve its value, as in the farming example).  Rent-seeking behavior involves trying to allocate property rights (or something similar) to yourself, and generally it isn't socially productive.  (The resources already exist, all you are doing is arrogating them to yourself.)

Sometimes rent-seeking behavior is really off-putting, but not always.  Imagine two farms are separated by a river.  The river shifts in its bed, and it's unclear where the boundary line between the farms should be drawn.  The farmers go to court to decide the matter.  It may not even be a rancorous dispute, they just need a legally binding answer so that they can both enjoy clear title to their own land.  But the resources that are spent at court are not going to make the land produce a single extra ear of corn.  It's purely a question of allocating property between the farmers.  If the system is set up in such a way that litigation is expensive and involves arms-races (each hires an expensive lawyer, procures expert testimony, etc.), then a lot of social resources can be used up in socially pointless rent-seeking.  And so a major part of designing a good society is avoiding these kinds of wasteful arms races.  (Bear in mind, the whole point here is that the rent-seeking behavior is individually rational but socially wasteful.  If one of the farmers "unilaterally disarms," he may lose a lot of land.  Lawyers, of course, eat that shit up with a spoon.  So the important thing is not to let lawyers, or anyone else who benefits from rent-seeking, design the system in a self-interested way.  If the returns from rent-seeking are too high, then people will put their efforts into that instead of earning wages.  This is a major critique of the modern financial system, by the way - that it draws an inordinate amount of resources into socially useless rent-seeking.)

There are some interesting implications here, and I might write some more about it.  But in my next post, I'll apply the "rentier" concept to the macroeconomic issues I've been thinking about.

Tuesday, July 29, 2014

Yak It Up with James

First Illinois resident:  What do you think about term limits for the governor?

Second Illinois resident:  [something about prison terms]

The Gratification of the Plutocrats

One slight addition to my last post.  Paul Krugman has written (here and here, and I'm sure elsewhere) about class interests and macroeconomic policy.  In short, rich people don't want inflation because they hold assets that are more valuable the lower inflation is.  I want to point out a few nuances.

First, as I pointed out in my last post, low interest rates tend to increase asset prices.  So if you were rich before the recession, and you held onto your financial assets, then you have seen your wealth surge over the last few years.  Although you can now look forward to a period of lower returns, this shouldn't really be a problem.  All that's happened is that you've been given your asset-price appreciation ahead of schedule.  (If anything, the recovery has increased the value of equity securities and made it more likely for fixed-income securities to be repaid.  It's hard to see how you've lost anything, unless you happened to make an ill-advised bet on gold or something.)

The people who are really hurt are the "HENRYs" - High Earner, Not Rich Yet.  They have accumulated relatively few assets but are going to be looking to buy a lot over the next few decades.  They may be screwed.  (Follow-up post here.)  They didn't enjoy the asset-price appreciation, and now they have few opportunities to buy high-return assets.  There's no need to cry for them - they will be fine - but they really will pay a fairly steep price for their bad luck in timing.  In the example Neil Irwin cited in this post, two people with identical saving patterns could end up with either $532,000 in retirement savings or $2.57 million - depending on the time period over which they invest.  (Those numbers are inflation-adjusted.)  In neither of those cases will the person starve, but that is a tremendous difference in wealth for people who save identical amounts.  Capitalism is not 100% fair, it would seem, even for rich people.  [I want to note here that Irwin's example is a little unrealistic, in that it compares portfolio value at retirement, but doesn't follow the portfolio through retirement.  In reality, even when you are retired you should own some stocks.  The person who only had $532,000 retired in 1981, at the inception of a big boom in stock prices.  The person who had $2.57 million retired in 1999, on the cusp of a market collapse.  So the two cases would tend to converge a bit in the first decade of retirement.  Still, it's undeniable that you can get hugely different outcomes based on timing, and that it seems like an inauspicious time to be a HENRY, at least in terms of market returns.]

But so, if the plutocrats have no particular reason to care about low-interest policy, what is Krugman's point?  Well, I've been ignoring the threat of inflation.  If you maintain super-low interest rates without sparking any inflation, as the Fed has done, then the plutocrats will do very well.  But, from their perspective, why take the chance?  Even if you think low interest rates are unlikely to cause significant inflation, you can never be sure.  So if you draw a bell curve around expected inflation, even if the peak is in a reasonable range, there is always that tail . . .

And so this, maybe, is why plutocrats don't want low interest rates.  I don't think it's so much that they need their assets to have high yields - it's that they have reason to be very worried about inflation.

Damn it, I get this far in the post and I realize there is another factor here.  Long term fixed-income assets have done very well.  But if you like to hold safe, liquid assets, then you didn't get a big run-up in portfolio value (short-term assets are not very responsive to changes in interest rates), but as your securities rolled over you started to get a very poor return.  So maybe that is the reason for the plutocrats' whining.  It looks as though I might have to write a post on yield curves.  Anyway none of this changes the fact that we can't base our policy on what will gratify the plutocrats.

Ambiguous Phrasings

Ambiguous phrasings, or phrasings that should be ambiguous:

1.  X has a hard on for Y.  Seems to me that in most contexts this would mean that X likes Y, right?  At the very least, X probably has some positive feelings about Y.

2.  X did a half-assed job.  This one has been much-noted.  What do we want here, a full-assed job or a no-assed job?

3.  Your money is no good here.  Sounds like a terrible thing to say to someone.

Billy, what are you doing?  Put your money away.  I told you your money's no good here.  No, don't ring that up, he's leaving.  Why did you do it, Billy?  Why did you come to my deli, of all places?  You give me no choice.  Why did you make me do this, Billy?  [beats the shit out of Billy in front of everyone]

Debt, Bubbles, Booms, and Our Present Situation

In my last post on macroeconomics, I considered the possibility that a period of low interest rates could time-shift so much spending that in future periods it may be difficult to maintain adequate spending in order to achieve full employment.  But I think it's important not to get too obsessed with debt levels in isolation.  Debt can be a problem, but only in some contexts.  What is crucially important is who holds the debt, who incurs it, and for what purpose.  (This is a point Krugman has made many times, I will try to find some links later.  As always, this is not original to me, though any mistakes in the analysis are highly likely to be mine.)

The first thing to recognize is that financial debt is really a relationship between two parties, and not only a burden on one party.  To the extent debt is a liability for one party, it is also an asset for another.  (It's true that a country might be a net debtor, but let's ignore this for now.)

The next thing to recognize is that debt is very helpful for time-shifting spending.  The capital markets are meeting real human needs when, for instance, they allow someone to save for retirement.  You technically don't need a capital market for that:  you could just accumulate a bunch of canned food and hope to barter it to meet your other needs.  But that would obviously be a vastly inferior way of accumulating assets for retirement.  Much better to lend money to someone and then count on using the future payments to support myself in retirement.

So when does debt become problematic?  Well, in macroeconomic terms, if a segment of the population is highly indebted, then it won't have much additional spending capacity, no matter how low interest rates go.  But if you think about it, the problem is actually that the people who hold the debt aren't spending more.  After all, we always knew that the borrowers weren't going to spend much at time T2.  They did their spending at time T1.  But the savers were supposed to be doing the opposite, spending less at time T1 but spending more at time T2.  What we tend to see is an asymmetric situation in which the borrowers spend amply in T1 but then the savers don't ramp up their spending in T2, for whatever reason.  Counter-intuitively, the debt is problematic because of the behavior of savers, not so much the behavior of borrowers.

Now let's consider how financial assets factor into macroeconomic policy.  To start, let's consider the relationship between financial assets and interest rates.  This can be confusing, and I don't entirely understand it, so I'll try to keep it as simple as possible.  Take, for instance, a standard fixed-income asset (that is, debt in the form of a bank loan or a bond or something like that).  One of the first things you learn in finance is that bond prices are inversely related to interest rates.  There's a sense in which this is just a statistical relationship, but there is also a deeper point here.

Consider two different interest rates, the interest rate on a bond and the market interest rate.  The inverse correlation of bond prices to market interest rates is simply statistical.  But the inverse correlation between the bond's interest rate and its price is exact.  This is because the two are simply different ways of expressing the same thing.  A bond's price is how much you have to pay now to obtain a known stream of payments in the future.  A bond's yield is how much you get in the future if you pay a specified amount now.

Here's another way to think of it.  Picture a graph with time on the x axis and dollars on the y axis.  Now draw a point at time T2 reflecting the payment in full of the bond.  (For simplicity we will assume there is only one payment remaining.)  Now draw another point at time T1, reflecting the current price of the bond.  This point should be lower than the point at time T2, indicating a positive interest rate.  Now connect the dots with a line.  The slope of that line is (roughly) the bond's yield.  (I think ideally you would use a slightly curved line or something - just ignore the mathematical niceties.)  You can see that as you change the bond's yield, it pivots around its price at time T2, and its price at time T1 changes.  In fact, as you can see, if someone tells you the slope of the line, it's easy to calculate the value of the bond at time T1.  Alternatively, if someone tells you the value of the bond at time T1, it's easy to calculate the bond's yield (the slope of the line connecting the two points).

Was that fun?  I hope so.  Now, a bond's yield is not necessarily the same as the market rate of interest.  But they tend to be strongly correlated, because investors buy and sell bonds to bring their yields into alignment with current interest rates.

So here we have another way of thinking about low interest rates:  they tend to increase the value of debt while reducing its future expected yield.  So if you hold a fixed-income asset, and the central bank lowers the interest rate, two things will happen.  First, your existing portfolio will increase in value, making you richer and enabling you to spend more, if you choose.  Second, on a forward-looking basis fixed-income assets become less attractive (relative to current consumption) because their yield is lower.  So the people who saved in the first period are now induced and enabled to spend, and balance is restored.

Now it's not just fixed-income assets that are subject to this phenomenon, it applies broadly to a lot of asset types.  For instance, a rental property behaves a lot like a fixed-income asset, especially if there is a long-term lease that specifies what the future rent payments will be.  But even shares of stock tend to follow this same pattern.

Hence the slut.  I mean, hence the "Everything Boom, or Maybe the Everything Bubble," as Neil Irwin formulated it.  Assets of almost every variety are expensive right now, because that is the flip side of market interest rates being low.  And it is arguably a good thing, if it completes the process I described above, inducing people who have accumulated financial assets in the past to spend more in the present.  (The other thing that is accomplished is that businesses can raise a lot of money in the financial markets, because financial assets command such a high price.  This enables businesses to make investments that otherwise might be uneconomical.  This is a phenomenon I have already pointed to, but now we are seeing it through the lens of high asset prices rather than cheap money - two sides of the same coin.)

Now here's a thought.  Just as the central bank can draw spending from the future to the present, possibly depleting future spending, the central bank can also draw asset appreciation from the future to the present, creating a low-return environment in the future.  That is, by lowering interest rates, financial assets appreciate massively in the present but appreciate much more slowly in the future.  Their value goes up, their future yield goes down.  (Recall our example of pivoting the line around the point at time T2.  You can increase the value at time T1, but by definition this reduces the yield between time T1 and time T2.)

At this point I have said the same thing like 5 different ways.  But anyway, that is the world we are living in:  our assets have appreciated to dizzying heights, and now we have to hope that economic growth follows.  Most people think that given how anemic the recovery has been, interest rates are going to be low for quite a while.  This helps explain why housing is unaffordable in a lot of places, why hyper-luxury towers are shooting up like weeds in New York, why the stock market has surged, why most people think it can't keep surging, and why everyone feels a little uneasy about our current situation.

Getting and Spending, We Lay Waste Our Powers

Okay, so, recall that our framework is that at times there may be insufficient spending to create full employment of an economy's resources.  The two main policy tools to prevent this are low interest rates and increased government spending.  And although, as we have seen, those policies are capable of generating spending (rather than just drawing it into the present from the future), we would still hope to be able to time-shift spending as part of a stimulus program.

But so now imagine that unemployment is elevated and inflation is muted.  The central bank keeps interest rates low and the government runs a deficit.  People begin borrowing heavily to finance current spending, and in particular they buy a lot of durable goods like houses.  They are time-shifting their spending, buying things now while knowing that they will have to pay for them later.  (Ignore for a moment whether people might be overconfident about the future value of the houses they are buying/building.)  So you end up with a bunch of highly-indebted individuals who will definitely not be spending a lot of money on housing in the future - they have drawn all of that spending back to the present.  (Even if they wanted to spend in the future, they wouldn't be able to - they are using up their borrowing capacity, and not only will they be unable to borrow more in the future, they won't even be able to spend everything they earn - a lot of their future income is earmarked for paying down debt.)  From a macroeconomic perspective, the economy's future spending capacity is being deployed now rather than later.

By the way, the same thing happens when businesses accumulate inventory.  If a business is going to sell 500 units during T1 and 500 units during T2, it can manufacture all 1,000 units in T1 and hold 500 of them in inventory.  That might be a sensible thing to do if interest rates are low.  It effectively shifts spending from T2 to T1, which is good for full employment at T1 but ensures that the spending on that particular item will be lower in T2 than it otherwise would have been.

And so certain kinds of spending can effectively strip future spending out of the economy.  Now I want to emphasize, this is not necessarily a bad thing.  It leaves more resources available at time T2 for spending on other things, while keeping people employed at time T1.  But it raises the possibility that there will be a spending shortfall in T2.

And of course that's roughly what happened to the U.S. in the period from 2003 (or so) through today.  A tremendous amount of economic activity in 2003-2007 consisted of the accumulation of housing and other durable goods, and so it was incredibly difficult to generate sufficient spending in 2008-present.  Now I want to emphasize, I think the recession could have been handled far better, with far less unemployment and misery.  To repeat my earlier point:  in theory all of that time-shifting freed up future resources for other productive use.  If our fiscal stimulus had been 2-3 times larger, maybe we would have enjoyed a several-year period in which we could enjoy high levels of government spending at low cost, without nearly so much unemployment.  It was a wasted opportunity in a lot of ways.  But for a variety of reasons that didn't happen, and so we came to regret all of that time-shifted activity in the 2003-2007 period.

But the central bank doesn't choose how people use low interest rates, and the government doesn't have all that much control over how the private sector spends its money.  So I don't mean to suggest, as some people have, that interest rates were "too low" during the 2003-2007 period.  I'm just observing that you can get into some pretty serious trouble if people time-shift their spending in certain ways.

We're Not Just Time-Shifting Anymore

In my last post on macroeconomics, I presented a simple model in which businesses and individuals can shift spending across time, and the point of macroeconomic policy is to spread out the spending so as to avoid excessive inflation, on the one hand, or excessive unemployment, on the other.  Now I'll tweak the model slightly.  Both fiscal and monetary policy are capable, not just of time-shifting spending, but of creating spending where it otherwise wouldn't have existed.

This is easy to see in the case of monetary policy.  Imagine that there is a business project that will return 5% on the initial investment.  If prevailing interest rates are over 5%, then it is not a profitable investment - it can't generate enough cash to compensate investors, and so it can't attract capital in the first place (unless people are deluded or misled as to its prospects).  But if the central bank lowers interest rates below 5%, then the project may become profitable.  So it's not that the project was going to happen at time T2, but thanks to low interest rates it will now happen at time T1.  The project wasn't going to happen at time T2 either, barring a drop in interest rates.  The project isn't being time-shifted at all, it's being made feasible by a low-interest-rate environment.  Regardless, this fits our basic story:  the central bank is lowering the interest rate to generate economic activity, which draws resources into productive use and reduces unemployment (assuming the economy isn't already at full employment - if it is, then we would expect a low-interest rate policy to be inflationary).

Fiscal policy is a little more complicated.  In one sense, of course, it's easy to "create" spending that otherwise wouldn't have existed.  But if we are talking about temporary stimulus spending (as opposed to a new, permanent program), then the spending is probably some kind of useful project that would have happened eventually anyway.  Bridges get repaired in time T1 that would have needed repairs in time T2, that kind of thing.  It's hard to come up with useful projects at time T1 that wouldn't have been useful at time T2 or T3 or whatever.  But this isn't a hard-and-fast rule:  because both real resources and government borrowing are cheap (that is, there are resources going unused, and the government can borrow cheaply), some kinds of spending that ordinarily wouldn't be cost-justified can be good candidates for stimulus spending, and in those cases you are really creating spending out of thin air, not just time-shifting it.

So although time-shifting is a good first cut, I think it makes sense to think of stimulus as both shifting spending across time and also generating spending that otherwise wouldn't exist.  In my next post, I will spell out a hypothetical that shows how an economy can get into trouble when the economy generates "the wrong kind of spending."

Monday, July 28, 2014

The Democrats

So everyone is up in arms about my post about the Democratic party.

William Buckley is supposed to have said that he would rather be governed by the first 500 people in the Boston phone book than by the faculty of Harvard.  I'm not a big Buckley fan, but if he really did say this, then it's one of the smartest things he's said.

Imagine that you are advising a black person, or a Social Security recipient, about a similar choice:  whether he will fare better under a government run by the Democratic party or by affluent white liberals.  I don't think it's even remotely a close call.  The Democrats are heavily - heavily - committed to racial equality and a strong social safety net.  Social Security is arguably the crown jewel of the New Deal, and in any case it has to be seen as one of the most enduringly popular social programs of all time.  The Democrats would sooner gouge out their own eyes than privatize it.

Now admittedly, as I said in my original post, a lot of this is structural.  It's awfully hard to adopt a platform of white racial superiority if your existence depends on keeping a lot of black voters happy.  Likewise for Social Security.  Affluent white liberals, free from such influences, can go wherever science or economics takes them.  Everything, from whether the races are equal to whether Social Security is a Ponzi scheme, is up for debate.

And I mean, I've got nothing against affluent white liberals.  I am one, if you don't scrutinize my finances too closely.  [Or if you substitute an "e" for an "a." - ed.]  So maybe my point is too obvious - of course the Democratic party is more trustworthy when it comes to the basic elements of a good society.  That's baked into the cake because the Democrats are a political party and affluent white liberals are a bunch of feckless dilettantes.  The outcome was preordained - not a fair fight.

But I think it's worth bearing these things in mind.  All too often democratic politics (note the lower case "d") is pilloried as some kind of cesspool of interest-group influence and ignorance.  If only the affluent white liberals were in charge!  I think this is terribly wrongheaded.  Sure, politics is subject to all kinds of pathologies, and elites really do sometimes know what's best.  But it's worth reminding ourselves who has earned our trust and who hasn't.

How to Get a Cheap Apartment in Manhattan

It would be funny to get an apartment in Manhattan, Kansas and then tell all your friends that you're renting a Manhattan apartment for like $500/month or whatever.  They're all like, "Wow, how did you get a rent-controlled apartment?" and you're like, "It's market rate, I don't think they even have rent control in Manhattan," and they're all like, "What the hell is wrong with you?"


For a variety of reasons I often like to sit in my office with my door closed.  (In the winter I need to keep my door closed because otherwise my humidified air will escape, and when the humidity is low enough my facial pain flares up.)

Anyway I recently moved offices, with the result that I have a new mail guy (actually several new mail guys).  And they are always knocking on my door or just opening it without knocking, to see if there is anything in my outbox.  I suppose I will get used to it, but for now it feels needlessly intrusive and disruptive.

And so it occurs to me that I vastly preferred the previous mail guy, who I suppose just decided not to check my mailbox.  Certainly he never knocked on my door unless he had something to deliver.  Probably that was the "wrong" choice on some level, probably it was considered part of his job to check the mailbox, but it worked for me.  I liked it quite a bit in fact.  Sometimes what you need is someone who has a good sense of when to do his job, and when not to.

Sunday, July 27, 2014

Is Walkable Urbanism on the Way Out?

I've been thinking a bit about urbanism, wealth, and prosperity.  The basic thought is:  as cars get more and more energy-efficient, and assuming they become safer and safer (with the adoption of driverless cars), I wonder whether traditional walkable urbanism will really make sense anymore.  Don't get me wrong, I love walkable urbanism.  I think connecting dense neighborhoods to business districts with reliable mass transit is an inherently good way to organize a city.  But many of the benefits of organizing society that way may be disappearing, and many of the downsides may be on an unstoppable upward trend.

So let's start with the big downside that I think is going to plague walkable urbanism for the foreseeable future.  It is really expensive.  In my neighborhood (which is eminently walkable and well-connected to Manhattan by mass transit, albeit with a 40-70 minute commute), you would have to spend in the $600,000 to $1,000,000 range for a two-bedroom apartment.  And many of those apartments carry monthly maintenance fees in the $500 to $1,000 range - and that is not counting property taxes.  So New York is increasingly a dense, walkable, livable city that is accessible only to the hyper-affluent.  (Other neighborhoods are cheaper, but rents are rapidly increasing almost everywhere in the city, and usually to live somewhere cheaper involves significant tradeoffs in terms of safety, amenities, and commute time.)

Now it's true that living in a sprawling city involves certain financial costs that you don't have to pay in New York.  For instance, I think it is truly unnecessary to own a car in New York, whereas in most mid-sized cities in the U.S. it would be a real hardship to live without a car.  But bear in mind that a lot of New Yorkers pay $1,344/year in transit costs (that is, 12 30-day unlimited-ride subway cards at $112 each).  Owning a car is not that much more expensive than paying $1,344/year.  And that's especially true for a family that can get by with one car - in that case, you are saving $2,688/year plus whatever you would have to pay for subway cards for the children in the family.  (Living with one car is not workable for everyone, of course, but it will be much easier when cars are self-driving.)

So walkable urbanism is perhaps not an affordable lifestyle for the vast majority of Americans.  And although to some degree this is a result of the low supply of urban areas in this country (that is, the supply of housing in walkable cities is unnaturally low because of bad public policy, driving prices up), to some degree I think this is an inevitable function of the way mass transit works.  In a walkable city, location is everything.  Living 500 feet from the subway station is vastly better than living 2 miles from the subway station, particularly in areas prone to inclement weather.  (2 miles may be much more bearable in a climate that is enjoyable year-round.)  But if you have a car, 2 extra miles means just a few extra minutes, a very low price to pay.  So once an amenity is in place, the effect on land values is spread out tremendously.  Instead of a spike of high value around an amenity like a park or a museum or a library, you have a large area of slightly-elevated land prices.  It becomes affordable for everyone (or at least, everyone with a car) to have realistic access to the nicest amenities in the city.

Now the sprawled-out cities pay a big cost for their affordability, which is that they use a fair amount of energy for transportation (though less than a lot of people think), the cars pollute the air (though how many small cities have air as dirty as New York's?), and people spend a lot of time in traffic and suffer a lot of injuries/deaths due to car accidents.  But if efficient, driverless cars end up dramatically reducing these problems, then really the big remaining problem is that people aren't walking enough and are therefore more prone to obesity and other health problems.  That's unfortunate, but there are steps that could be taken to get people to exercise.

So cities may end up being suitable only for the very rich and the very poor:  people who can afford to spend $3 million on a house that anywhere else would cost a few hundred thousand, and people who can't afford to own a car (or use driverless cars, if they become available on a non-ownership basis).  Sprawling mid-sized cities may be poised for a comeback, and dense walkable urbanism may soon be a niche product without widespread appeal.

Democrat First, Liberal a (Distant) Second

Just a few thoughts on institutions and ideologies.  You can't quite apply the same moral reasoning to institutions that you can to individuals.  The constraints are different, the decision-making process is different, the moral status is of course different.  But you can still think about an institution's role in history, and you can apply some basic judgments.

The reason I bring this up is that some liberals sometimes say that they can never vote Democratic again, because of the party's various sins.  And that's fine, obviously it's important to have some standards when you vote, and if a party doesn't live up to your standards (and another party does), then by all means do what you think is right.

But I just want to observe that as between the Democratic party and the liberal/leftwing movement in American politics, the Democratic party is far more trustworthy on most of the important issues.  I can easily imagine affluent liberals throwing Social Security under the bus, for instance, but I can never imagine the Democratic party doing it.  Affluent liberals are eager to embrace wealth maximization as the logically correct policy criterion, but I doubt the Democrats ever will.

And in particular, I think that while plenty of affluent white liberals are happy to embrace the emerging scientific consensus that blacks are racially inferior to whites, it is absolutely unimaginable that the Democratic party ever will.  Over the period from 1948 to 1968 (that is, from the adoption of the 1948 civil rights plank, through the integration of the military, and then through the Civil Rights Act and the Voting Rights Act), the Democratic party bound its destiny so tightly with the rights of black Americans that the two essentially merged into each other.  The Democrats decided that black rights were worth fighting and (politically) dying for, and the result was that whenever the Democrats had power, they used it to roll back the southern reign of terror, to integrate blacks into the key institutions of American society, and eventually to build a society in which overt racism is socially and politically unacceptable in both major parties.  Now, this has worked  out decently well for the Democrats, electorally, but the party is uncompetitive anywhere race is highly salient, and increasingly white people simply won't pull the lever for a Democrat no matter what.

And so now we return to racial science.  Liberals, for a variety of reasons, have put science and the work of scientists on a pedestal and love nothing more than to tar their opponents as "unscientific."  Now, traditionally eugenics was regarded as bad science, that is, not just immoral but factually wrong.  But because liberal rhetoric is aghast at the idea that morals might ever intrude into the world of science, white liberals were only ever a few twin-studies away from eagerly embracing the conclusion that they are simply better (that is, genetically prone to be smarter and less criminally inclined) than black people.  (Black liberals, I suspect, won't be so eager to cast aside the "myth" of racial equality.)

So again, as between the Democrats and affluent white liberals, the Democrats are far more trustworthy, that is, unalterably bound up with doing what is right in the world.  Again, you can't take a complicated institution like a political party and label it "good" or "bad" as a moral matter, especially because so much of the Democratic party's stance is structural (at this point, it needs those black votes).  But the point is that Democrats are implacably on the right side of history, and liberals are squishy.  I know that I will vote Democratic until I die, but I am not nearly so sure that bien-pensant liberalism will be at all attractive to me in 10 years.  I don't even know if it will be recognizably liberal, in the sense of being concerned with the well-being of people who are oppressed or poor.  Its commitments (to technocracy, "science," the market, Muslim-bashing, and the professional classes) are likely to drive it even further into unsavory territory.

Saturday, July 26, 2014

I Like My Version Better

Caledon:  You can be blasé about some things, Rose, but not about Titanic.

Rose:  Actually, I can be blasé about anything but Pascal.

Tuesday, July 22, 2014

Embarrassing Moments

Had this conversation with my girlfriend:

My girlfriend:  If each menu item were assigned a different prime number, you could communicate your entire order in one number, which would be the multiple of all the items you want to order.

Me:  That system wouldn't work, because there could be more than one order that would result in the same number.

My girlfriend:  No there couldn't.  You just factor the number and you know exactly what was ordered.

Me:  But what if the number could be factored in different ways?  Like, how can the waiter tell if you wanted two "4's" or one "8"?

My girlfriend:  That's why you use prime numbers, none of the numbers is a factor of another.  Neither of your numbers is prime.

Me:  But what if one of the prime numbers is a factor of another prime number?  What will the restaurant do then?

My girlfriend:  If a number has factors other than itself and one, it's not a prime number.

By that point she was embarrassing herself so much that I had to stop the conversation.  Apparently she's never heard of the "no true Scotsman" fallacy.  In this case, she might as well have said:  "No true prime number has factors other than itself and one."  Yes, dear.  [Nodding dutifully.]  Whatever you say.  I sometimes wonder whether two people, like us, who are so different in terms of intelligence, can really be happy together.

Monday, July 21, 2014

A Fairly Simple Way to Think About Macroeconomics

I've been thinking a bit about macroeconomics.  As always, I make no claim to originality.  Just thinking things through "out loud."

Okay, so take this as a rough sketch of the economy.  There are productive resources that can be used to satisfy people's desires.  People express those desires through consumption and investment decisions, and often people can choose to consume/invest now or later.  The central bank sets short-term interest rates.  If people collectively decide to buy more economic output than can be supported by the economy's productive resources, then prices are driven up and the result is inflation.  On the other hand, if people collectively decide to buy less economic output than can be supported by the economy's productive resources, then resources are left idle.  One of those resources is labor, and when it is left idle this results in elevated unemployment.  (A quick note:  we can never achieve absolutely full employment of all resources in the economy.  Even in a wartime economy, some resources are wasted or simply can't be used at a reasonable price.  So there's a concept of using resources to the maximum degree possible without causing inflation, and this is considered full employment.  A separate project, which the central bank is not usually responsible for, involves trying to increase the amount of consumption that the economy can support at full employment.)

I've slipped in a few implicit assumptions to which we will return, but first think about what the central bank is trying to do.  It is trying to set interest rates so as to shift purchasing forward or backward in time to avoid inflation (on the one hand) or idle resources (on the other).  You can think of it almost like inventory management at a factory.  Given time periods T1, T2, ... T10, you are just trying to shift spending around from period to period to maintain a steady level of economic activity.  It's a quite dry and technical thing.  You've got essentially a supply of economic resources, and a demand for those resources, which is capable of being shifted across time.  You're just trying to line them up, chronologically, so that they are in balance as much as possible.

And the tool to shift spending across time is the interest rate.  The price of purchasing something now as opposed to later is the rate of interest, which puts an opportunity cost on spending money.  (You can spend $100 today or $100(1+x) next year, where x is the interest rate you could obtain in the market.)  Alternatively, the interest rate is a direct cost of borrowing money.  (You can spend $100 today if you promise to repay $100(1+x) next year.)  So the central bank is just trying to set the "right" price for immediate purchasing power, and that price is the same thing as the interest rate.  Again, if it sets the price too high, people will shift their spending into the future even though resources are available, and those resources will go unused in the present.  If it sets the price too low, people will shift their spending into the present even though the economy is already at full employment, and instead of increasing economic activity, people will simply bid up the price of scarce resources.  The result is inflation.

(Inflation is not a simple function of money supply.  It results from an interaction between purchasing decisions and available resources.  You might say that money only has the potential to cause inflation when it is put into motion.  By analogy, money is electrons and spending is electric power.  Power systems don't go down because of a shortage of electrons, they go down because of a shortage of power to push/pull those electrons through the system.  Likewise for money in the economy.  In fact I like this analogy very much.  The central bank is like a utility that raises and lowers electricity rates in an effort to match supply and demand of power on the grid.  It is not an exact metaphor, but it gets at the technical nature of the project.)

(One other note.  Spending is not always a straightforward function of the interest rate.  For instance, imagine that my goal is to have $x when I retire.  If the interest rate goes up, then I might be able to save less today in order to generate $x when I'm 65.  So as the interest rate rises, my spending might actually go up!  I think on balance, though, it is plausible that interest rates generally work in the more straightforward way.)

I think this is a (highly simplified) version of the model that most people use to think about these issues.  Two implications that follow:  (1) if inflation is low and steady, then by definition interest rates are not too low, and (2) the "correct" interest rate could in theory be negative, in which case the economy will not be at full employment even if the central bank lowers interest rates as low as they can go (zero).  At that point, government spending is cheap or free (from a social perspective, if not a fiscal one), because it mobilizes resources that would have been idle otherwise.  You see these themes again and again in, for instance, Krugman's writing.

Note that there is an asymmetry built into this model:  prices are assumed to adjust upwards quickly if interest rates are too low (inflation), but prices are assumed not to adjust downwards so quickly if interest rates are too low (deflation).  In theory a rapid deflation could leave prices so low that all resources are put to use.  This is more or less the anti-Keynesian position, I believe:  prices will adjust so that resources are always used at an appropriate level, and so the central bank has no business trying to achieve a particular level of economic activity.  Recessions are market outcomes and are therefore good for one reason or another.  Just let prices adjust and the market will take care of everything.  New Keynesians reply that prices aren't so flexible ("menu costs"), so resources end up going idle after all, and a whole literature has developed around this question.  But anyway price flexibility is worth thinking about.  In a sense it is the core of the debate.  I think there are other reasons, besides the New Keynesian ones, to suspect that deflation is not adequate to bring about full employment.  A topic for another time.

One thing that occurs to me is that certain products aren't really subject to inflationary pressure, at least directly.  Imagine that the central bank has set interest rates too low, and so people are spending more money than they otherwise would have.  If they buy things like refrigerators, clothes, etc., then of course they will use up existing inventories and draw resources into production, and when those resources become scarce the result will be inflation.  But if they just start streaming expensive movies/TV shows over the internet (instead of bargain movies/TV shows), then there really aren't any inventories to deplete or resources that need to be drawn into use.  It's a windfall for whoever owns the streaming rights to premium content, but no resources are being diverted from other uses.  I guess the indirect effect is that resources might be drawn into production of premium movies and TV shows, but that's not 100% clear.  It depends on market structure and exactly what TV/movies people want.

Anyway, just a thought.  Overall I think the framework is a nice, simple way of capturing the current macroeconomic debates.  I think it's also a good foundation onto which to add other concepts, which maybe I will do in the next few posts.

Sunday, July 20, 2014

How To Take Away What Is Fake In You

I was thinking about a scene from "Oki's Movie," and then I realized I own it!  So here is a transcript of the scene.  A film instructor (who is also a director) is giving advice to a student.

Film instructor:  "Your sincerity needs its own form.  The form will take you to the truth.  Telling it as it is won't get you there.  That's a big mistake.  Don't be so stubborn.  You have potential.  Dialogue is great.  The characters' emotions aren't fake.  There's a real sensibility.  But if you don't fix this, it won't stand as a feature.  Can't your understand?"

Student:  "Do you want me to be greedy?  Is that why you do it, because of greed?"

Instructor:  [laughs]  "What the hell do you know?  So I'm doing all this shit because of greed?  I'm showing you how to survive.  You can't even change this?  Turning points!  Two turning points!  That's how to take away what's fake in you, idiot!"

Student:  "I can't.  I just can't do it."

Now, I don't know how good the instructor's advice is.  Hong Sang-soo may be winking at the audience, as the first paragraph of this review suggests.  But anyway I love that line:  "That's how to take away what's fake in you, idiot!"

I think this feeds into two of my current obsessions, beer styles and process vs. substance.  But I better defer those topics to another day.

What Slips Away

I think one of the saddest things is finally abandoning a long-held dream.  The terrible finality of that knowledge, that you are never going to do it.  That it's time to cut your losses.  Admitting to yourself that you don't have what it takes.  Knowing that it would have been possible, in fact that it might be trivially easy for some people, but that you lack the willpower to do it.

Especially if you've built up some kind of narrative that you've maintained socially, and that will now only be a source of embarrassment.  So people will bring it up - weren't you going to do ________?  How is that going?  And you have to admit:  that's never going to happen.  That was all a kind of affectation, a pretense.  I wanted, so badly, to be the kind of person who does _______.  I did what I thought you are supposed to do, I shared my ambitions almost as a way of committing myself, counting on precisely this embarrassment to keep me going.  But I didn't keep going, and now I have to admit that I have seated myself too high up at the table, as in the old parable:

"When someone invites you to a wedding feast, do not take the place of honor, for a person more distinguished than you may have been invited.  If so, the host who invited both of you will come and say to you, 'Give this person your seat.'  Then, humiliated, you will have to take the least important place."

But as I said, the really sad part is admitting it to yourself.  That you took your own measure and fell short.  Clinging to unachievable dreams is pathetic in its own way, but it is also perversely admirable, like the scorned wife who refuses to go quietly.  Your self-conception is as much a part of you as your memories, and giving up a dream is like performing major surgery, a kind of amputation.

I suppose you can take some amount of comfort in the idea that it would be a big mistake to limit yourself to realistic dreams and ambitions.  Sensible, maybe, but off-putting and inhuman somehow.

Sympathy for Vronsky and a Few Thoughts on Madame Bovary

I just finished reading Madame Bovary, by Gustave Flaubert.  People seem to think that Emma Bovary is less sympathetic, somehow, than Anna Karenina.  I am not sure that's right.  It's true that Anna is shone in a sympathetic light, but I think Emma is too.  She is a victim of the grip that romance has on her impractical mind.

(This is how Jeffrey Eugenides opens The Marriage Plot, with a description of the books that Madeleine Hanna had read:

To start with, look at all the books.  There were her Edith Wharton novels, arranged not by title but date of publication; there was the complete Modern Library set of Henry James, a gift from her father on her twenty-first birthday; there were the dog-eared paperbacks assigned in her college courses, a lot of Dickens, a smidgen of Trollope, along with good helpings of Austen, George Eliot, and the redoubtable Brontë sisters.  There were a whole lot of black-and-white New Directions paperbacks, mostly poetry by people like H.D. or Denise Levertov.  There were the Colette novels she read on the sly.  There was the first edition of Couples, belonging to her mother, which Madeleine had surreptitiously dipped into back in sixth grade and which she was using now to provide textual support in her English honors thesis on the marriage plot.  There was, in short, this mid-size but still portable library representing pretty much everything Madeleine had read in college, a collection of texts, seemingly chosen at random, whose focus slowly narrowed, like a personality test, a sophisticated one you couldn't trick by anticipating the implications of its questions and finally got so lost in that your only recourse was to answer the simple truth.  And then you waited for the result, hoping for "Artistic," or "Passionate," thinking you could live with "Sensitive," secretly fearing "Narcissistic" and "Domestic," but finally being presented with an outcome that cut both ways and made you feel different depending on the day, the hour, or the guy you happened to be dating:  "Incurably Romantic."

It seems to me that Emma Bovary is very much the kind of character Eugenides had in mind, that is, a woman in the grip of a certain romantic idealization of the world that leaves her ill-equipped to make the compromises that real life forces on us.  Unfortunately I don't think Madeleine develops in that way, in fact I'm not sure she develops much at all as a character.  But anyway this idea of having been infected with incurable romanticism, this is a very Emma Bovary thing it seems to me.)

I also find this completely unfair (stop reading if you don't want to find out what happens in Anna Karenina!):

"Anna Karenina has a repellent husband, embarks on an affair with a man who ultimately betrays her love, and commits suicide."

How does Vronsky betray Anna's love?  Vronsky is not the most admirable man in Russian literature, but he treats Anna pretty well I think.  Or at least, he treats her well by his own lights.  I can't think of any way in which he betrays her.  I think one of Tolstoy's great achievements, and Flaubert's too, is that characters who should be repellent are understandable and even likeable.  (And by the way I don't find Karenin so repellent.  Unattractive, maybe, and very James-like in his fusty pedantic uselessness . . .  okay, I guess the word "repellent" is apt, but he too is understandable and almost likeable - he is being the only way he knows how to be.  It is only his misfortune that it is a disgusting way to be.)

But so I think Emma Bovary has an undeserved reputation.  The book is a tragedy because her predicament is so understandable and the logic of her destruction is so true to human life.

Friday, July 18, 2014

Beliefs, Attitudes, Pain, Optimism and Doubt

So there has been some interesting back-and-forth in the comments to my last post.  I want to broaden the point a little, although my thoughts are not focused enough to write with much precision.

Let's say that you have to decide whether to believe a proposition.  For some propositions, there may be a very clear piece of evidence that (for practical purposes) resolves the question.  For instance, you may have a scale that you regard as highly reliable in measuring weight.  Now strictly speaking, this entails a bunch of foundational beliefs about whether the gravitational constant might change dramatically at any moment, whether a demon might have substituted a less-reliable scale while you weren't looking, etc.  But let's ignore these "absurd" possibilities, just as we do in real life.  For the proposition that the coffee in a cup weighs 250 grams (plus or minus a gram), a simple measurement may constitute adequate evidence to adopt the relevant belief and take any appropriate action (in my case, I would stop pouring and drink the coffee).  We'll take this as an unproblematic case, though I have unwavering faith in the ability of philosophers to "problematize" it.

Now consider the position of an alcoholic who is faced with the proposition, "I will successfully refrain from drinking for the rest of my life."  This proposition may be very important, because if the alcoholic accepts it as a belief (or attributes a very high likelihood to it), then he will propose marriage to his girlfriend.  If, on the other hand, he does not believe it (or assigns something less than a very high likelihood to it), then he will consider himself unsuitable for marriage, and may even end his relationship so that his girlfriend can find a more suitable long-term partner.  (I'm not suggesting that's the correct approach for him to take, it just happens to be his choice in this example.)

There may be a lot of evidence available to the alcoholic, in the sense of "data that bear on the likelihood of the proposition."  But assessing that evidence is not straightforward.  Basically, the alcoholic is presented with the problem, "Am I more similar to the population that has a good chance of remaining sober, or am I more similar to the population that doesn't?"  There are infinitely many ways in which he is similar to each population, so the similarities have to be prioritized and weighted, and there is no demonstrably "right" methodology for doing so.  The alcoholic may also have to predict how his risk factors will change over time (for instance, maybe it will be easier to stay sober if he can get a job in Utah, or maybe it will be harder to stay sober if his wife becomes chronically ill).

Now I think that in this case, adopting a belief (or attributing a likelihood) is not so different from adopting an optimistic or pessimistic attitude.  This doesn't quite fit my "evidential threshold" framework, but I think it captures what I was getting at.  If we had two similarly situated men, and one decided that his likelihood of staying sober was high enough to propose marriage, while the other didn't, would it really be wrong to say that the difference is that one man has a more optimistic attitude than the other?

I suppose it would be possible to distinguish between "subjective" optimism and "objective" optimism.  In other words, imagine that an alcoholic faced with this situation makes all of his methodological choices with "no thumb on the scale."  That is, he doesn't consciously shade any of his estimates based on his attitudes.  (Query whether this is logically possible, much less realistic as a psychological matter.)  Nevertheless, it seems as though you could rank men from "pessimistic" to "optimistic" based on their conclusions, although you might want to call it a kind of objective (or non-subjective) pessimism or optimism.  But I suppose this raises the possibility that I might be using the word "attitude" to mean something like "series of modeling choices," which makes my point tautological, maybe.  Or maybe the point is that it's possible to re-cast values and attitudes in the form of modeling choices, which is sort of the other side of the coin.  (But then is there any room, anymore, for "subjective" optimism?)

Apologies for the vagueness and unsettledness.  This bears more thought, I think.

Monday, July 14, 2014

Belief and Evidence

I've been thinking about belief and evidence.  I suppose it's natural to think of confidence as varying continuously from 0 to 1, but in reality there are discrete, yes-or-no decisions that have to be made, and so the question is whether the evidence has pushed your confidence level across a threshold.

But in reality, evidence is often scarce.  And so there is the question of setting thresholds in light of scarce evidence.  And in fact some of the most important decisions will turn on beliefs that are inherently difficult to assess in terms of evidence.  So what is to be done?

I don't know.  It strikes me as being similar to the "bounded rationality" problem.  In short, the problem is that if you have scarce processing power, then you have to allocate it judiciously, but the allocation problem itself requires processing power.  But how much processing power should be allocated to the allocation of processing power?  To answer that question requires processing power.  But how much should be allocated to that problem?

To give a more down-to-earth example, imagine you are buying some kind of ingredient online.  It is available in different amounts (measured in different units) and at different prices (specified in different currencies).  If we are assuming that you are perfectly rational, then you should pick the best combination of quantity and price.  And we could simplify this by assuming that you only care about minimizing the per-unit price (so you don't care about the overall quantity).  It's a very simple calculation at that point, in that it involves no judgments.  It's arithmetic.

But it's still not simple enough.  You value your time, and you don't want to spend an undue amount of time converting all of the quantities and prices into common units.  And so there is a possibility that you will select a price quote that is strictly worse than another option, by your own lights.  (Now I want to be clear:  we are assuming that you have all of the vendors' price quotes at your fingertips.  In other words, this is a processing problem, not a search problem.  A search problem has roughly the same dynamic, though.)

And then there is the possibility that you will spend the "wrong" amount of time converting units and currencies.  If you spend too little time, you are likely to end up paying too much.  If you spend too much time, you will end up "paying" more in time than you gain in improved price.  And so the right amount of time to spend processing the data is a function of the expected gains from each calculation.

But calculating the expected gains for each calculation is itself difficult.  I suppose you could do a handful of conversions, then see what the distribution of prices and quantities is, and then use that to predict what the lowest price will be if you convert x prices.  But doing this calculation itself takes time.  You might choose to make an informal calculation - glance at the prices you've converted so far, see that they are in a tight range, and simply pick the best one.  Or see that they are all over the place, and convert a few more.  This economizes on meta-processing but it risks failing to optimize on processing itself.

Anyway enough.  This is not a new problem, there is a whole concept of "satisficing" that addresses it.  My point is just, it seems we are in a similar position when it comes to reasoning our way through decisions when the evidence is inherently limited.  We have to set thresholds uncomfortably low, or we have to abandon rational thought altogether.  And it seems to me that in fact as you set thresholds low enough, and you bring in enough informal and subjective evidence, you essentially turn a reasoning process into an emotional one.  That's not quite right.  Your beliefs become more like attitudes, more "political," the more you rely on low thresholds.  This is why deciding that you love someone is as much a choice as it is a conclusion.  Our language in this area is (maybe appropriately) fuzzy.  You determine that you love someone, or you determine to love someone.

So your beliefs end up merging seamlessly into your values and dispositions.  And so of course you are open to accusations of being "unscientific" or lacking rigor, or whatever, but that is just how life is lived on the low-evidence end of the spectrum.

You Must Change Your Life

A couple of translations of the same poem by Rainer Maria Rilke.

The first:

Torso of an Archaic Apollo
Translated by C. F. MacIntyre

Never will we know his fabulous head
where the eyes' apples slowly ripened. Yet
his torso glows: a candelabrum set
before his gaze which is pushed back and hid,

restrained and shining. Else the curving breast
could not thus blind you, nor through the soft turn
of the loins could this smile easily have passed
into the bright groins where the genitals burned.

Else stood this stone a fragment and defaced,
with lucent body from the shoulders falling,
too short, not gleaming like a lion's fell;

nor would this star have shaken the shackles off,
bursting with light, until there is no place
that does not see you. You must change your life.

From Rilke: Selected Poems (Univ. of California Press, 1957)

The second:

Archaic Torso of Apollo
Rainer Maria Rilke, 1875 - 1926

We cannot know his legendary head
with eyes like ripening fruit. And yet his torso
is still suffused with brilliance from inside,
like a lamp, in which his gaze, now turned to low,

gleams in all its power. Otherwise
the curved breast could not dazzle you so, nor could
a smile run through the placid hips and thighs
to that dark center where procreation flared.

Otherwise this stone would seem defaced
beneath the translucent cascade of the shoulders
and would not glisten like a wild beast’s fur:

would not, from all the borders of itself,
burst like a star: for here there is no place
that does not see you. You must change your life.

I much prefer the second one, though I have no idea which one is "better" as a translation.  (Someone seems to have gotten to Google Translate, which currently matches the second poem exactly for the line, "to that dark center where procreation flared," which does not seem like Google's usual clunky literal translation.)

[UPDATE:  As Sarang points out, the second translation is by Stephen Mitchell, as I could have discovered if I had scrolled down.  Some other good translations there too.  I think the process of translation (or specifically, multiple translations) actually adds quite a bit of richness to the poem, almost as though you can use parallax to work out its dimensions more precisely.]  [Or if you prefer, it's like computed tomography - like a CT scan in which multiple passes can be combined to infer something that no single scan could show.]

Here is a poem by Elisa Gabbert that refers to the poem.  Like a barbarian, I tried reading every other line (so 1, 3, 5, 7, 9, 11, 13, 15, 17, 19, 2, 4, 6, 8, 10, 12, 14, 16, 18).  If you ignore the punctuation, it kind of works, or at least it works for me.

Saturday, July 05, 2014

Urban Landowners as Utilities

I have been thinking a bit about property taxes.  This is one of those things that I'm sure already has an extensive literature, but I want to do a little thinking about it before seeing what has already been written.  (Realistically I probably won't go looking for articles on this topic, though.)

So here is the key insight.  Assuming property taxes are predictable, they should be fully factored into the purchase price of the house.  That is, the parties should discount back the stream of payments to its present value, and that should be deducted from the purchase price of the house.  If you are not a homeowner, but you want to buy a house in the future, then you should be (roughly) indifferent to changes in the property tax rate.  If property taxes go up, then when you buy a house you will have a larger tax burden, but on the other hand, the purchase price will be lower.  (It is quite possible I have this wrong, by the way.  It seems intuitively plausible, but it's not as though I've rigorously worked it through.  But let's go with it for now.)

So changing the property tax rate should operate primarily to give wealth to landowners, or to take it away from them.  This raises the possibility that you could use property taxes to capture the value created by government-funded amenities.  Imagine that you start with an "isolated state" as in von Thünen.  Then as you add amenities, you could adjust tax rates lot-by-lot so that property values remain stable relative to each other.  So for instance, let's say you add a subway stop in a neighborhood.  If previously land values were essentially flat across the neighborhood, then you could raise property taxes as a function of proximity to the subway station, so that property values remain flat after the subway station starts operating.  (You might even measure distance to the station using a Voronoi diagram—that is, you might measure walking distance as opposed to simple distance, because presumably walking distance has more bearing on land value.  [Edited to add:  specifically I am thinking of "Manhattan distance."]  But really, you might not have to think about it that hard.  Just adjust taxes lot-by-lot until land values are flat again.  And keep doing this every few years.)  A lot of the value of a subway system is reflected in increased land values, but that value mostly accrues to private landowners in the status quo.  If the city were able to capture the value of its investments in mass transit, then it might be much easier to finance mass transit.  And the landowners have no grounds to complain—the city gives with one hand and takes away with the other.  Landowners should be mostly indifferent as to the location of the subway station, because any increase in value will be taxed away.  No one is losing money because a subway station is located near to him, or far from him.  The city is just recouping the value created by its investments.

Now there is a serious problem here, which is that it may be very difficult to measure the contribution the subway station makes to land value.  In my example it seemed straightforward because we started with flat land values, so it would seem that the only factor that might elevate land values is the construction of the subway stop.  But it's not so simple.  It is probably a good idea to build especially densely near subway stations, so as to locate as many people as possible near mass transit.  But once landowners have invested in new, bigger structures near the subway station, then some of the land-value increase is attributable to their infusion of capital, and not merely to proximity to the subway station.  So you can't actually tax away all land-value increases, or you will deter the appropriate development of property near subway stations.  Ideally you would tax only the increase in value that is caused by proximity to the subway station.  (Causation is incredibly tricky to work out, though.)

One way to deal with all of this would be to treat landowners like utilities.  That is, you would permit landowners to operate their buildings for a profit, and you would allow them to profit from capital infusions (so as to develop land appropriately).  But the rate of profit would be bureaucratically determined, and all "excess profits" would accrue to the city via tax increases.  Land would be a safe, stable investment, but would not hold any potential for big speculative gains.  The city would be able to count on big revenue increases every time it enhances property values (and likewise it would suffer revenue losses every time it allows property values to fall, for instance by failing to control street crime or graffiti or whatever—in those cases, the city might be compelled to lower tax rates to hold land values steady).

I note that in New York City, rent-controlled apartments are already treated very much like utilities.  It is expected that the owners should earn roughly enough to cover their expenses, but not much more.  (My understanding is that some landlords lose money every month—that is, rent is not high enough to cover taxes and maintenance.  Imagine being put in that situation with one of your investments!)  Here is what Mayor Bill "the Blaze" de Blasio said when rents were increased by 1%:

“It’s quite striking that we’ve had a pattern in recent years of tenants being charged substantial increases while the actual costs to landlords did not increase anywhere near the same amount,” the mayor said. “So, in fact, there’s been a pattern of unfairness in the last few years.”
So it's unfair for landowners to increase the profit from their investments.  This attitude would be unthinkable in almost any other context (imagine applying the same logic to restaurant owners, or for that matter to owners of non-rent-stabilized buildings).  But one context in which this attitude makes complete sense is in the utility sector.  That's exactly how people think about utilities:  they should be able to increase rates only to the extent necessary to cover increased costs.  (Of course, the flip side is that no one expects utilities to operate at a loss over extended periods of time.  So in that respect owners of rent-stabilized buildings are treated worse than utilities.)

So de Blasio already thinks of owners of rent-stabilized buildings as utilities.  It's not such a stretch to apply the same logic to all landowners in a city (especially since most of the changes in their wealth are attributable to factors outside their control—basically you could have gotten very rich in New York City simply by purchasing land and then doing nothing).  Though of course it's worth noting that one would expect the system to operate with a fair amount of corruption, arbitrariness, and inefficiency, since it's not as though we've solved all the problems in utility-regulation (and we would be talking about millions of little utilities, each one subject to perverse incentives in terms of cost-control, information-hiding, etc.).  So I'm not actually advocating this approach, just noting it as a potential alternative to our current way of doing things.

And now I realize that I am probably just reinventing the "single tax" promoted by Henry George.  Oh well.  I never claimed to be particularly original.

[UPDATE:  You learn a lot by clicking around Wikipedia.  Check out "The Landlord's Game," which was invented by a Georgist.  Truth really is stranger and more fascinating than fiction.]