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Arnold Kling at EconLog

Last Build Date: Fri, 23 Aug 2013 13:47:18 -0500

Copyright: Copyright 2013

The Outlook for New York, Continued, by Arnold Kling

Thu, 01 Nov 2012 09:46:37 -0500

The New York Times reports,

The storm damage had a synergy of its own. Efforts to pump floodwaters from subway and automobile tunnels were slowed by electrical shortages. Hastily arranged car pools became bogged down on highways and city streets clogged with other commuters. Many gas stations, without power to operate their pumps, could not open for business, eerily evoking the fuel crisis of the 1970s.

This is consistent with what I wrote in a post that most people disagreed with, and which may yet prove to be mostly wrong.

But I worry that people have sunk too deeply into folk Keynesianism, in which economic activity consists of jobs and spending. Spending creates jobs, and jobs create spending. So let's send everybody back into the city to work and spend. Instead, I would be inclined to shut down the hair salons and the boutiques for a few days longer in order to clear the roads to bring in generators and repair workers. And I would not want the additional logistical challenges of holding the NYC marathon. I keep thinking that there is probably some 70-year-old couple trapped on the 10th floor somewhere without electricity or running water, and perhaps city personnel should be dealing with them rather than with setting up water stations and barricades for a race. But maybe that's why Bloomberg is mayor of New York and I'm not.

I think of the economy as a system for collaboration over long distance. I taunt locavores by saying, "why stop with buying only from farmers in the community? Why don't you refuse to buy anything that was not manufactured and made from materials that can be found within a one-block radius of where you live?"

I occasionally fantasize about what I would have done differently on the Allied side during World War II. Instead of trying to bomb cities and factories, I would have tried to take out the main transportation conduits, particularly railroad bridges and highway bridges. I would also have gone after electrical transmission stations, fuel pipelines, and the water distribution system.

Forget about whether my fantasy strategy would have been feasible. The point here is that the storm executed that strategy in New York. It took out key transportation arteries, electrical transmission, and it disrupted the fuel and water system. To me, the economic consequences of that look much worse than the destruction of the World Trade Center (although more people died in that attack).

Maybe it will all get fixed more quickly than I first assumed. I hope so. But I stand by the point that if you think of the economy as a system of collaboration, then the conduits that facilitate collaboration are vital. Losing subway tunnels and electricity is a big deal. And, as the paragraph quoted above illustrates and as I wrote in the other post, the patterns of interdependence make for a compounding effect.


The Outlook for New York, by Arnold Kling

Tue, 30 Oct 2012 10:44:17 -0500

If there are no objections, I am going to interrupt my non-blogging to offer a downbeat economic prognosis for New York City in the wake of the storm. I can imagine that the disruption to patterns of sustainable specialization and trade could be significant and long-lasting. Even granting that this was a smaller flood than New Orleans, New York is more multi-layered and complex. The recovery process could be quite challenging.

To start with, my guess is that restoring the transit system and the electrical grid will involve a lot of interdependencies. You cannot solve problem A without first solving problem B, which requires solving problem C, and so on. Meanwhile, because A is not working, problems X, Y and Z emerge. Even when you think you have things working, there might be weeks of inspections and testing to be completed. Unless citizens and public officials are willing to accept a whole new level of risk in everyday life.

So my guess is that it will take much longer to get back to normal than most people are assuming. In fact, the process will take so long that in the meantime "normal" will have been redefined. Perhaps some transit routes will never re-open.

The loss of key transportation infrastructure raises the cost of imports (food, construction materials, etc.), even as exports (financial services) go down. This drives down equilibrium real wages in many secondary industries (food service, for example), but the adjustment process is not at all smooth. Many small businesses fail and many jobs are lost.

In order to remain ongoing concerns, many financial services firms will "temporarily" relocate to suburban offices and to virtual offices. These "temporary" adaptations will become so well entrenched that many of these businesses will not return to Manhattan.

I live in Maryland, and I know nothing about the on-the-ground situation anywhere else. But my experiences with the New York subway system, from the painful squeals of trains descending the Queensboro bridge to the labyrinthine thicket of wires that you see underground, have always provided a sense of lurking danger. I look at the maintenance challenge of the New York subway as something akin to an old COBOL program that no one wants to touch, because anyone who ever understood its inner workings has long since departed.

I hope that I am wrong. I hope that we see spectacular feats of civil engineering and remarkable returns to social capital, resulting in a robust recovery. Above all, I hope that there are no further repercussions for New York City from the storm, such as flooding from rain-swollen rivers. But at this point, my instincts lean toward gloomier scenarios.


My Last Post, by Arnold Kling

Fri, 24 Aug 2012 10:42:32 -0500

Sorry for being abrupt, but this is something I have been thinking about for months.

In the future, I plan to do my writing in essay format.

As far as blogging goes, I am opting for exit rather than voice, as it were.


Changing the Corporate Form of Organization, by Arnold Kling

Fri, 24 Aug 2012 07:34:29 -0500

Concerning U.S. corporate law, Kent Greenfield writes,

Compare this to the European model of corporate governance, which requires much more robust social obligation on the part of corporations, embodied not only in cultural norms but also in law. The duty to disclose information and consult with employees is much more robust, and many large European companies include labor representatives on their boards. Germany, for instance, requires that half the senior board of large companies be elected by employees rather than shareholders. And at least another 15 European countries have some kind of provision requiring "co-determination," worker representation on boards of companies headquartered in their national territory.

The entire article is a must-read if you want insights into the progressive mindset. Perhaps our colleagues at libertylawsite will comment.

My reading is that Greenfield is asking why corporations should be controlled by shareholders. Aren't other stakeholders, including workers, at least as important?

My off-the-cuff answer is that shareholders have to be in control because they are subject to looting in a way that workers are not. A worker who gets the shaft can simply go elsewhere*. Shareholders are in it for the duration, regardless**.

*As a worker, I might invest in a lot of firm-specific human capital, which could make it difficult for me to exit the firm. So in theory I do face some risks of adverse, arbitrary decisions from management. However, I do not need to have a voice in order to protect myself. As long as the firm and I are sharing the rents from this firm-specific human capital (vs. me taking all of them), the firm has an incentive to treat me well.

**As a shareholder, I can sell stock at any time. However, suppose that today the workers vote to loot the company, selling off its assets to pay a huge worker benefit. At that point, I can sell my stock, but it is already going to be worthless, because who will buy it? So, even though I can sell at any time, the value of my shares depends on the long-term value of the company.

If you want to see how the "workers as stakeholders" model turns out, I suggest you look at the public sector in California or the school system in Maryland.


Hardline Libertarians?, by Arnold Kling

Fri, 24 Aug 2012 07:20:53 -0500

Daron Acemoglu and James Robinson write,

Central planning maximizes the extent of control that the state, and the people running the state, exercise. The desire to control others is a constant in history and is part and parcel of the construction of states. If the state can grab all the land and resources and control who and on what terms people get access to them, then this maximizes control, even if it sacrifices economic efficiency.

Pointer from Mark Thoma.

This argument comes across to me as a hardline libertarian position, not one that I would typically associate with the authors. It is hard to root for government intervention after reading just this post. To make the case for government intervention, you want to ascribe moral authority to those who advocate intervention and ascribe evil motives to those who oppose it. In this post, it's the other way around.

I am somewhat less hard line. I believe that the motives and intentions are sometimes (often?) better than "the desire to control others." In any case, I think that a major goal of economic reasoning should be to focus attention on consequences rather than motives and intentions.