I have annual passes to both the U.S. and the California Parks and Recreational Areas. So when someone asks what we need in terms of parks, my visceral answer is always: More! But others view the National Monument and National Park systems differently. Right now, the Trump administration is re-evaluating them with an eye towards shrinking some and opening up others to mining and development.

The economist in me wants to ask: What are the trade-offs of making such changes in our parks? And how are such changes valued?

Let’s start by acknowledging there is always a trade-off between economic activity and the environment. Everything we do—from sheltering and feeding ourselves, to going to movies and ballgames—changes the natural environment around us. And this is not new. Pre-Columbian hunter-gatherers altered the environment as they burned Great Plains grasses in their quest for buffalo burgers.

What are the costs of such alteration? For a long time, planners have sought to ascertain the value of urban open space. A recent study by Harvard lecturer Linda Bilmes and Colorado State University professor John Loomis tried to estimate the value of the National Park Service system. It is a big number, $92 billion. But even then, they admit that many aspects of the park system are undervalued because putting any price on them would be speculative at best.

Among these difficult-to-price aspects are the health and psychological benefits to those who use the parks—and to those who don’t use the parks, but who benefit from changed behavior by those who do. Their analysis also does not consider the opportunity cost of the parks—in other words the money that might be made were they not parks, but privatized for housing, mining, logging, or commercialized recreation.

The Trump administration’s current evaluation is focused on those parks that are designated as National Monuments under the Antiquities Act of 1906. While there are huge challenges in conducting a cost-benefit analysis of the National Monuments, it is still a worthwhile exercise to think about the values that can be pinned down.

Let’s begin with an easy example. The Statue of Liberty is a National Monument. It sits in New York Harbor on Liberty Island, prime real estate. In 2016 there were over 4.5 million visitors. They paid about $27 each to visit, which includes the boat ride to and from, and admission tickets to all or part of the monument. If we compare this to Manhattan skyscrapers that have an average age of over 60 years, then over the same amount of time visitors will have spent more than $7 billion at the monument.

Again, we don’t count those who benefit because others have been inspired by their visit to the Statue of Liberty, nor the value of connecting us to our heritage. It is undeniable that these are significant.

On the road to Bears Ears. Photo courtesy of Wikimedia Commons.

An alternative to the statue would be a skyscraper. The island would be prime real estate for building exclusive condos with views of the city and the harbor. The value would be diminished by the fact that domestic and maintenance workers would have to be paid more to get over to the island, and that access to the city would require a boat ride. So perhaps the comparable development is the Kushner family’s 666 Fifth Avenue office tower, another prime property.

The Kushners paid $1.8 billion for it, and The New York Times reports that they expect to spend $3.3 billion to renovate it. When you add this up—$5.1 billion—it is clear that the Statue of Liberty Monument (with a value of $7 billion-plus) is worth more than the alternative condo skyscraper occupying the same land.

And this is just the pure economic cost-benefit analysis. It leaves out the non-pecuniary value of being inspired by Lady Liberty, of connecting us to our heritage, and of reminding Americans that we were all once immigrants yearning to breathe free.

So it’s clear why no one, as far as I know, is contemplating selling or leasing parts or all of Liberty Island. But what about Bears Ears National Monument, the first target of Interior Secretary Ryan Zinke’s effort to shrink national monuments and open them up for development?

I’m betting that, at least until recently, you never had heard of it. Bears Ears is in a remote part of southern Utah.

But as an example, Bears Ears is instructive—and the economics are a bit more complicated. First of all, Bears Ears, like many monuments, is free to visit. So we don’t have admissions revenue to look at. Plus, the remoteness of the park means it will not have the same level of visitor traffic as the Statue of Liberty National Monument. Of course, luxury condos are not an alternative in such a remote place. But you can make the case that mining is an alternative use.

Now let’s consider the full value of Bears Ears. It spans an area with a fossil record from the age of the dinosaurs, one of the most complete records we have. The value in studying this record is that we may obtain a better understanding of the fossils from this time spanning the Triassic and Jurassic periods. Also, Bears Ears is home to more than 1,000 archeological sites dating from when early Native Americans lived in the area. This civilization vanished and new knowledge on how climactic changes seemed to have decimated their civilization is going to be useful for our grandchildren (or maybe even ourselves). The monument also has other values—to the visitors who make the trek there, and to Native Americans who still live in the area and have a spiritual and heritage connection to many parts of it.

What are we giving up by protecting this potentially useful historical, cultural, and scientific research site? Uranium. The Daneros Mine in Red Canyon is an existing uranium mining operation in the Bears Ears area that was purposely left out of the monument. But the monument effectively prevents further exploration and mining inside its boundary.

Here is the context. Uranium prices have been falling since they peaked in 2007, and economics teaches us that this happens when demand falls or supply increases. So if other parts of Bears Ears were not great places to mine before the monument was declared, they certainly are not now.

The counter to that point is: Uranium prices may change someday. How and when is hard to predict. But uranium ore is important, and could be critically important to our national security. Still, this is unlikely. The U.S. demand for uranium is not likely to increase anytime soon, as reactors like San Onofre in California close and other reactors—such as two to be built in Jenkinsville, South Carolina—are abandoned in mid-construction. Indeed, there is so little demand that most of the uranium now mined from southwest Utah is exported.

In such a case, where we are dealing with “might-be’s” instead of quantifiable benefits, we can turn to optimal decision theory to help us make wiser choices.

The optimal decision is the one that provides at least as good an outcome as all other available decision options. So if the costs of the “might-be’s” are not immediate, they receive little weight. In the case of Bears Ears, the optimal decision now is to leave well enough alone and to keep an eye on the “might-be’s” just in case.

In other words, if we don’t need to make a decision, the optimal action is to make contingency plans for the time when a decision must be made.

A secondary argument for opening Bears Ears to mining is that it takes time to open a mine and begin ore production. So if we need uranium for national security, we could be behind the production power curve. The answer to this is quite easy. If quick access to uranium is valuable, then instead of exporting it from the Daneros Mine to South Korea, the federal government should purchase and stockpile it. The reason why this is superior is that uranium seams play out, and if they are opened today they still might not be available when a national crisis requires them. Thus the uncertainty of the need for the strategic ore drives the decision to preserve Bears Ears.

There is also the issue of jobs. According to the Salt Lake Tribune, this amounts to less than 40 jobs. In an economy of 147 million jobs in the United States and 1.5 million in Utah, this is no more than spit in the ocean. So the strategic metal arguments are the ones to consider seriously, and they point to no economic alternatives superior to doing nothing with Bears Ears at the moment.

My guess is that other National Monuments would end up with a similar cost/benefit calculus. There may be legitimate arguments about future needs, either by those who will benefit from maintaining the park in perpetuity, or by those who see a national interest in exploiting resources from the park at some point in time. But the absolute wrong economic decision would be to change a “might-be” to a “must,” thereby creating a cost in the loss of the park.

That brings me back to my personal interests in parks and monuments. Of course, I don’t want to see even one-tenth of one acre given over to mining or development. But the point that should drive decision-making is not personal preference, but analysis of costs and benefits to society as a whole. And it’s clear that careful study and a willingness to admit what we don’t know can lead to a better solution for such places than short-term changes in policy to satisfy exploitation interests.

And if we don’t take care to respect the analysis, you might find yourself booking a tour of the unique architecture of Liberty Island Condos in the middle of Upper New York Bay some day.

The post The Trump Administration Wants Uranium Mining in Utah—but What About the Dinosaur Fossils? appeared first on Zócalo Public Square.

Jevons’ observations on coal also have something to say about the Oshiya (train pushers) who squeeze every last person onto subway cars in Tokyo, and about Governor Andrew Cuomo’s recent declaration of a transit emergency for New York’s famed subway system.

Jevons wrote that an increase in the efficiency of coal production would stimulate increased demand for coal. Jevons’ reasoning was that more efficient coal production would lead to lower prices. And Economics 101 tells us that lower prices lead to more consumption—perhaps, in this case, creating so much more demand that it would outstrip the capacity to produce coal.

In such a scenario, the production of coal might be increased to meet the heightened demand, but that would require marginal mines to be brought into operation. Given that these mines would be less efficient, prices necessarily would rise to cover the additional cost. Prices would not initially increase back to their old levels, but as the population grew it would generate additional demand for coal and such a rebound in prices might well occur.

These same insights about coal are applicable to mass transportation systems—particularly freeways. Last February, the Dutch firm TomTom, which produces traffic, navigation, and mapping products, drew on the brave new world of big data to release their 2016 index of traffic congestion. Our region, the Pacific Rim, was the clear “winner”—or, I should say, the clear loser. Seven of the top 10 congested cities are on the Pacific Rim and Los Angeles leads the list of American cities.

Anyone who travels the cities around the rim can attest to snarled traffic in Jakarta, Beijing, Seattle, and Los Angeles. The question “What are we going to do about traffic?” is a constant source of conversation, particularly here in L.A., and it is pervasive enough to have given rise to the parody “The Californians” on Saturday Night Live.

There would seem to be two ways to ease traffic congestion: build more capacity, or reduce the number of people who use the existing capacity. Yet, just as with Jevons’ coal demand, traffic seems to expand to meet whatever capacity exists. And this is not just a Los Angeles or Beijing problem. In 1990, British transportation analyst Martin Mogridge observed it as a more general characteristic of highways, and it is now enshrined in transportation planning circles as the “Lewis-Mogridge Position.”

Why is it that cities cannot build enough capacity to solve the problem? The answer may lie in two factors: the price of housing, and the pricing of congestion.

Let’s start with the price of housing. The purchase or rental price of a home reflects the sum value of many characteristics of that home. In this column, I have often written about how proximity to natural amenities, such as beaches and mountains, makes housing more expensive. But proximity to work also is an important consideration. The closer to work, the shorter the commute time, and the more valuable will be the home.

But it is commuting time and not linear distance that matters most. Consequently, when you increase the capacity of transportation infrastructure, you get shorter commute times—at least initially. And that makes homes close to the new infrastructure initially more attractive.

Intensifying congestion, however, will affect a home’s price. At 3 a.m., the opportunity cost of traveling the freeway to a destination is practically zero. It takes a little time, and that is a cost, but not much. But in rush hour when freeway speeds are slow, the opportunity cost increases with the additional time spent sitting in your car listening to The Grateful Dead on the radio. The more cars there are (higher demand), the more time is required to crawl through rush hour (the higher cost).

Here is where Jevons’ idea comes in. When there is not much congestion, one can live further away from work where home prices are lower, and still arrive at work on time without spending too much more time commuting. Consequently, building another lane on the freeway opens up more residential options.

So adding capacity makes two big things happen. First, there is an increased demand for the housing that is now within driving distance to work; and second, more people will use the freeways to get to work. This leads to more freeway congestion and ultimately longer commute times for everyone. Empirically we see this happening quite fast, and eventually the new lane has done nothing to ease congestion.

There are a number of solutions to this. One is to build mass transit and induce people to use it. This is the favored solution of urban planners today because mass transit is a more efficient means of transportation. It can carry many more people per dollar spent on building, maintaining, and operating the transit than the highways can.

But with mass transit, as with highways, the same principles of capacity and demand apply. When Japan began building the Tokaido Shinkansen (high-speed rail) in 1959, it was, in part, intended to ease the burden of commuting in densely packed Tokyo. Today, anyone who rides the rail line, especially in rush hour, knows what a sardine feels like when packed into a flat tin can. In this case the cost is not time, but the discomfort of cheek-to-jowl train ridership.

Another solution to the problem of increased capacity driving demand is to convert lanes on the freeways to toll lanes. This is a favorite of economists because people who value time more will pay a premium to avoid the costs of congestion. Consequently, the scarce resource—road space—will be rationed according to its relative value to consumers. Of course, it is not only the value of time that matters in the decision; income—the ability to pay tolls—does as well. Adding a toll lane allows rich people to drive fast and reduces the capacity on the freeway for everyone else. And that raises issues of equity for infrastructure built with tax dollars.

The other problem with toll lanes is that there is an alternative to either paying for the less congested toll lane, or driving in the now more congested free lanes: driving on surface streets. With navigation apps such as Waze, drivers can take the nearest off-ramp and motor through residential neighborhoods. When they do that, they expose residential neighborhoods to the congestion, noise, and pollution that the freeways were originally built to eliminate.

Moreover, a 2001 article by Ingo Hansen of Delft University of Technology suggests that transportation analysis of toll roads gets it all wrong. His research indicates that when fed-up freeway commuters start taking app-directed shortcuts through residential areas, the local roads quickly become clogged, hampering residents’ ability to make short trips or run errands. These residents are now competing with longer-distance drivers, and so they, too, pay a cost in congestion, safety, and pollution. Indeed, this Waze phenomenon induced L.A. City Councilman Paul Krekorian in 2015 to suggest new government regulations for local street usage.

So, toll roads don’t seem to be a complete answer either. Recognizing this, Mexico City, Beijing, and other cities have followed the example of Julius Caesar, who in 1st Century BCE Rome banned chariots from the center city during the day, except for two hours in the morning and two hours in the late afternoon. Romans responded by moving their trips to the allowable four hours each day—thereby creating epic chariot jams.

Today Singapore uses a combination of policies to limit the number of cars on the roads. First there is a quota system that limits the number of cars on the island. Second, those who have cars are charged for driving them through a sophisticated system that measures where they are and when they are driving. This system will be improved shortly with the installation of GPS monitors in each car.

These are useful alternatives. But let’s remember our friend Jevons. Policies to limit traffic might not do much, even with the best of planning, so long as the city we live in is attractive to a lot of people. An oft-heard refrain about my hometown is: “I would love to live in L.A. but couldn’t stand the traffic.” If you make traffic better, more people would move here, and traffic would get worse. Congestion costs ration limited space and this reduces the number of people moving in.

All we can do for now is stay ahead of the game in the best way possible. Provide incentives for people to use the least-used modes of transportation and plan for the increases in population that will invariably happen to cities that are attractive to people from far-flung lands. Perhaps the advent of self-driving autos will provide the bandwidth to break the traffic jam for good, but perhaps not. What will be required is to engage transportation planning with housing planning in a way that recognizes the close tie between the cost of congestion and the price of housing.

On the bright side, if you are late for something in one of the Pacific Rim’s notoriously congested cities, simply saying “Sorry, traffic!” is sufficient to get you by.

The post Why Building More Freeways Makes Traffic Worse, Not Better appeared first on Zócalo Public Square.

I usually write in this space about the economies of the Pacific Rim, and the lessons they hold for policymakers in the United States. But this year, Iceland, with its stunning beauty, is the place to go on vacation, and so I headed to the other side of the planet.

Settled by Vikings in the ninth century, Iceland was one of the first proto-democracies. Those Norse settlers held their rudimentary version of parliament, called the Alþing (Althing), at Thingviller, the rift where the North American and European plates are tearing apart.

From its inception, Iceland was part of a globalized world—first as a dominion in the far-flung lands of the Vikings, and later linked with European commerce. That linkage—essential for a country with fewer people than the city of Santa Ana, California—continues to this day, although the current prime minister’s Independence Party, now leading a coalition government, has serious questions about the value of European integration.

The trouble with globalized Iceland is that its connections to the outside world have been accompanied, and strained, by a relatively severe business cycle. Why? The causes are too many to name here, but two stand out: trade and finance.

Finance casts an especially long shadow. We in the United States thought the financial crisis of September 2008 was bad, and it was. But in Iceland it was much, much worse. Beginning in September 2008, Iceland suffered a financial crisis during which 90 percent of its financial system evaporated, all of the major banks defaulted and were nationalized, and the value of the Krona fell by 50 percent. It has been described as one of the worst financial crises of any economy in modern history.

In September and October of 2008, when the banking system exploded like so many Icelandic volcanoes, Icelanders faced the same choice that many countries, including the United States, confronted: backstop the banking system, or let it fail and start over again.

The Icelandic Independence Party was in power at the time of the crash (though it had not been in power during the preceding “banks-gone-wild” period). And so the party tried to reassure their countrymen that Iceland, like all other countries facing huge systemic debts, needed to step up to the plate and guarantee the private debt of the banking system. This is similar to what Ben Bernanke and the U.S. Federal Reserve decided to do in the fall of 2008.

But that was not to be. The Icelandic Independence Party’s coalition government, which (full disclosure) was led by my University of Minnesota classmate Geir Haarde, fell in February 2009. Eventually, Sigmundur David Gunnlaugsson’s Progressive Party came to power with a different point of view.

Gunnlaugsson, who rode a wave of anti-bailout sentiment, decided to default on Iceland’s international debts. His view was that foreign investors should have known the risks they were taking in exchange for the high returns they hoped to receive. Now that the risks had materialized, Gunnlaugsson asserted, they ought not look to others to help them.

“Icelanders, as descendants of the Vikings, are highly individualistic and have difficulty putting up with authorities, let alone oppression,” is how he colorfully put it after the election.

The results: Iceland’s banks went under, the bad debt was put into a resolution authority for sorting out, and a new, much more conservative banking system arose from the ashes.

The new banking system improved regulation, instituted higher bank equity requirements, and established strict stress tests, similar to what the U.S. implemented, but perhaps a little more restrictive.

And Iceland itself did not go under. In fact, the Icelandic economy has recovered quite nicely since then. That’s in part because taking decisive action was possible in a small, homogenous country. It’s also because the important parts of the real economy—agriculture, renewable energy, fisheries, and tourism—were still solid, despite a moribund banking sector.

As Geir Haarde put it, the hull of the Icelandic economic ship was strong, with only the superstructure being damaged. Fixing that superstructure by creating new banks with more restrictive regulation, and with bridge loans from the International Monetary Fund, engendered a return to prosperity.

Today, demand for fish is growing, tourism is hot, and economic activity has diversified into marine and renewable energy technology. From the Ocean Cluster House on the docks of Reykjavik to the large geothermal-heated greenhouses in Fliori, Iceland’s non-financial economic activity is booming.

The question is whether the new monetary system can meet its promise to smooth out fluctuations in the business cycle. History provides reason to worry. Iceland remains exposed to the world economy and, as a small player, is going to be buffeted by it in the future.

There is an Icelandic aphorism: to lay your head in water. It roughly means to think about what you are doing and perhaps come up with a new and better solution.

Economists from the Bank of Iceland are doing just that. They recently studied the past 150 years of Iceland’s economic history and found financial crises in Iceland are the rule not the exception. Of the 20 financial crises studied, five were quite similar to the 2008 implosion. The common thread is that they arose in conjunction with adverse global financial events.

The option of isolating the economy from the rest of the world exists, but this is not very palatable for a small trading country. Another more radical solution was proposed in a government-commissioned study by Frosti Sigurjónsson: establishing a sovereign monetary system.

The basic idea is to eliminate fractional reserve banking; that’s the system whereby banks can leverage depositors’ funds through loans to others. By eliminating such leveraging, banks can be sure that they have enough funds to cover customers’ deposits during a financial crisis.

In a sovereign monetary system, banks play a transactions-only role. They take in deposits, charge a fee for storing and processing them, and facilitate transactions. Effectively, the banks become a big mattress for putting one’s money under. A bank cannot be insolvent because it always has on hand 100 percent of customers’ deposits. More risky investments may be made via investment banks similar to mutual funds in the U.S. For these, the customer is not guaranteed a return nor guaranteed the ability to withdraw their investment.

There are some technical issues about monetary policy in this system, but they can be resolved relatively easily. The real cost of a sovereign money system is that the deposits are now idle. In Western banking, deposits are put to work as loans that generate new economic activity. That doesn’t happen under the Icelandic bank mattress; the money just sleeps until the customer is ready to withdraw it.

If Iceland were to implement such a system, it would be an instructive experiment in monetary economics. Whether successful or not, we would learn something about how to better manage the systemic risks of the banking system. However, it would be very difficult for the United States to adopt such a policy.

Be that as it may, can we in the United States learn something from the Icelandic financial experience? After all, major financial panics with significant impacts on the U.S. economy occurred in 1819, 1837, 1873, 1893, 1907, 1929, and 2008.

In the wake of the Panic of 1929, significant banking reform in the United States was instituted, including the Glass-Steagall Act of 1933. Eventually, through subsequent regulatory changes and the Gramm-Leach-Bliley Act of 1999 (signed by President Bill Clinton), some restrictions on bank activity were repealed. That the longest episode without a major financial panic occurred during the time Glass-Steagall restrictions were in place may be significant, or it may be a coincidence. Economists who study this period have not settled the question definitively.

But we don’t have to know the answer to this question to take a lesson from Iceland’s Vikings. For countries with recurrent financial crises, there may be a real danger in rushing to return to the old banking system, as some of current efforts to repeal important sections of the Dodd-Frank financial regulation bill seek to do. Rather, taking your time is vital. There are complex interactions in the globalized banking system that should be analyzed with methodical care, considerable thought, and an eye towards economic history.

While that all seems very reasonable, I am reminded of a line from one of Icelandic musical superstar Björk’s hits, “There’s definitely, definitely, no logic to human behavior.” When one believes that financial markets are always and everywhere self-correcting, they may indeed be living in a Björk song.

The post How Iceland’s Rugged Viking Heritage Helped Salvage Its Economy appeared first on Zócalo Public Square.

On my way home, I thought of an SAT exam-like question. One of these things is not like the others: San Francisco, Cleveland, Hong Kong, Sydney, and Vancouver. I am going to take a wild guess and say that you, the reader, have chosen Cleveland.

You are right. But why? After all, Cleveland rocks, but just not in the same way as the other cities. One of the many ways it is different is in the cost of living. Demographia’s just-released 2017 affordability study has Cleveland as one of the most affordable cities for housing, and each of the other cities in my SAT question as among the least affordable.

This suggests something important about the affordability crisis that has not, but really should, enter the discussion of housing affordability: The cities that we find most attractive are cities where housing is “unaffordable.” In other words, the affordable housing crisis is not just about a lack of housing supply.

In my current city, Los Angeles, one hears over and over again that everyone is leaving because no one can afford to live here. This talk reminds me of the Yogi Berra homily, “Nobody goes there anymore. It’s too crowded.” Of course, exactly the opposite is true, and that truth is what should guide us in our housing policy.

The oft-made mistake is to suggest that housing is expensive because, as Demographia incorrectly puts it in their report, “Studies do not leave the slightest doubt that unaffordable housing is almost everywhere and every time caused by the same factor: housing supply restrictions.” Well, these “studies,” some of which are by very thoughtful people, leave plenty of doubt, and some of their authors ought to go back to Econ 101. Prices are not just a supply phenomenon but are rather an interaction between supply, what is available for sale, and demand, what people want to buy.

Clearly the people who live in San Francisco, Los Angeles, and other cities on Demographia’s list of cities with an affordability crisis could afford to live there. They just paid a larger portion of their income to do so. They could have moved to a more affordable place to live—Cleveland, for example. So those who say that housing prices are unaffordable are saying that, at lower prices, there would be more demand than supply. Let’s explore the implications of this.

Cleveland is so affordable because many people find it less desirable (think “lake effect” blizzards). Indeed, half the population of Cleveland left over the past 50 years. The housing stock is more than ample for the people who want to live there. Which reminds me of the time I interviewed for a job in Buffalo, New York, right after graduation. Part of the pitch was, “Buffalo is a great place. It is so depressed that you can afford a really good house.” Somehow this did not seem like an endorsement of a community I wanted to move to.

The reason San Francisco is different is that it is a wonderful place to live. The scenery is spectacular, the climate mild, cultural amenities are abundant, and in a very short time one can be in the Sierra for some incredible winter sports or at Mavericks for world-class surfing.

Edward Glaeser, in his towering work on urban economies, The Triumph of the City, said “vitality makes people willing to pay for space.” Glaeser, like many other urban economists, argues for more building, but the point repeatedly made by those who study urban migration is that exciting innovation (documented by UC Berkeley economist Enrico Moretti), natural amenities such as beaches, mountains, and lakes (documented in the “superstar cities” study of Goyurko, Sinai, Mayer), and cultural amenities (as oft described by economist Richard Florida) attract people from declining to successful cities.

To be sure, San Francisco is not to everyone’s taste; some prefer the charm of a Louisiana bayou, and others the silence of a Minnesota winter. But given the housing stock, many more people want to live in San Francisco than can. An estimate in a 2015 paper by Moretti and the University of Chicago’s Chang-Tai Hsieh found that more affordable housing could increase San Francisco’s population by 100 percent or more. So there exists significant demand for San Francisco housing that a moderate change in zoning and building standards will not correct.

The population growth Hsieh and Moretti found means that today’s locals in places where people want to live are going to have to write a check for the infrastructure to support them. This is an old story in a place like California. In 1967, one of Ronald Reagan’s first acts as governor was to increase taxes dramatically, giving us Californians the highly progressive income tax system we enjoy today, and that Republicans everywhere rail against. The reason? Large-scale migration to the state had caused his predecessor, Pat Brown, to build infrastructure to support a burgeoning population, and as a result the state was running a structural deficit.

So what’s happening in San Francisco—or Seattle or Austin, or any number of popular places where the cost of living is rising—is the market system doing its thing. The market increases prices to ration the available land through the cost of housing. And people economize on their consumption of housing by living in smaller quarters, sharing with roommates, or stacking up generations. And for some, the price is not worth the value they would receive, and they leave. That is how any market rationalizes differences between supply and demand.

What about those who are squeezed out of California (such as my kids, who moved to Colorado)? The Dad in me says, “That’s horrible, I want them down the block from me.” But the economist in me says, “They do not value what Los Angeles has, relative to their life in a small town in Colorado, enough to sacrifice other things for it.” Resources, when scarce, are appropriately allocated according to their value to those consuming them.

And what about our schoolteachers, firemen, police, and city officials who struggle to live in the high-priced cities where they work? Here is the rub. When a place is really attractive and therefore really expensive—take Santa Barbara—many who perform valuable services live elsewhere, like in Ventura, 90 minutes away during rush hour.

Instead of wringing our hands about affordability in high-demand places, and trying to build enough to meet a worldwide demand that is difficult to satiate, we should be saying, “Great, we have a really successful city, but we also want to have a city with certain professional, service, and demographic characteristics,” and design housing policy targeted to that. For example, Santa Clara County built high-quality affordable housing that it rents to schoolteachers. It is a small program, but it is a good start. What doesn’t work are overly broad measures, such as directing developers to make 20 percent of their units affordable in exchange for building permits. Such policies generate homes for only a very few San Franciscans (while attracting ever-more newcomers who want to live there).

That is not to say we should ignore affordability. We definitely must pay attention to affordability, as we plan the cities we want to live in. But in doing so, we must pay attention not only to whether we have enough housing supply but also to the nature of the demand in places where people want to live. If we ignore demand, we risk creating urban nightmares—of crowding, traffic, long commutes, and ill health—in pursuit of a successful and affordable city.

The post Why the Housing Crisis Won’t Get Fixed by Building Cheaper Homes appeared first on Zócalo Public Square.

Which is why it boggles the mind that experts in Washington D.C., including the President’s senior economic advisor Peter Navarro, fail to understand this fundamental principle as it applies to tariffs and border taxes. Perhaps these experts think manna will fall when we execute trade policies that purport to close the trade deficit. But what they advocate—tariffs, currency adjustments, and other protectionist measures—is no different from Sisyphus pushing a rock up the hill only to have it roll back on top of him.

If you take Navarro’s argument at face value (and not as a populist diversion), Trump’s protectionists believe that by closing the trade gap and bringing manufacturing back to the U.S., we will grow and become wealthier and more prosperous. Navarro’s argument was presented in a Trump policy white paper written with Secretary of Commerce nominee Wilbur Ross, entitled “Scoring The Trump Economic Plan.”

In it they explain their position:

“Suppose the U.S. had been able to completely eliminate its roughly $500 billion 2015 trade deficit through a combination of increased exports and decreased imports rather than simply closing its borders to trade. This would have resulted in a one-time gain of 3.38 real GDP points and a real GDP growth rate that year of 5.97 percent.”

This is so far off the mark that it begs a little work explaining why. So let’s consider how (and if) one can close the trade gap with China and what the consequences would be were policy to be successful in accomplishing this.

In December, Trump tweeted: “Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete), heavily tax our products going into their country?… I don’t think so!”

He also has repeatedly claimed that China is a currency manipulator. So, let’s suppose he convinces China to increase the value of the yuan. (Important note: China would have to be a manipulator to do this, as most people who follow foreign exchange rates think the yuan is overvalued rather than undervalued).

Presumably a yuan of higher value would make American goods less expensive for Chinese and Chinese goods more expensive for Americans. Similarly, a tariff on Chinese goods would presumably make them more expensive, discouraging imports. But the realities of trade would complicate those plans.

China’s purchases of American goods and services are mostly airplanes, machinery, earth-moving equipment, food, scrap, and education. Will the Chinese buy more airplanes if they are less expensive? Perhaps they will buy one or two, but not much more. It is not easy to integrate new airplanes into an airline. And earth-moving equipment? That depends much more on China’s infrastructure needs—and not all that much on the price offered by Caterpillar.

Food? Yes, the Chinese will buy more food, but that in turn will drive up the price of food for Americans. And education? It’s hard to say if that would have any effect, given the scarcity of higher education here. Are there really extra spaces in U.S. colleges and universities for more Chinese students?

The point of considering all these examples is this: Chinese demand is not very sensitive to price for the goods the Chinese purchase. So it would take a very large increase in prices to bring trade back in balance from the Chinese side.

But, you might counter, couldn’t we sell consumer goods to Chinese households that they do not as yet buy? Aren’t there 1.4 billion Chinese who might like a whole host of consumer goods America could produce?

Yes, but in practice, it’s hard to get people to change their behavior. For Chinese households to buy more goods, they would have to reduce their savings. And that won’t be easy. Yes, there is room for more consumption—at present Chinese saving rates are above 30 percent, which is very high. But the ruling Communist Party has found it difficult—as demonstrated by its own failed efforts to create demand for domestic consumer goods—to get Chinese families to stop saving so much.

Why? China does not have the social safety net of the United States. So Chinese families are saving to take care of their parents, to have a decent retirement, and to pay for their child’s education—and marriage. Marriage is a critically important expenditure for many Chinese families, as the one-child policy has resulted in a shortage of women for marriage. Chinese families raising a son are saving huge amounts of money to educate their child and purchase a home for him, increasing his marriage prospects. No matter how cheap North Carolina furniture is in Shanghai, Trump is trumped by the prospect of a grandchild.

Okay, so if the Chinese are not going to buy much more even if the yuan strengthens or if prices drop, then what about the U.S. purchases of Chinese goods? Wal-Mart shelves in the U.S. are full of inexpensive goods from China that Americans purchase. And yes, were the yuan to appreciate, these goods would become more expensive and we would purchase less. But a rise in the yuan would also make textiles, toys, and electronics from Malaysia, Vietnam, Indonesia, and Bangladesh—all countries with a significantly lower cost of labor than China—more attractive. As a result, we would still not close the trade deficit—we would just make U.S. consumers pay more, to cover the costs of moving the factories out of the Pearl River Delta and into Southeast Asia.

The same effect would be produced if prices were raised on more expensive goods such as iPhones and steel. India, which could produce such items at a lower cost than China, would benefit, and China (losing factories) and the United States (paying more) would be hurt, but not much else would change.

Simply put, tariffs or currency changes are only going to produce marginal changes to the trade deficit because you cannot tweet away the fundamental problem: Americans do not save enough to pay for their expenditures.

U.S. households on average save a bit over 5.5 percent of their disposable income. Take that percentage of the economy, and add corporate savings and the amount collected in taxes, and you have approximately 18 percent of GDP that is available for investment and government spending, as opposed to consumption. Investment accounts for the bulk of that 18 percent—approximately $3.1 trillion. That leaves the rest for government.

And the rest is not nearly enough to pay for all federal purchases and transfers. In fact, the U.S. is short of the money it needs for federal spending by upwards of $400 billion a year. So where do we get that money? It comes from people who sell more than they consume—like the Chinese.

So if we didn’t have a trade deficit, we couldn’t cover our spending. We would either have to increase taxes (the Republicans who control Washington want to cut taxes), save a lot more (and how could we motivate Americans to do that?), or cut government expenditures (politically impossible).

In fact, our need for people who sell more than they consume is increasing. The federal deficit is projected to grow to $1 trillion by 2023. Someone has to cover that with saving. If not the Chinese, then who? The Russians? The Japanese? The Indians?

Remember Peter Navarro’s argument. He says that economic growth will solve our problems—and cover the deficit. So let’s do a little arithmetic to check this out. Don’t worry about the math—it’s simple.

A $1 trillion deficit is about 5.3 percent of GDP. If Trump and Navarro are going to deliver the rapid economic growth they promise, corporations will be investing their additional saving to drive that growth. So if the money to cover the trade and fiscal deficits is not going to come from foreigners it must come from household saving. And to achieve an increase of private saving of $1 trillion by 2023, GDP would need to double. That would require a sustained growth rate of 10.2 percent. Historical growth has been at 3 percent, and recent growth at 2.5 percent. It’s ludicrous to believe we will grow out of the savings gap.

Is there another way? The answer is yes. But it wouldn’t be pleasant. You could, like Argentina, raise tariffs (also called import taxes) to such an extent that imports become prohibitively expensive. Doing so would completely disrupt the globally dependent automobile, construction, computer and electronics, telecommunications, retail, and manufacturing sectors and send the economy into a tailspin.

The low savings rate on falling incomes and higher unemployment would mean the federal government would have to tighten its belt. And, as we saw in the Great Depression, households—freaked-out by the potential for horrible economic outcomes—would dramatically boost savings rates (Remember your Depression-era grandmother washing Saran Wrap so as to reuse it?). Eventually, the economy would recover, but at a very high price and at a lower level of income and wealth than would otherwise have been the case.

If we consider the trade deficit a problem (and at current levels it may well be one), then appropriate economic policy is to institute long-term reforms that boost domestic saving and reduce the federal deficit without crashing the economy. Bellicosity and tariff mongering do not constitute long-term reform. And they are an exercise in futility anyway.

Perhaps the 20th century American postmodernist John Barth said it best in his novel The Floating Opera: “The enemy you flee is not exterior to yourself.”

The post Bad Math Can’t Close the U.S. Tr­­­ade Deficit appeared first on Zócalo Public Square.

With the sixth largest economy in the world, nearly 40 million people and a land area of more than 160,000 square miles, California is larger by far than most countries. It also is a state with a progressive worldview, and an awareness of the government policies needed to realize that vision. To cite just one example, California’s cap-and-trade and alternative energy initiatives address both global warming and local emissions. In 2018 it is possible that voters in the Golden State could begin a process whereby California splits off from the rest of the United States. Stranger things have happened.

But there is another, more likely scenario—that of Calternative.

The California of high taxes, strict environmental and business regulations, $15-per-hour minimum wages, and exorbitant housing prices has been the subject of an endless stream of articles—too many to cite here—which claim that the Golden State is no longer golden. Their conclusion is that opportunity lies elsewhere. The alternatives to California are supposedly business-friendly states such as Texas and Tennessee.

However, in the time of Trump, California also may be a magnet, particularly for creative, productive, outside-the-box Americans, and of similarly minded foreign expats. Calternative posits a possible future in which California prospers even as other states struggle over the next four years.

Calternative flows from the notion that economist Charles Tiebout described in 1956 in his Journal of Political Economy article “The Pure Theory of Local Expenditure.” Tiebout’s basic idea was that people choose the local government they want by voting with their feet. It doesn’t happen instantaneously, as people are not entirely mobile, but it does happen: part of the decision on where one lives is what kind of government one wants to live under.

In Ernest Callenbach’s 1975 novel Ecotopia: The Notebooks and Reports of William Weston, Calexit occurs, or more precisely LeftCoastExit, and the two parts of the United States go in different directions. Ecotopia is populated by socialists and hippies who create a utopia based on sustainable ecosystems. The author was a great believer in this vision and pushed for at least some version of it until his death in 2012. The book is structured as a report written by a journalist from a future ultra-conservative America, visiting Ecotopia 20 years after secession. Implicit is the assumption that there has been little trade or migration back and forth across the border.

In the strange bedfellows camp, Callenbach shares this assumption with conservatives who claim that California is making itself unlivable by adopting a relentlessly progressive social and environmental agenda. Their other shared premise is that there will be little migration to the West Coast; they believe that, compared to California, Houston or Kansas City look good, at least to the real people who start companies and create jobs.

But this assumption should be reconsidered, now that State Senate pro Tem Kevin de León, Assembly Speaker Anthony Rendon, and Governor Jerry Brown have vowed to thwart Trumpian policies on climate change, the environment, labor conditions, and gender equality. Washington and Oregon are likely to take similar positions vis-à-vis Washington D.C. Will this lead to an exodus of businesses and the middle class from the Left Coast, leaving behind a moribund economy of the super-rich, hippies, and their servants? In other words, will the fight against Trump help bring about Callenbach’s dream of Ecotopia (18 years later than he predicted)?

I would submit that this assumption has a logical fallacy. Yes, some may leave California for “business-friendly” states, but many perhaps will migrate in the other direction. Creative, entrepreneurial people–those who start companies and create good 21st century jobs—are not lining up to live in Topeka, nor will they.

Edward Luttwak’s brilliant 1994 essay in the London Review of Books predicted the election of a Donald Trump-like leader, a British exit from the European Union, and the rise of populist ideology throughout Europe. His central idea was that creative destruction, the way in which innovation takes a capitalist economy to the next level, may sometimes happen so fast as to cause a backlash. The backlash he forecast would be a longing for the (real or imaginary) economic security of the past, protected and guaranteed by the government. Were that to occur, Luttwak argued, the result would be a stifling of creativity and innovation as firms become more comfortable in their government-provided security blanket and would feel less need to compete with new ideas.

But what about those who yearn to step out of the box? That is where The Left Coast comes in.

Innovators tend to be non-conformists who go against conventional wisdom and ideas. As Kurt Vonnegut put it in Player Piano, “Out on the edge you see so many things you can’t see from the center.”

So let’s say you’re comfortable challenging the social and business environment of the day, or that you have the temperament and drive to collaborate with other creative people to translate their ideas into commercially successful products. Where better for you to locate than in a bastion of Trump-defiance?

A second source of migration of productive creative people to the Left Coast could result from the social milieu. A society that takes its cues from a president who engages in hurtful talk about gays, women, immigrants, and minorities, people with disabilities, or people of certain religious beliefs, will prove to be uncomfortable at best for those constituencies. California will truly be the Golden State for those targeted by the president—and for anyone seeking a workplace in a more tolerant and pluralistic environment.

The Tiebout Hypothesis held that the variety of taxes and services offered by local governments leads to a sorting of the population according to individual preferences. Today’s well-documented sorting of people according to political beliefs is evidence that the Tiebout Hypothesis applies to more than just local taxes and public safety.

So sure, people who agree with Trumponomics, or who think California is a bad place to do business, or who just are tired of a state with uber-progressive governmental policy, will leave for states and cities that better match their worldview. That phenomenon is being observed and commented upon across the country; Phoenix, Dallas, and Las Vegas are attracting Californians fed up with high taxes and high housing prices.

But the opposite also may be true, particularly with a polarizing President whose supporters constitute a majority in large parts of the U.S. Highly productive people who earn comfortable incomes and can afford to make new homes in California, Washington or Oregon may head West, opting for progressive government, a welcoming and diverse social environment, and greater rather than lesser concern about lower carbon emissions and clean water.

The symmetry of the Tiebout Hypothesis—a symmetry that California bashers and Ecotopians alike both miss—may in fact be a Calternative within the United States that produces an expanded creative, entrepreneurial West Coast that remains one of the fastest growing economies of the world.

The post Go West, Young Entrepreneur–The Left Coast Is Open for Business appeared first on Zócalo Public Square.

I am here in Myanmar teaching an international business class. After the gloom and doom of the rancorous U.S. election, spending winter break in a beautiful place where everyone is looking towards a brighter future is refreshing. At UCLA Anderson, we offer these classes to our MBA students as a way of showing them contrasts to the U.S. business climate.

And what a contrast Myanmar is.

The distance between the two largest cities in Myanmar, Yangon and Mandalay, is about the same as that between Los Angeles and San Francisco. The road to Mandalay is relatively good. But Yangon, the major port for the country, is another story.

Singapore’s Straits Times accurately observes that Myanmar’s “main port has changed little since the end of British colonial rule nearly 70 years ago—emblematic of ramshackle infrastructure.” The key here is not that Yangon’s port facility uses old technology; it does, but the port operators are changing that rapidly. The operative word is “ramshackle.” The port does not function because the natural degradation of equipment and structures from usage over time has not been countered with maintenance and repair. That’s because repair costs money and government funds were directed to immediate rather than future needs.

And the Yangon port is more the rule than the exception. Aside from the aforementioned road to Mandalay, surface transport is quite poor. A drive from Yangon to Thilawa, site of the new deep water port under construction, reveals roads far worse than pothole-marked Sunset Boulevard in Los Angeles. By rail, it takes three days at best to deliver goods from Yangon to Myitkynia, the capital of the 1.7 million-population Kachin State in the north. That adds up to about 300 miles a day. By contrast, shipping by rail from the Port of Long Beach to Chicago, more than twice the distance, takes not much longer and is more reliable.

In addition to the problem with transportation, power generation is another challenge. Everywhere in Yangon are small generators used to back up an unreliable electrical system. As one investor I spoke with put it, “even a low-tech textile factory needs power.” While that seems like a truism, it’s also a reminder that expectations of growth must confront physical limitations that might take a long time to ease.

This is a country that has now awakened from a 50-year economic slumber. Myanmar’s economy was asleep on purpose. Back in 1962, after a turbulent 14 years of independence, the military stepped in. The dominant ethos under General Ne Win was isolation. He and his generals wanted to avoid Western “exploitation” and to create economic development through centralized direction and protectionism.

But, in 2011, the military voluntarily turned the government over to an elected civilian government. The election was controversial as the military-friendly USDP won, but it was a step forward. The giant step came in 2015 with the opposition NLD party led by Nobel Peace laureate Aung San Suu Kyi prevailing in elections. The peaceful transition to an opposition government is, of course, a key element of a true democracy and it has arrived in Myanmar.

The optimism in this country is palpable. The re-pats—Burmese who fled the country for Singapore, Thailand, the U.K., and the U.S. but have recently moved back home—say things like: “I never expected to return to my home country, but there are so many opportunities to build something good and to prosper while doing it.”

And for the world, this resource rich country is now arguably the best new thing since China opened up in the mid-90s. Myanmar is blessed with natural resources, fertile land, and a central location between the fast-growing economies of India and China. Everything seems possible here—but with a caveat you often hear: “possible is only for those who are patient.” This advice is understandable: Corruption and bureaucracy, hallmarks of the previous regime, fade slowly. But, that is not the only reason why patience is counseled in Myanmar.

The real issue in Myanmar is infrastructure. Understanding that issue here offers a strong lesson—and warning even—for the U.S.

Why does Myanmar matter to our country and its relatively good roads, air and seaports, and railways?

It matters because usage means depreciation, in the U.S. as in Myanmar. If fiscal austerity puts repair, maintenance, and upgrades on the back burner, the ability of infrastructure to support economic growth diminishes. And the U.S. has failed to keep up with repairs, maintenance and upgrades to its infrastructure.

For example, a city street has about a 30-year life before it needs to be replaced. If it is periodically capped with asphalt slurry, that life can be extended. But if it deteriorates beyond a certain point, capping it is no longer possible. About one-third of the city roads in Los Angeles are in this condition right now. It is still possible to navigate these roads without too much disruption, but for how long?

The bottom line is that, if it is difficult to get goods and services to market and people to jobs, rapid growth doesn’t occur. So the notion of sustained 3 percent growth—much less the 4 to 5 percent growth promised in the U.S. Presidential election—looks more challenging when you consider our infrastructure constraints.

President-elect Trump has promised a $1 trillion infrastructure plan, but it is in trouble even before Inauguration Day. The public-private partnership that was supposed to fund a significant portion of the plan is fatally flawed. Even with big tax breaks, the private sector won’t be interested in building infrastructure that doesn’t produce sufficient revenue streams. And the types of infrastructure we most need do not generate such streams. Bridges in Missouri, potholes in San Francisco and levees in Louisiana generate economic growth but not direct revenue for the developer.

Thus the Federal Government would have to fund the bulk of the $1 trillion spending. The appointment of a fiscal hawk, the South Carolina Congressman Mike Mulvaney, as Director of Management and Budget, coupled with Mr. Trump’s promise to end deficits, might be the final nail in the massive-infrastructure-plan coffin.

This brings me back to the road to Mandalay. The U.S. has been letting its infrastructure depreciate for some time. The less we do now, the more likely we’ll learn once again the lessons of Myanmar: that everything is possible, but a lot of patience and optimism are needed for the infrastructure to catch up to the possible.

The post A Warning From the Bumpy Road to Mandalay appeared first on Zócalo Public Square.

During these days of transition speculation, there is plenty of talk about what president-elect Donald Trump’s victory means for health care, for immigrants, for the economy, for minorities, for NATO, and so on. In terms of long-term national interests, it’s important to add the endangered concept of a U.S.-centric Pacific Rim to this list. This is because the Trump victory may well spell the end of America’s previous Pacific aspirations.

We will quite possibly see a significant shift of innovation and entrepreneurship westward in the Pacific Rim—indeed, so far West that the center of economic gravity ends up firmly in the Far East.

There are two big reasons for these shifts. First, changes in immigration policy under a new administration will make the U.S. less friendly to talented foreigners seeking to work here. Second, new trade policy is likely to diminish the competitive environment for domestic manufacturers.

The new administration’s anticipated changes to immigration and trade policy are, whatever you think of them and their potential impact on the U.S. economy, a response to real issues. For one thing, globalization has depressed incomes of the middle class—average wages for production and non-supervisory workers is about the same after inflation as in 1974, at $20.67 per hour, according to the Pew Research Center. For another, immigration exacerbated competition for an ever-shrinking pool of low-skilled jobs. Economists have documented, for example, a 6 percent decline in employment and a 2.5 percent decline in wages for low-skilled African-American men attributable to this increased competition.

On top of that, manufacturing employment has been steadily declining for decades and is now at one-third the number of jobs in 1970.

Hillary Clinton promised a continuation of current policy (i.e. these trends) and Donald Trump promised less of them. The voters have now asked for a different engagement with the world that will seek to blunt these three trends.

Immigration policy, in particular, may shift the geography. During the campaign, Trump, with talk of walls and border security, was all over the place. His policy position on H1B work visas and J1 work and study visas has been unclear, through the views of his confidant and nominee for attorney general clearly lean toward more restrictive visa policy.

Overseas news media and businesses—according to reports in the India Express, The Jakarta Post and elsewhere in the Pacific Region—see current visa programs as being in jeopardy. Suffice it to say that whatever new immigration policy emerges will be less inviting to foreigners.

In particular, innovators and tech entrepreneurs from China (vilified in the campaign), Indonesia (the world’s largest Islamic country), Malaysia (another Islamic country), and India (with a Muslim population of 175 million) will feel less welcome. This will be true even if there is an expansion in visa issuance to highly qualified tech people in general.

Instead those ambitious, smart, entrepreneurial innovators will be more inclined to migrate to another hub of technological innovation, perhaps Singapore, Bangalore, Toronto, Tokyo or Shanghai. The more attractive these hubs are to innovators, the faster their local economies will grow, potentially at the expense of U.S. growth. Singapore, with centrality, two large universities, and several small technical colleges and the new Singapore Technology Development Center, is especially ready to take advantage. But others are as well.

Shanghai eased restrictions for foreign science and technology professionals willing to participate in the Chinese Communist Party’s innovation initiatives at its new technology hub in 2015. When I was in Shanghai with a UCLA class last March, we learned that even though China ranked low on IP protection, innovation in the new hub was starting to explode. Silicon Valley Bank, whose original mission was funding new ventures in California, is in a joint venture that provides funding to exciting new Shanghai start-ups.

The U.S. election will push not only people but also the products they produce in a “westward to the East” direction. New innovative products coming out of expanding Asian tech centers will be traded among Asian countries and not as much with the U.S. This is because American trade policy will be less friendly towards imports that compete with U.S. manufacturing.

The rejection of the Trans-Pacific Partnership trade deal and the consequent ascendency of the Chinese-led Regional Comprehensive Economic Partnership (RCEP) will reinforce this trend. Meanwhile, as our innovation edge erodes over time, the U.S. will likely lag in producing, and exporting, cutting-edge goods. Instead U.S. firms may come to copy what the foreign firms are doing much in the way that the Chinese now try to copy what quality U.S. firms are doing.

One might argue that the U.S. is a very large economy and therefore restrictive trade measures are not liable to have much impact. Domestic competition and the ability to sell in a very wealthy market should be attraction enough for entrepreneurs.

While that might be true, protectionist policies—what economists call import-substitution policies that include high tariffs on imports, like those suggested by Trump during the campaign—have been pursued by many countries and studied extensively. The consensus is that, by protecting domestic firms from more efficient international competitors, they hurt economic growth and manufacturing efficiency.

Stagnation in Latin America is in part attributable to a reliance on import substitution. Argentina is a classic case. In 1909 it was the seventh-richest country in the world. Many things went wrong in the 20th century, but import substitution was part of the story. Nehru’s India is another case of a country that insulated itself from world competition because it thought itself a big enough market to go it alone, and suffered the consequences. Myanmar, where I will be writing the next piece in this series in December, took protectionism to extremes and has basically been dormant for 50 years.

The point here is not that the U.S. will stagnate nor that it will become Myanmar, Argentina, or India, but rather that all of the examples of protectionist policies, however mildly applied, lead to a diminution of the country’s ability to be a leader in the protected industries.

A desired move towards a more protectionist economy was one of the key takeaways of the Nov. 8 vote, especially in battleground industrial states like Pennsylvania, Wisconsin, and Michigan. The electorate may have deliberately chosen international withdrawal, opting for stable but less efficient domestic industries over dynamic and nimble leading industries.

It is rare—and very valuable—for a place to achieve critical mass in a certain industry. Critical mass in entertainment occurred in Los Angeles because it was possible to film in a variety of nearby locations all year long. Many states and countries have tried to counter it with subsidies, but Atlanta, Toronto, and others have transferred wealth into Hollywood moguls’ bank accounts in Beverly Hills, and not into a self-sustaining critical mass. The same is true with technology and Silicon Valley. The Silicon Corn Field in Iowa and Silicon Bayou in Louisiana are only shells of what the planners dreamed of for them.

We don’t know right now which places are going to be most competitive and achieve critical mass in innovative industries as the Pacific Rim center shifts west. My money would be on Singapore, with its English common law, low taxes, affluent and well trained work force, major universities, and central location. If Singapore (or insert your top candidate here) in fact hits critical mass, it will be very hard to dislodge. So even if the U.S decides to reverse course on immigration and trade policy in the future, we will have to live with the consequences of this shift.

In 2011, Joshua Kerlantzik in an article in Current History argued that the 21st Century was “not quite yet” the Asian Century. A shift to the west of innovation and technology may well change that.

The post How a Trump Economy Could Make Singapore Great Again appeared first on Zócalo Public Square.

I went with some preconceptions. For one thing, I had read that ayrag, home-fermented horse milk, was widely consumed and not for the faint of heart. For another, I had also read that investors were high on the Mongolian economy, an economy with a 10-fold increase in GDP since the fall of communism.

This trip was about climbing, but I could not help but look for clues about Mongolia’s purported success. The analysts are consistent; Mongolia is a great place to invest even though its GDP growth has slowed significantly since hitting double digits in 2014. Google Mongolia and you will find many articles to this effect. (You also will find a few contrary notices about how some foreigners spend time in jail for tax evasion without being afforded due process).

I arrived in the capital, Ulaanbaatar (UB), on the middle of a day in early August. As is my custom, the first thing I did was take a walk and get a sense of the place.

The Blue Sky Tower (a.k.a. the Blue Taco) and the Choijin Lama Temple in Ulaanbaatar.

 
UB is a city of 1.4 million, half the population of the country, but it feels smaller. There are a few modern structures—like the famous blue taco, a high-rise hotel and office building that looks like its nickname. For the most part, however, this is a city of yurts (1/3 of the people live in them) and old socialist-style buildings. In the center is the Government Palace complete with a giant statue of Chingas Kahn (for Mongolians–no hard G) and a massive square reminiscent of Red and Tiananmen Squares. All this left me wondering: where was the supposed economic dynamism hiding?

My search would continue but first it was time to go for some climbing. The trip to the Altai Tavan Bogd Mountains began with a three-hour flight to the town of Ölgii on Hunnu Airlines (pronounced “who knew”). UB’s modernity, such as it is, quickly gave way to the relatively unpopulated windswept steppes of Asia. Ölgii with 30,000 inhabitants, it is the seventh largest city in Mongolia.

From Ölgii we traveled seven hours by Russian four-wheel drive over a maze of dirt tracks to the National Park gate and then hiked into the mountains. Over the next nine days, thoughts on the Mongolian economy were drowned out by the majesty and primitive beauty of the mountains of Western Mongolia. Large glaciers, tundra, sweeping views, and snow fields spread out before us as we moved into base camp. This is what I came to Mongolia for and it definitely did not disappoint.

In the Altai you feel you are about as far away from California, where I live, as possible. The region is home to nomadic Kazaks, and while they have some trappings of the western world, they still work their herds on horseback, live in gers (Kazak yurts) and cut grass by hand with homemade scythes. It is a hard, perhaps idyllic, life for these nomads, who make up almost 40 percent of Mongolia’s population.

Back in Ölgii I noticed that the stores had mostly Russian products. The people were poor but not starving, and economic growth had eluded them. I did find ayrag, the highly touted horse milk, in a little out-of-the-way shop, and it lived up to its reputation—strong with a sour and long-lasting aftertaste.

Vegetables at the market in Olgii.

I also saw more clearly why this country, despite its dynamic economy reputation, didn’t seem so promising on the ground. The problem lies in the engine of Mongolia’s growth: extractive industries.

In boom times the few—the very few who work removing riches from the ground— accumulate wealth and share some of it by spending in the domestic economy. But mines and oil fields employ lots of capital and not many people. If a country is largely rural, as Mongolia is, most of it may be untouched.

When commodity prices fall, as they did in 2015 (coal and copper were off by more than 30 percent), that growth turns on a dime (hence the fall in the rate of Mongolia’s GDP growth). While starkly clear in Mongolia and less so in Texas and Louisiana, the phenomenon is present in all three.

Much has been written on how countries can be cursed by an abundance of natural resources. What I saw in Mongolia confirmed that if the windfall gains from natural resources are not turned into the fundamental building blocks of a diversified economy, like education and infrastructure, the promise of mineral wealth will be squandered.

Mongolians I met didn’t complain about this much—I was treated warmly and generously, and I appreciated how absent modern stresses were from life there. But the lack of economic opportunity has a deep human cost; many Mongolian youth are working abroad.

As my departing flight to Beijing ascended over the glass buildings and sheepskin yurts of UB, it occurred to me that Mongolia can teach us much about economic miracles. A North Dakota or Texas miracle may be real, but it may also be ephemeral.

Also, now that I know how to ride a Mongolian horse bareback, if Chingas Kahn and the Golden Horde ever ride again, I have a fallback to working as an economist.

The post Why Mongolia and North Dakota Aren’t Economic Miracles appeared first on Zócalo Public Square.