Subtracted cities -- the art of falling gracefully

A few years ago, I was doing some work for a young company that had developed a reputation as a growth stock. As I became privy to more of the company's long-term plans, I started to wonder about the sustainability of its strategy. The company seemed to be counting on sustaining growth rates that would soon put us over 100% of the market.

I once mentioned this to a colleague who had drank deeply of the Kool-aid. I expected one of two responses: either he would find this troubling or he would point out a flaw in my argument. He did neither. Instead he just shrugged and smiled and assured me that when we reached that point the people who ran the company would simply find a way to "innovate out of the problem."

It's easy to understand the appeal of growth but good planning and management also have to be able to handle plateaus and even declines. This is true for industries like the newspaper business. It's also true for cities.

From Deborah Potter via Richard Green by way of Mark Thoma:

Detroit stands as the ultimate expression of industrial depopulation. The Motor City offers traffic-free streets, burned-out skyscrapers, open-prairie neighborhoods, nesting pheasants, an ornate-trashed former railroad station, vast closed factories, and signs urging "Fists, Not Guns." A third of its 139 square miles lie vacant. In the 2010 census it lost a national-record-setting quarter of the people it had at the millennium: a huge dip not just to its people, but to anxious potential private- and public-sector investors.

Is Detroit an epic outlier, a spectacular aberration or is it a fractured finger pointing at a horrific future for other large shrinking cities? Cleveland lost 17 percent of its population in the census, Birmingham 13 percent, Buffalo 11 percent, and the special case of post-Katrina New Orleans 29 percent. The losses in such places and smaller ones like Braddock, Penn.; Cairo, Ill.; or Flint, Mich., go well beyond population. In every recent decade, houses, businesses, jobs, schools, entire neighborhoods -- and hope -- keep getting removed.

The subtractions have occurred without plan, intention or control of any sort and so pose daunting challenges. In contrast, population growth or stability is much more manageable and politically palatable. Subtraction is haphazard, volatile, unexpected, risky. No American city plan, zoning law or environmental regulation anticipates it. In principle, a city can buy a deserted house, store or factory and return it to use. Yet which use? If the city cannot find or decide on one, how long should the property stay idle before the city razes it? How prevalent must abandonment become before it demands systematic neighborhood or citywide solutions instead of lot-by-lot ones?

Subtracted cities can rely on no standard approaches. Such places have struggled for at least two generations, since the peak of the postwar consumer boom. Thousands of neighborhoods in hundreds of cities have lost their grip on the American dream. As a nation, we have little idea how to respond. The frustratingly slow national economic recovery only makes conditions worse by suggesting that they may become permanent.

Subtracted cities rarely begin even fitful action until perhaps half the population has left. Thus generations can pass between first big loss and substantial action. Usually the local leadership must change before the city's hopes for growth subside to allow the new leadership to work with or around loss instead of directly against it. By then, the tax base, public services, budget troubles, labor forces, morale and spirit have predictably become dismal. To reverse the momentum of the long-established downward spiral requires extraordinary effort. Fatalism is no option: Subtracted cities must try to reclaim control of their destinies. ...

While we're on the subject of economic assumptions...

James Kwak makes some insightful points about allocative efficiency:

I was catching up on some old Planet Money episodes and caught Allen Sanderson of the University of Chicago talking about how to allocate scarce resources. The first day of introductory economics, he says, there are always more students than seats. Say there are forty extra people, and he can only accept ten more into the class. He asks the class: how should the ten slots be allocated? You can easily guess the typical suggestions: by seniority, because seniors won’t be able to take the class later; by merit (e.g., GPA), because better students will contribute more to the class and get more out of it; to the first ten people outside his office at 8 am the next day, since that is a proxy for desire to get in; randomly, since that’s fair; and so on. Someone also invariably suggests auctioning off the slots.

This, Sanderson says, illustrates the core tradeoff of economics: fairness and efficiency. If you auction off the slots, they will go to the people to whom they are worth the most, which is best for the economy as a whole.* If we assume that taking the class will increase your lifetime productivity and therefore your lifetime earnings by some amount, then you should be willing to pay up to the present value of that increase in order to get into the class. An auction therefore ensures that the slots will go to the people whose productivity will go up the most. But of course, this isn’t necessarily fair, especially when you consider that the people who will get the most out of a marginal chunk of education are often the people who have the most already.

...

But I think the picture is still a bit more complicated. Even if we assume for a moment that allocative efficiency is the only thing we care about, it’s far from clear than an auction will give it to us. If people could (a) predict their increased productivity from taking the class, (b) predict their increased lifetime earnings, (c) discount those earnings to the present (which implies knowing the proper discount rate), and (d) borrow up to that amount of money at the risk-free rate, then, yes, everything would work out OK. But this is clearly not the case, since then people would be bidding thousands if not tens of thousands of dollars to get into the class.

Still, you might say that people’s willingness to pay for the class — even if it’s just that one person is willing to pay $60 and another is only willing to pay $5 — is a valid proxy for the value of the class to them. So instead of thinking in terms of lifetime productivity, we’re thinking of the class as a short-term consumption good, and it would provide $60 of utility to one person and $5 of utility to the other. (Note that we’ve given up the idea of maximizing the ultimately economic impact of the class.) But then we have to ask whether money is a valid proxy for utility, and at this point the chain of reasoning breaks down. My willingness to pay for various goods might reflect their relative utility to me, but saying that different people’s willingness to pay for the same good reflects the relative utility of that good to those people is a much greater leap. Most obviously, a rich person will be willing to pay more for some goods than a poor person, even if those goods would provide more utility to the poor person. Assume for example that the rich person has a wool overcoat, the poor person has no overcoat, and the good in question is a cashmere overcoat.

I'm not against the language of the marketplace

I'm against using it where it doesn't apply.

From Rashi Fein, via Paul Krugman:

A new language is infecting the culture of American medicine. It is the language of the marketplace, of the tradesman, and of the cost accountant. It is a language that depersonalizes both patients and physicians and describes medical care as just another commodity. It is a language that is dangerous.

"On Public Funding of Colleges and Towards a General Theory of Public Options"

The U.S. has the best university system in the world. Mike Konczal has some important things to say about the way we fund it.

As a rule, the Centers for Disease Control give better health advice than Gawker

Not much posting this weekend but I did have to take a moment to make the point in the subject line. This might seem too obvious to bother with but the otherwise very smart people at naked capitalism missed it.

The post in question was by Seth Abramovitch:

Hand Sanitizers Will Not Save You From the Coming Plague

The Food and Drug Administration has issued a caveat today, reminding consumers that any hand sanitizer or antiseptic product claiming to be effective against antibiotic-resistant infection is telling you a Bald. Faced. Lie.

No. They're. Not.

This is a complicated issue and our resident expert is otherwise occupied but I think I can lay out the basics. Rubbing alcohol and chlorine bleach both do well against MRSA and other antibiotic-resistant strains. We can get into a discussion of acceptable wording here which is what the FDA was getting at (admittedly in a poorly written statement) and we can talk about side effects, but if the active ingredient of a product is alcohol or bleach then it probably is effective.

How about hand sanitizers specifically? Wikipedia has a good summary (emphasis added):

The Centers for Disease Control says the most important way to prevent the transmission of dangerous diseases is to frequently wash your hands with soap and water and/or use a hand sanitizer. If soap and water are not available it is recommended to use a hand sanitizer that contains at least 60 percent alcohol.[16][17] Alcohol rubs kill many different kinds of bacteria, including antibiotic resistant bacteria and TB bacteria. It also has high viricidal activity against many different kinds of viruses, including enveloped viruses such as the flu virus, the common cold virus, and HIV, though is notably ineffective against the rabies virus.[18] [19] [20] Alcohol rub sanitizers are not very effective against Norovirus (winter vomiting virus) unless they are combined with benzalkonium chloride in a hand sanitizer.[21] Alcohol rubs also kill fungi.[22] University of Virginia Medical School researchers concluded that hand sanitizing is more effective against fighting the common cold than hand washing.[23] Alcohol kills both pathogenic (disease causing) microorganisms as well as resident bacterial flora, which generally do not cause illness. [24] Research shows that alcohol hand sanitizers do not pose any risk by eliminating "good" germs that are naturally present on the skin. The body quickly replenishes the good germs on the hands, often moving them in from just up the arms where there are fewer harmful germs.[25] Alcohol also strips the skin of the outer layer of oil, which may have negative effects on barrier function of the skin. However, washing with detergents, such as commonly used hand soaps, results in a greater barrier disruption of skin compared to alcohol solutions, suggesting a increased loss of skin lipids.[26] [27]

Fortunately, not everyone missed the CDC angle.

Silence

I am about to be travelling for a bit so the blog might be lightly updated until May 2nd.

In the meantime, I strongly recommend trying a few other good sites:

http://www.stat.columbia.edu/~cook/movabletype/mlm/

http://worthwhile.typepad.com/worthwhile_canadian_initi/

http://marginalrevolution.com/

as these are all blogs with good runs of posts. Not on my blog-roll, but also worth noting is Matt Yglesias who has also been putting out some very goos stuff lately.

When people are willing to pay extra not to use your enhancement...

... you may have a problem.

Via Gizmodo by way of Salmon, here's a place that sells glasses that allow you to watch 3D in glorious 2D. If they can just do something about the murky color they'll be onto something.

For more on the failings of 3D, check here.

Cool yet useful -- typography edition

From John D. Cook, here's a site that will identify fonts in JPEGs.

Taxes and Growth

I think that this is the most insightful post I have read in ages:

Think about it this way: Grant to the tax skeptic all he wants about the idea that high taxes reduce the level of economic output. There’s an easy story to tell here. The quantity of economic output is, in part, a function of how much time and effort people want to put into doing market production. And the amount of time and effort any given person wants to put into market production is in part a feature of how much purchasing power extra time and effort put into market production will get him. Higher taxes—either on his labor or on his consumption of goods and services—reduces the purchasing power of extra time and effort on market production, and thus tend to reduce the amount of time and effort people put into it. You can tell a different, more leftwing story about this, but the point I want to make here is simply that this rightwing story about taxes and output is a story about levels not growth rates. If Americans started working the number of hours per year that South Koreans work, our per capita GDP would go way up.

But that’d be a onetime adjustment. Countries don’t grow over time by steadily increasing their number of hours worked. They grow, roughly speaking, because people think up better ways to do things and then businessmen either adopt those new better methods or else they get put out of business by those who did.

Taxes suppressing growth was a vicious argument because it suggested that it could (via compounding effects) lead to relative impoverishment over time. While it is true that less work could suppress some innovation at the margins, the story of changing absolute wealth actually seems more credible to me.

It focus the argument on what trade-offs are we willing to make between things like personal security and affluence. It also removes the idea that low taxes might spur growth levels and allow us to grow faster than thus reduce debt (as a proportion of GDP) via economic growth. But it is notable that more socialist and high tax countries (Sweden, Canada, The Netherlands) have not have a fall into relative poverty compared with the lower tax United States.

That is worth considering in these discussions.

"Great moments in marketing -- Charlie Sheen edition"

Even by the lax standards of contemporary journalism, it's hard to see how the meltdown of Charlie Sheen rises above the dog-bites-man standard. He's an actor with a history of drug abuse and manic-depressive (if not bipolar) tendencies -- not an unusual combination -- and his combination of denial and lashing out are absolutely typical for an addict.

I do, however, have to admit that the speed of development here is impressive. Back when I was doing marketing modelling, it took us forever to roll out a new product.

Cheap Beer, Paradoxical Dice, and the Unfounded Morality of Economists

Sometimes a concept can be so intuitively obvious that it actually becomes more difficult to teach and discuss. Take transitivity. We say that real numbers have the transitive property. That means that if you have three real numbers (A, B and C) and you know A > B and B > C then you also know that A > C.

Transitivity is just too obvious to get your head around. In order to think about a concept you really have to think about its opposite as well --

A > B, B > C and C > A. None too imaginatively, we call these opposite relationships intransitive or non-transitive. Non-transitive relationships are deeply counter-intuitive. We just don't expect the world to work like that. If you like butterscotch shakes better than chocolate shakes and chocolate shakes better than vanilla shakes, you expect to like butterscotch better than vanilla. If you can beat me at chess and I can beat Harry, you assume you can beat Harry. There is. of course, an element of variability here -- Harry might be having a good day or you might be in a vanilla kind of mood -- but on average we expect these relationships to hold.

The only example of a non-transitive relationship most people can think of is the game Rock, Paper, Scissors. Other games with non-transitive elements include the boomer classic Stratego where the highest ranked piece can only be captured by the lowest and my contribution, the game Kruzno which was designed specifically to give students a chance to work with these concepts.

While these games give us a chance to play around with non-transitive relationships, they don't tell us anything about how these relationships might arise in the real world. To answer that question, it's useful to look at another game.

Here are the rules. We have three dice marked as follows:

Die A {2,2,4,4,9,9}

Die B {1,1,6,6,8,8}

Die C {3,3,5,5,7,7}

Because I'm a nice guy, I'm going to let you pick the die you want. I'll then take one of the two remaining dice. We'll roll and whoever gets the higher number wins. Which die should you pick?

The surprising answer is that no matter which one you pick I'll still have the advantage because these are non-transitive dice. A beats B five out of nine times. B beats C five out of nine times. C beats A five out of nine times. The player who chooses second can always have better odds.

The dice example shows that it's possible for systems using random variables to result in non-transitive relationships. Can we still get these relationships in something deterministic like the rules of a control system or perhaps the algorithm a customer might use to decide on a product?

One way of dealing with multiple variables in a decision is to apply a threshold test to one variable while optimizing another. Here's how you might use this approach to decide between two six-packs of beer: if the price difference is a dollar or less, buy the better brand; otherwise pick the cheaper one.* For example, let's say that if beer were free you would rank beers in this order:

1. Sam Adams

2. Tecate

3. Budweiser

If these three beers cost $7.99, $6.99 and $5.99 respectively, you would pick Tecate over Bud, Sam Adams over Tecate and Bud over Sam Adams. In other words, a rock/paper/scissors relationship.

Admittedly, this example is a bit contrived but the idea of a customer having a threshold price is not outlandish, and there are precedents for the idea of a decision process where one variable is ignored as long as it stays within a certain range.

Of course, we haven't established the existence, let alone the prevalence of these relationships in economics but their very possibility raises some interesting questions and implications. Because transitivity is such an intuitively appealing concept, it often works its way unnoticed into the assumptions behind all sorts of arguments. If you've shown A is greater than B and B is greater than C, it's natural not to bother with A and C.

What's worse, as Edward Glaeser has observed, economists tend to be reductionists, and non-transitivity tends to play hell with reductionism. This makes economics particularly dependent on assumptions of transitivity. Take Glaeser's widely-cited proposal for a "moral heart of economics":

Teachers of first-year graduate courses in economic theory, like me, often begin by discussing the assumption that individuals can rank their preferred outcomes. We then propose a measure — a ranking mechanism called a utility function — that follows people’s preferences.

If there were 1,000 outcomes, an equivalent utility function could be defined by giving the most favored outcome a value of 1,000, the second best outcome a value of 999 and so forth. This “utility function” has nothing to do with happiness or self-satisfaction; it’s just a mathematical convenience for ranking people’s choices.

But then we turn to welfare, and that’s where we make our great leap.

Improvements in welfare occur when there are improvements in utility, and those occur only when an individual gets an option that wasn’t previously available. We typically prove that someone’s welfare has increased when the person has an increased set of choices.

When we make that assumption (which is hotly contested by some people, especially psychologists), we essentially assume that the fundamental objective of public policy is to increase freedom of choice.

But if these rankings can be non-transitive, then you run into all sorts of problems with the very idea of a utility function. (It would also seem to raise some interesting questions about revealed preference.) Does that actually change the moral calculus? Perhaps not but it certainly complicates things (what exactly does it mean to improve someone's choices when you don't have a well-ordered set?). More importantly, it raises questions about the other assumptions lurking in the shadows here. What if new options affect the previous ones in some other way? For example, what if the value of new options diminishes as options accumulate?

It's not difficult to argue for the assumption that additional choices bring diminishing returns. After all, the more choices you have, the less likely you are to choose the new one. This would imply that any action that takes choices from someone who has many and gives them to someone has significantly fewer represents a net gain since the choice is more likely to be used by the recipient. Let's say we weight the value of a choice by the likelihood of it being used, and if we further assume that giving someone money increases his or her choices, then taking money from a rich person and giving it to a poor person should produce a net gain in freedom.

Does this mean Glaeser's libertarian argument is secretly socialist? Of course not. The fact that he explicitly cites utility functions suggests that he is talking about a world where orders are well defined, and effects are additive and you can understand the whole by looking at the parts. In that world his argument is perfectly valid.

But as we've just seen with our dice and our beer, we can't always trust even the most intuitively obvious assumptions to hold. What's more, our examples were incredibly simple. The distribution of each die just had three equally probable values. The purchasing algorithm only used two variables and two extremely straightforward rules.

The real world is far more complex. With more variables and more involved rules and relationships, the chances of an assumption catching us off guard only get greater.



*Some economists might object at this point that this algorithm is not rational in the strict economics sense of the word. That's true, but unless those economists are also prepared to argue that all consumers are always completely rational actors, the argument still stands.

Post-weekend Gaming -- five-penny backgammon

[We haven't forgotten about games here at OE. Quite the opposite. I've been working on a post about games of perfect and imperfect information for a while now and it should be going up soon. While I was thinking about the backgammon section of the post, I remembered a variant for math teachers I've been meaning to write up for a few years now.]

FIVE-PENNY BACKGAMMON

Played exactly like traditional backgammon except:

The dice are replaced with five coins;

instead of rolling the dice, each player tosses the five coins using the cup, adds one to the number of heads then repeats the procedure a second time;

the two (h + 1) totals are treated like the results from rolling a pair of dice.

For example, tossing two heads then tossing three would be the same as rolling a three and a four.



PLAYER'S CHOICE

In this variant, the player can choose dice or coins on a turn-by-turn basis.




FIVE-PENNY BACKGAMMON IN THE CLASSROOM

Though this is largely matter of preference, I would introduce five-penny games well before any kind of formal or semi-formal introduction to the underlying probability theory. This gives the students a chance to become comfortable with these examples before they see them in lectures and it also gives them the opportunity to discover on their own that there's a difference between having the same possible outcomes and having the same probabilities associated with those outcomes.

Mark Thoma makes an important point

From Economist's View:

That was a mistake, but what is the lesson? One is that we should not necessarily ignore something just because it cannot be found in the data. Much of the empirical work prior to the crisis involved data from the early 1980s to the present (due to an assumption of structural change around that time), sometimes the data goes back to 1959 (when standard series on money end), and occasionally empirical work will use data starting in 1947. So important, infrequent events like the great Depression are rarely even in the data we use to test our models. Things that help to explain this episode may not seem important in limited data sets, but we ignore these possibilities at our own peril.

But how do we know which things to pay attention to if the data isn't always the best guide? We can't just say anything is possible no matter what the data tell us, that's not much of a guide on where to focus our attention.

The data can certainly tell us which things we should take a closer look at. If something is empirically important in explaining business cycles (or other economic phenomena ), that should draw our attention.

But things that do not appear important in data since, say, 1980 should not necessarily be ignored. This is where history plays a key role in directing our attention. If we believe that a collapse of financial intermediation was important in the Great Depression (or in other collapses in the 1800s), then we should ask how that might occur in our models and what might happen if it did. You may not find that the Bernanke, Gertler, Gilchrist model is important when tested against recent data, but does it seem to give us information that coincides with what we know about these earlier periods? We can't do formal tests in these cases, but there is information and guidance here. Had we followed it -- had we remembered to test our models not just against recent data but also against the lessons of history -- we might have been better prepared theoretically when he crisis hit.

Removing Uncertainty

One of the arguments that has been made a lot is that it is important to remove sources of uncertainty to make business investments less susceptible to political changes. However, this need to make things less uncertain doesn't appear to apply in the public sector:

Every one of Detroit's public school teachers is receiving a layoff notice -- but that doesn't mean they will all be fired.

The layoff notices were sent to the 5,466 unionized teachers "in anticipation of a workforce reduction to match the district's declining student enrollment," according to a Detroit Public Schools statement. The layoff notices are required as part of the Detroit Teachers Federation collective-bargaining agreement. Non-Renewal notices have also been sent to 248 administrators, and the layoffs would go into effect by July 29.

Even though the risk of an actually losing a job might be low, imagine having to plan around how to pay for a mortgage or a lease if one's job might not be there? How can this possibly be a good way to organize an economy?

Because it's Saturday