Monday, October 29, 2012

Monday School: Character Part II

The name of the podcast series I have been listening to was Andy Stanley's "Character Under Construction". He notes that, "The biblical imperatives apart from biblical thinking always result in short term obedience and long term frustration." Another example of this line of thinking is in G.K. Chesterton's famous remark, "Christianity has not been tried and found wanting; it has been found difficult and not tried." Frustration from failed attempts at rededicating our will leaves us thinking Christianity is impossible. Just remember, "I can't but He can."  

When it comes to renovating our character it is a two-step process. The first step to renewal is taking off the old. The second step is putting on the new. Each present their own unique challenges.This particular podcast (#4 in the series) was about taking off the old.

Our beliefs shape our attitude. How we think of a person shapes our attitude towards them. What we think of our spouse shapes our treatment of them. What we think about God colors our whole life. Therefore, because these attitudes shape our behavior and we want to be transformed it is imperative that we take off the old. Thanks be to God who has instructed us to go back to the most basic level. Stanley says, "God wants to deal with us at the fundamental belief system level . . . A renewed mind doesn't resist God like an un-renewed mind."

We need to identify the lies that fuel our attitudes and behavior. Stanley communicates the following message (paraphrase): Listen to your excuses and rationalizations because those rationalizations support lies.  

Some examples:
What's the harm in ____?
Everyone else is doing it.
Who is going to know?
But, I love him/her
He/She deserves it
I can't help it

What else supports lies? Fear and pain. When we examine the places we overreact we can generally find a lie embedded in our thoughts. Also behind the temptations that best us are lies. What lies support the areas where we are most susceptible to sin?
So the sermon was a call to be cognizant of (1) Excuses, (2) Overreactions, and (3) Temptations. All of these can give us clues to the lies that keep us back from "taking off the old". When we expose the lies they lose their grip and as Jesus said, "Then you will know the truth and the truth will set you free" (John 8:32).

Thursday, October 25, 2012

Character Part I

My first year in the economics PhD program, was both successful and difficult. The worst part of the year was how I turned my back on communion with God. Of course there were excuses, the most frequent being, "too busy". But, it is time for renewed attention. I have been listening to Andy Stanley podcasts called "Character under Construction".  He has a great capacity for teaching; and, listening to these sermons has been an encouragement to an ongoing project: the renovation of my heart.

What does it mean to have good character? Stanley defines character as doing what is right, as God defines right, no matter the cost. But, how can we know, "what is right, as God defines right"? This requires surrender and renewal.

First, the surrender part is a statement that, "I can't but He can" ---the acknowledgement that when we attempt to rededicate our will or make ourselves we become better versions of ourselves, not necessarily more like Jesus. This falls short of the Christian goal to gain in our likeness with Christ until we can say, as Paul wrote, "I no longer live but Christ lives in me" (Galatians 2:20).

Second, what is renewal and how can it help to obtain good character? Renewal is to make new again. To do this we must take off the old and put on the new (Ephesians 4:22-24, Mark 2:22). In fact, we are told in Paul's letter to the Romans,
"Do not conform to the pattern of this world, but be transformed by the renewing of your mind. Then you will be able to test and approve what God's will is ---his good, pleasing, and perfect will." (Romans 12:2)       
So we can know "what is right as God defines right" because the Bible tells us when our mind is renewed that we can "test and approve". That sounds awesome! How does renewal happen? How do we become transformed? "I can't but He can". You can't manufacture character it is produced with a life spent abiding in Christ (John 15).

To cultivate character we should be people focused on association, not imitation.

Tuesday, October 23, 2012

Neighborhood Dynamics

Another post in preparation for the Urban and Regional exam on Wednesday. In class we covered two models of neighborhood change (1) Filtering and (2) Arbitrage. These are both models of neighborhood change and are of interest to urban economists because neighborhoods are a huge determinant of how people value homes and, from a social point of view, neighborhoods create environments where kids can grow to reach their full potential.

The filtering model states that the housing stock trickles down from high income to low income over time. Let me illustrate this with an example from another context. Suppose we are in the market for automobiles and there are three income categories: high, middle, and low.  High income people want to buy a new car and decide to trade in their old car (which still has a significant amount of useful life). The middle income people look at the car traded-in by the high income folks. If that traded-in car is at least as good as their current car and costs less they will trade-in their old car. This trickling down of the automobile stock continues.

There is a similar process with housing that occurs because (1) Architectural style changes, (2) Technology in housing gets better, and (3) Physical deterioration happens.  Though a house can be maintained to be up-to-date with new technology and physical deterioration can be slowed if maintenance costs ever exceed the price a house can fetch on the market watch out! That home will depreciate in value and a similar process will take place in the housing market, albeit with significantly higher transaction costs than the car market!

The arbitrage model is a model based on prejudicial preferences. What do I mean? The assumption that high income people like to be around other high income people and white people like to be around other white people drives this model.  Imagine a border between a high and low income neighborhood (or different races). High income people along that border do not like where they are living because they are close to low income folks.  But, low income people like living near high income people for some reason. This was not clearly explained in class, but, there is literature on positive spillovers from public services like police patrol, fire safety, not to mention peer effects in schools. Then we need some "shock" to disturb the equilibrium like a redrawing of school zoning for example. Once this shock happens people from the border decide to move to the interior of the higher income area. But, anticipating this those already in the interior know they will be on the new border of low and high income housing. Because of this expectation they decide to move. Where does it end? We were not told in class, but, there are at least two reasonable thoughts about closing the model (1) Transportation costs become too great to move further away, (2) The benefit to the low income group declines as lot sizes get further from the CBD which would mean spillovers would not be as great.

The filtering model provides a reasonable explanation about why we see income increase away from the central business district. Also, the filtering model suggests that we have a choice with respect to low income housing options (1) We can build low income housing explicitly, or (2) We can subsidize the purchase of new housing and the housing stock will trickle down to the low income earners. 

But this is a treatment of the structure not of other meaningful housing attributes like public services and quality neighborhoods which empirically seem to be the reason people select their households. There is a looming question in all of this, how do you provide people all of these things in a scarce world? Just relying on the private market difficult trade-offs will need to be made. The governmental track record does not evoke confidence (see government's hand in the housing crisis). In addition, some attributes that spur success are less tangible, like a culture of achievement. Hard for the government to legislate that. Still another approach, underused, is the voluntary association approach. Nonprofit organizations of different kinds and churches certainly have a role.

Monday, October 22, 2012

Urban Sprawl

There are so many things I want to write about. The political chatter on facebook has reached a fever pitch. Some things people have written have been thoughtful and poignant but overall the medium does not seem to lend itself to a quality forum for discussion. I hope to write a little bit about the political climate soon. In addition, there will soon be posts on the "Liberty and the Market Process" colloquium readings and discussion from last week, however, studies come first. The last midterm for the fall semester is on Urban and Regional Planning and while working through the class notes I thought it was a good opportunity to just post on some topics here. This particular post is on Urban Sprawl (more posts on cities to come!).

What is Urban Sprawl? Why is it considered a problem?

Urban sprawl refers to the "excessive" spatial growth of cities. Urban sprawl is believed to be problematic because it represents market failure. There are three common market failures that are discussed: (1) The positive externality of open space, (2) The negative externality of pollution, (3) The negative externality of millage rates. I discuss each of these in turn. First, open space is valued through the market based on its productive use, but, the productive use does not capture the aesthetic value that urban populations place on the open space. Because new developments do not account for this positive externality open space is under-provided in the market. Second, because people are locating further from their occupations there are longer commutes associated with sprawl. The costliness of these longer commutes is amplified when we consider the congestion of roads which lead to even longer commutes. Third, when housing sprawls further from the city new infrastructure like roads, sewer, electric must be built to accommodate the new structures. But, because property taxes do not fully cover the large up-front cost of this infrastructure this places a burden on other taxpayers.

What does it mean for something to be excessive? That implies there is an optimal amount of city growth. This is somewhat difficult concept to wrap your arms around because first you need a model to tell you what is optimal and second you are going to have serious measurement problems.

What policy prescriptions are associated with fixing Urban Sprawl?
There is a policy prescription associated with each of these market failures. With respect to open space the thought is that developers are not accounting for this aesthetic benefit therefore developers should pay a development tax equal to the cost on society of not having the open space. To handle the pollution caused through commute times one thought is that people could pay time-of-day tolls to alleviate congestion during rush hour. Or people could pay tolls during all the time which would increase the commute cost giving people a reason to drive less. With the millage externality up-front costs can be managed through the implementation of an impact fee where the developer pays a fee equal to the cost of the new infrastructure. This means that property taxes will be able to cover the maintenance of that infrastructure. Finally, the policy often provided by Urban Planners is zoning and urban growth boundaries (UGB). Both of these policies are attempts to restrict "excessive growth". Zoning allows for particular land uses in a given area while UGBs draw a circle around the current land use and do not allow for development past the boundary (until the planners decide the boundary needs to be expanded)

What are the problems associated with these policies? Which policies seem to have the most merit?
All of these prescriptions are wrought with problems but some are better than others. There are significant measurement problems with the valuation of open space beauty.  Even if open space could be "socially valued" you might think that if open space is valuable to city dwellers then they can contribute their money to conservation nonprofits that purchase and preserve land.

With respect to the UGBs there is an arbitrariness in determining the boundaries.  Moreover, to the extent that land at the boundaries have more access to open space and open space is valuable this should reflect in their housing value. However, because UGBs are subject to change this person will likely lose value on their home and engage in rent-seeking behavior to try to restrict growth to maintain their housing values. The existence of a UGB creates a bootleggers and baptists public choice problem where current residents desire to restrict land use to keep their housing prices artificially high while planners and environmentalists like it because it decreases sprawl.

Zoning also has similar problems where it makes land artificially scarce. Moreover, the creation of a zoning bureaucracy as well as the rent-seeking that ensues from the bureaucracy to the state and local governments as well as rent-seeking from developers is a drain on resources that could have been allocated to more productive uses. With respect to urban sprawl and zoning it seems to be a case where the cure is worse than the disease.

The bottom line on UGB and Zoning is that there are possible benefits to society; but, these benefits are difficult to measure. Moreover, these policies are difficult to implement in an appropriate manner that does not perturb market allocations of housing goods too much. To the extent we value the ability for people to have affordable rent or housing these policies are quite detrimental. To say the least, it is unclear that benefits exceed costs. 

The congestion fee and impact fee ideas have some merit because their administrative costs would be relatively low with both. Also measurement of the impact fee should be relatively easy since there is a more concrete idea about how much infrastructure costs. Also, even though congestion as a social cost would be difficult to measure the price can be manipulated to search out what price produces a good flow of traffic (again, there are measurement problems, "what is a good flow?") . . .

I think the post has gotten long enough. I'll post on another Urban topic tomorrow.

Wednesday, October 10, 2012

The Market and Entrepreneurship

These past few papers have feverishly banged at the door shouting, "Economics is not a science based entirely on allocations!" This new round of articles from Hayek and Kirzner are making the same point, however, with different emphasis. Rather than a particular focus on the economic calculation problems of social planners ---the aim of the previous articles by Mises and Hayek (I will write about these soon) --- these articles attempt to articulate the processes inside of markets.

All intro students of economics are acquainted with the model of perfect competition. The intersection of supply and demand curves determines equilibrium price and quantity. However, Hayek and Kirzner do not portray the market with the stillness and tranquility of equilibrium, but, a market in which entrepreneurs are restless in their attempts at improvement. Ironically, this competitive process (where each entrepreneur attempts to provide better products at lower costs) is completely removed from the competitive model. All of the action, so to speak, occurs outside of the model.

This might seem like an academic exercise and you might be asking yourself, "So what?" The big point here is that in our focus on outcomes we turn our attention away from process. Turning our backs on process is detrimental because there are good economic lessons to be learned from the process. For Hayek the "good economics" being missed by the model of perfect competition is discovery. Discoveries and innovations lead us to new products and decrease costs of providing products. But, these innovations and dynamics which are the engine of growth in our economy are not captured in the model of perfect competition ---not even close.
//Start wonkiness
Our mathematical models are completely incapable of handling the Austrian critiques for two reasons: (1) Disequilibrium behavior, and (2) Surprise. First, there is a French word used in general equilibrium analysis called "tatonement" which translates as groping. Agents are always groping towards an equilibrium resting place. Like water poured into a bowl it will stop swirling once it reaches a resting place. Bottom line, we always model things as moving towards equilibrium and do not know how to model things moving out of equilibrium. Second, our rational expectations models presume that there is no surprise. With respect to discovery this means that if you want to build innovation in a model you must presume a probability distribution over the arrival of new inventions. But, how do you know the probability distribution? At present, this is the best we can do. In a rational expectations framework you cannot start with innovations having a measure of zero and then suddenly have a non-zero measure.
//End wonkiness

Akin to the criticism Hayek and Kirzner levy against the competitive model I have a similar example culled from game theory. George Akerlof's work on asymmetric information  is a canonical model in economic theory where the common example is used cars. Imagine you are shopping for automobiles at a used car lot.
You are not certain whether you're buying a good car or a lemon. Since you are a rational shopper you form an expectation about the value of the car.  However, the dealer knows this expectation is less than the most valuable car on his lot. Thus, he removes that car from the set of cars he offers you. Now you form a different expectation about the value of the remaining cars. The dealer continues to remove cars he values more than your expectation. This keeps going and can result in an equilibrium of complete market failure. However, we observe in the real world that used car dealers have developed warranties to overcome some of these problems. Other entrepreneurs have developed ideas like Carfax.

The point? Entrepreneurs turn Akerlof's lemons into lemonade.

This point is not as evident when we focus on equilibrium rather than process.