Kotkin: Back to Basics

December 7, 2009

I have been organizing all my notes and material, and I have found the very first notes. That was from my first day as  a PhD student when I went to a presentation of Joel Kotkin. As I explain it was partly done as a presentation to try to neutralize the influence of Richard Florida and the creative class theories, in the Danish local planning and economic development.  It was a good start for me.

Looking at the notes I google some of his words, and got it.

The decline of cities and regions come from:

  • Inability to absorb newcomers
  • Lack of upward mobility
  • Inattention to basic infrastructure
  • Lack of shared common culture
  • Decline of Family

Here is the link of his presentation (Back To Basics: A Return to the Essentials of Urban Growth)

This five points, according to Kotkin, are interesting. I agree to some extent with them. Regarding the first one, I wrote a paper for a PhD course in Economic Geography, and my conclussion was basically the same. Although I don’t think I was remembering him. Concerning the other points, I think he basically cut and pasted the conclussions from the U.S. and put it in Denmark. I already said that in the post in April 2008, though. But, anyways I find it interesting his thesis. I found a more updated presentation, from Sept. 2009. After the Bubble: Back to Basics. Coping with Hard TimesBack. I think the title is very appropriate, as I look back at my basic notes.

My good friend Ana Luiza was talking today about the article “What went wrong with economics” published in the always interesting The Economist. She mentioned that it was a good analysis of the situation. She’s one of the best economists I know, so I listen to her.

The articles starts powerfully “Of all the economic bubbles that have been pricked, few have burst more spectacularly than the reputation of economics itself.” Something worth it to put in the recently open my quotes page. I enjoyed reading the whole thing. The only thing that I didn’t really agree is when he says “Macroeconomists, especially within central banks, were too fixated on taming inflation and too cavalier about asset bubbles.” I think central banks in the U.S., Spain and many other did not care at all about real inflation. We have to remember that the housing prices (which many say that this is what brought us here) , which is by far the highest expenditure of the families was rising around a 15% yearly, I did not see the central banks really calling for an action on this issue, like for example a tax on an empty house/apartment to avoid speculation.

Anyways what I found interesting is the quote of my man Paul Krugman. Last month at the London School of Economics (!!) he argued that much of the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst.”

Professor teaching economics

A Professor teaching economics

I was never a fan of macroeconomics, so, obviously this assertion makes me feel really good. I remember in 1998, in my first year at the Facultad de Ciencias Económicas y Empresariales (Economics and Business School at Universidad de Alcala, Spain), we were going over Mankiw’s textbook on micro and macro, and after a few classes we started questioning our Professor (sorry I can only remember his nickname). I remember raising my hand in a specific example about the labor maket and saying, “but, this does seem to happen in reality”, and he answered “well, you have to learn the theory, even if it does not happen in reality”. Later in class I wondered with friends why in the world we should learn something like the theories of flying pigs. Anyways I was happy to learn about it, but probably less hours on subjects like these would be good.

This non-sense long studies in the mainstream economics studies, among other reasons, was why I probably found Ana in the masters program at the Business Department of Aalborg University in 2005.

6 months ago I looked at how many times the term “economic crisis” and “økonomisk krise” were mentioned in the most popular newspapers of the USA (New York Times) and Denmark (Jyllands-Posten) respectively. I’m proud of this entry because it’s one of the most visited. So this summer I was kind of interested to see a comparison looking at the first 6 months of 2009.

It is important to notice that I have multiplied times 2, the corresponding figure for the first half of the year. So the 2009 “result” will actually be the final result, if they mentioned the term exactly the same times between and July and December, as they have done from January to the end of June.

So this is how it looks the agreement of both newspapers. Comparing it with the 1994-2008 graph You can draw your own conclussions.
The term "economic crisis /økonomisk krise" mentioned in New York Times and Jyllands-Posten respectively (1994-2009). Note that 2009 is only based on the first half of the year.

Now I’m really busy, trying to write a paper for a journal before my wife gives birth in the next days, but whenever I need a break from the paper, I will add the consumer confidence chart.

From the U.S. we have some numbers and various interpretations.

reported unemployment figures for every month since begining of recesssion

reported unemployment figures for every month since begining of recesssion

National Public Radio | July 5 2009:
Is The Worst Over? Most Economists Say Yes

Nouriel Roubini | Jul 2, 2009
U.S. Job Report Suggests that Green Shoots are Mostly Yellow Weeds
“The June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure…”
(I read this quote and I started laughing)

Anyways as I mentioned, and the same Paul Samuelson (Nobel Prize in Economics and key figure in neoclassical economics) admitted last year: “What we know about the global financial crisis is that we don’t know very much.”

This week I listened to an article on NPR (American public radio) which suggests that the MBA’s were highly implicated in this economic crisis (click on “listen now” 7 min. article). If you consider that all CEO’s, CFO’s, economic planners, and many influential politicians (including presidents) had earned their MBA’s from these prestigious schools, have they not been infected with some type of hard core capitalist virus? Have they not been thinking about making profits instead of creating real wealth for the society?
Of course, the professors of business schools declare in their interviews how stupid it is to put the blame on them. Actually for me, it does not make a lot of sense to blame their education to what has been happening all around the world and all types of industries. However I would say they are guilty of something.
First of all, I should say I probably have a bias. My background is in business studies and economics, however I mingle with many economist, who having been disenchant with the mainstream economic have entered the realm of Economic Geography. When I could have done an MBA in United States or Spain, I preferred to go to Scandinavia to do a Masters of Innovation and Entrepreneurship, with a good dosage of Evolutionary Economics.
Where I think they’re guilty is on not having told their student enough about economic cycles (see my previous post to get an idea). That businesses and economies come and go, surge and plunge. I have several friend in the US and Spain with MBA’s, I know their classes and I believe this is somewhat missing. I mean, it’s something really basic. You don’t grow in a linear way. Economic growth, should be more understood as Economic evolution. You can’t make a business plan of how a business it’s going to evolve. Stories that have been told for ever (the 7 fat and 7 lean cows anyone?) were discontinued. This never ending economic growth mentality, not only happened in the mentality all across the industries, also happened with the Goverments, and the majority of the citizens.
So NPR’s article while is wrong, goes in the right direction. However, many blame the economists for having created all this bubble, and not having predicted it. But I actually believe the problem is that we don’t have, in our business schools, society and government, enough real economics.

Today, my native country Spain, officially reaches for the first time in its history the 4 Million figure of unemployed.  This is a devastating number of people, no matter if this is just a psychological number or if is correctly measured.

I remember in the early 90’s when it reached the 3 million mark. It was a shock for the nation, it was a pretty scary moment. I was in high-school so it did not affect me directly but I knew that the family business was going through a hard time.

Now we reach 4 million. There has been a lot of immigration increasing the total population, so maybe it’s around the same percentage we had, although it’s hard to measure as methodologies have changed.

Spain until recently has been admired in Europe. It was seen as one of the fastest growing and most dynamic economies. Now it’s becoming the ugly duck of western Europe. For some analysts might even be the canary in the coalmine of deflation (perhaps a little exaggerated article for my taste). Reading the commentaries in the Spanish newspapers, now it’s all critics for the Government, which I positioned in the political right (with a little flavor of the left). Everyone is mad at Zapatero now. Some are saying go left, other go right.

For my part, instead of criticizing I would give to suggest two concrete policy suggestions for Spain. I might be wrong, many times I am, but this is what I feel today:
1. Try to adapt some type of flexicurity model. The concept was originated here in Denmark, and after living here almost 2 years I have been convinced of the wonders of it. Of course you can’t “cut & paste” it, you have to adapt it to the Spanish socioeconomic background, but I think it should be worth to explore the possibility of trying it. In fact I wish some researchers or policy makers could come here to my University where they have the Centre for Labour Market Research at Aalborg University (CARMA). I’m convinced that Spain needs some flexibility for the labour market. As I said, I come from a family who has been involved in the creation of several businesses. I’m not saying we’re the perfect firms, but we have created overtime good services for the people and employment. We have also suffered tremendously when the businesses were not doing good. Some times it came for the difficult to hire someone or fire someone. In Spain, compared to other countries it’s quite hard to layout someone, even with more than accepted reasons in other countries. Another leg of the flexicurity tripod, it’s the embarrassing the Spanish official “Oficina de Empleo”, which it’s just a bureaucrat machine, that in many cases has very nice civil servants, but it provides the worst service for everyone. They should be able to find employment in an effective way. I wonder what kind of incentives should be given to the ones running the show. Also it’s important that the unemployed (especially the recently) received economic support until they find another job. I also find useful that the employed buy some type of subsidised insurance in case they loose their job (in Denmark this was used to do through the unions).

2. Incentive the renting in the housing market. In Spain we have the highest rate of home owners in the world. In order to do it, for some this could be very unpopular measures such as taxing empty housing in bigger cities (specially among banks, ha!), besides other measures. The other possibility of course (very reasonable too) it’s to let the banks and housing developers to bankrupt so the market stabilizes. That means not a single cent for any type of corporate bailouts. Anyways, helping to boost the housing market with rent could cover several possibilities: a) People would be more flexible to move to find a job, b) Speculation would decrease which highly has affected the economy-employment c) many people could save their homes upon renting a place they can’t afford (for that it would be more than helpful to have some agreements with the bank (giving the mortgage) and government as some type of collateral), d) many young people could start their own families and this would revert in the economy. I talked a little bit more about this in a past post also talking about housing in Spain and America.

It’s always nice to stop by Creative Class by the Richard Florida squad. Following links I hit the “How the Crash Will Reshape America” published in the Atlantic in the March 2009 issue.

As I have said sometimes, I like Florida. It seems to be kind of funny that all academics related to the discipline of economic geography say “Florida’s ideas are good, BUT…” It seems that they have to say that in order to show their academic credentials.
So, I of course have to say the same. However, for this last document I admit I have very little objection or none.
He clearly explains the change of economic paradigms and how the American cities have to evolve. He quotes Schumpeter, Jacobs, Romer, Glaeser, Lucas, Krugman among some of the key fellows. His final proposals to change the housing market towards a more renting instead of owning are bold. Which is exactly what the U.S., and great part of the world needs now. Not so much Denmark, but this will be especially fit for my home country Spain.

The solution begins with the removal of homeownership from its long-privileged place at the center of the U.S. economy. Substantial incentives for homeownership (from tax breaks to artificially low mortgage-interest rates) distort demand, encouraging people to buy bigger houses than they otherwise would. That means less spending on medical technology, or software, or alternative energy—the sectors and products that could drive U.S. growth and exports in the coming years. Artificial demand for bigger houses also skews residential patterns, leading to excessive low-density suburban growth. The measures that prop up this demand should be eliminated.

If anything, our government policies should encourage renting, not buying. Homeownership occupies a central place in the American Dream primarily because decades of policy have put it there. A recent study by Grace Wong, an economist at the Wharton School of Business, shows that, controlling for income and demographics, homeowners are no happier than renters, nor do they report lower levels of stress or higher levels of self-esteem.

Once again I have to say, thank you Richard!