The Coordination Problem and Winner Cities

A commenter writes,

[migration of firms to small cities is inhibited by] Insufficient maturity of the coordination mechanisms – Maybe tomorrow’s equivalent of the free-state project/charter cities could be a proper linked in group where people can quite literally call out for all sorts of talent that they want in a city. This group could take over small towns or build new cities on empty land with finance coordinated with dominant assurance contracts enforced by blockchain like trustless/minimal trust mechanisms. All of these mechanisms are still immature. Maybe someday when the costs of the bay area really go up, the next big tech firm could try this.

Competing with San Francisco or New York for talented people is like trying to compete with Google in search or Facebook in social networking. In fact, it is more difficult, because the coordination problem is more subtle.

For instance, if you wanted to lure me to new city, you would need to insure that there are Israeli folk dance sessions. That requires coordinating enough dancers to move there. But prior to that, it requires that you know that this is an issue for me. And, of course, to get those dancers, you have to deal with their primary considerations, which might not be dancing.

Also, to get me to move, you need to persuade my wife. And she has her own considerations.

Established big cities have “solved” these coordination problems through a spontaneous order. You can think of them as overlapping networks of coordination. They attract Jane with a particular job opportunity, John with a particular amenity, and someone else with the opportunity to meet John and Jane.

The Felons Among Us

Nicholas Eberstadt writes,

Maybe 90 percent of all sentenced felons today are out of confinement and living more or less among us.

…rough arithmetic suggests that about 17 million men in our general population have a felony conviction somewhere in their CV. That works out to one of every eight adult males in America today.

Read the entire essay, which paints a very dark picture of conditions in this country. It strikes me as the most important magazine piece that I have seen so far this year.

Shorter Version of Tyler Cowen’s New Book

From one of my comenters.

the chief anti-libertarian human tendency is the wish to minimize risk by distributing it which leads to all the “too big to fail” and social security and regulatory boondoggles. The bigger and richer the society the easier it is to fulfill this wish at least in the short-medium run

This sounds like the problem of the “complacent class,” as reviewed by Walter Russell Mead or Edward Luce.

The Null Hypothesis in Education, Restated

By request. I probably should look up earlier statements before writing this, but I hope I am consistent. Consider an education intervention and a set of tests that it must pass. The intervention could be “more spending” or “method X used in the classroom” or “longer school days” or “charter schools” or what have you.

1. It should show a meaningful difference under experimental conditions, meaning that selection bias is eliminated.

2. The difference should persist, rather than fade out. If you show a difference in first grade but by third grade or fifth grade the experimental group is on on the same level as the control group, then there is fade-out.

3. The results should be replicated. One experiment that works one time does not count.

4. The intervention should be scalable. The intervention does not depend on a uniquely gifted teacher.

The Null Hypothesis is that no intervention passes all four tests.

My Thoughts on Cost Disease

Scott Alexander writes

Any explanation of the form “administrative bloat” or “inefficiency” has to explain why non-bloated alternatives don’t pop up or become popular. I’m sure the CEO of Ford would love to just stop doing his job and approve every single funding request that passes his desk and pay for it by jacking up the price of cars, but at some point if he did that too much we’d all just buy Toyotas instead. Although there are some barriers to competition in the hospital market, there are fewer such barriers in the college, private school, and ambulatory clinic market. Why hasn’t competition discouraged administrative bloat here the same way it does in other industries?

1. At any given time, you will have sectors where demand is growing faster than productivity (think of health care and education) and other sectors where productivity is growing faster than demand (think of manufacturing). In the sectors where demand is growing faster than productivity, you have rising relative prices, or “cost disease.”

2. In health care and education, you also have a lot of government intervention, and government intervention almost always takes the form of subsidizing demand while restricting supply. Of course, that is going to cause relative prices to be higher, thereby exacerbating “cost disease.”

3. I would argue that there are plenty of barriers to competition in the college market. Accreditation is one such barrier. But there are natural incumbent advantages as well. You may be able to enter the market for high school graduates who are in no way prepared for college. But trying to enter the market at the level of a top 100 college is nearly impossible.

4. There are plenty of barriers in health care, also. Clinics are a good innovation, but the real expenses in health care are in chronic illnesses, and clinics do not compete to treat diabetes, Alzheimer’s, and so on.

5. It is in the nature of organizations for middle managers to try to build empires, adding to cost without necessarily creating value. In for-profit businesses, the owners have an incentive to check this, because the owners want to maximize profits. In non-profits, the natural checks operate only when revenues are not rising to cover the cost of expansion. Non-profits only worry about the bottom line when it threatens to go negative.

In short, some “cost disease” is natural. At any given time, some industries will have demand growing faster than productivity. However, much of it is artificial, as government subsidizes demand and restricts supply. Finally, some of it results from the fact that non-profits are less efficient than for-profit firms.

Libertarians vs. Human Nature

I believe that humans in large societies have two natural desires that frustrate libertarians.

1. A desire for religion, defined as a set of rituals, norms, and affirmations that are shared by a group and which the group believes it is wrong not to share. Thus, rooting for your local sports team is not a religion, because you realize that it is not wrong for someone else not to root for your local sports team. But if you are against GMO foods, then you believe that those who disagree with you are wrong.

2. A desire for war. I think that it is in human nature to fantasize about battles against tribal enemies. War arises when those fantasies are strong enough to drive behavior. People who have recently experienced war have mixed feelings about it. Some want revenge for defeats. Others are sick of war. The sickness of war often dominates, but not always. If there has been no recent experience of war, there is a gradual loss of the aversion to war, and war becomes more likely. Peter Turchin takes this view. Incidentally, Robin Hanson recently binge-read Turchin. I think that the way to read Turchin is to view his thought as 95 percent intuition/theory, 5 percent empirical analysis. Turchin himself would prefer you to believe that he is much more driven by empirical analysis.

If these desires were to disappear, I believe that humans could live without a state. However, given these desires, the best approach for a peaceful large society is that which was undertaken in the U.S. when it was founded: freedom of religion guaranteed by the government, and a political system designed for peaceful succession and limitations on the power of any one political office.

At the moment, I fear that the anti-Trump resistance strikes me as having the characteristics of a religion whose followers are fantasizing about war. Perhaps there is a symmetry on the other side, but it is dampened by the fact that when you hold the Presidency you can get your way peacefully (if coercively).

I think that it is fine for libertarians to warn of the dangers of religion and to oppose war. That is what I am doing here. On other other hand, when libertarians assume away the desire for religion and war, their thinking becomes at best irrelevant and at worst nihilistic.

K-12 Spending and Children with Special Needs

Education Realist writes,

dive into “special education”, the mother of all ed spending sinkholes.

… research hasn’t revealed any promising practices to give those with mild learning disabilities higher test scores or better engagement. And that’s just where academic improvement might be possible. In many cases, expensive services are provided with no expectation of academic improvement.

Read the whole post. A couple of comments from me.

1. The special-ed phenomenon supports a Hansonian theory of education spending, which is that it is about “showing that we care.” Who can be against spending money on children with special needs?

2. In California, lawyers have a great gig. It turns out that taxpayers will pay you $350 an hour to advocate for parents of special-needs children against the taxpayer-run schools.

James Pethokoukis and Joel Kotkin

No, it’s not a love match, just an interview. Kotkin says,

the valley that I used to cover back in the 80s, and even 90s, was filled with people who had been boat people, who had started PC board companies. You know, kind of somewhat people being able to make a career for themselves in the tech industry even if they didn’t, let’s say have a PhD or an MBA from an elite school. That’s just not the case anymore. I mean, you have a much more hierarchal order in Silicon Valley than you used to have and that is really reflected throughout most of this economy. I mean, what you see particularly here in California is wealthy, older property owners who are in pretty good shape because their property up, but young people can’t possibly buy a house.

He calls this “neo-feudalism” because it creates an order that is stable, but stagnant. I would argue that it is due mostly to natural forces, but there are policies at work as well. Read the whole interview.

The natural forces are the four forces that I often talk about.

1. The New Commanding Heights, as demand rises faster than productivity in education and health care.
2. Assortative mating and bifurcated family patterns.
3. Factor-price equalization (globalization).
4. The Internet and other new technology, which complements some skills and substitutes for others.

The policy forces at work include:

1. Credential requirements, which protect some workers by excluding others.
2. Subsidizing demand and restricting supply in health care and education. Credentialism does both, in that it adds to the demand for credential-providing schools and while restricting supply.
3. Subsidizing demand and restricting supply in housing markets. Environmental and other building restrictions in high-demand areas help to hold down supply and enable young professionals to outbid others for housing in places like San Francisco and Brooklyn.
4. The system of public education, which creates neighorhoods with “good schools” (meaning schools that have a lot of affluent students attending), leading people to bid up prices for those neighborhoods. If you had vouchers instead, parents probably would still bid up the prices of schools that attract affluent students (that is what happens in colleges–it is what the competition to get into “elite” colleges is all about), but at least this would not be linked as tightly to housing.
5. Various policies that redistribute income upward, particularly to the affluent elderly. Social security, Medicare, and public-sector pensions come to mind.

What I Believe About Education

This is in response to comments on some previous posts about teachers’ unions and other matters.

1. The U.S. leads the world in health care spending per person, but not in health care outcomes. Many people look at that and say that health care costs too much in the U.S., and we should be able to get the same our better outcomes by sending less. Maybe that is correct, maybe not. That is not the point here. But–

2. the U.S. leads the world in K-12 education spending per student, but not in student outcomes. Yet nobody, says that education costs too much and that we should spend less. Except–

3. me. I believe that we spend way too much on K-12 education.

4. We spend as much as we do on education in part because it is a sacred cow. We want to show that we care about children. (Yes, “showing that you care” is also Robin Hanson’s explanation for health care spending.)

5. We also spend as much as we do because of teachers’ unions. They engage in featherbedding, adding all sorts of non-teaching staff to school payrolls (and adding more union members in the process). In Montgomery`County, last time I looked, there was one person on the payroll for every 6 students, but there were more than 25 students per classroom teacher. That is why I do not think that cost disease, as discussed recently by Scott Alexander, is the full story. It’s not just that it’s hard to raise productivity in teaching. It’s that teachers’ unions cut down on productivity by continually getting schools to add non-teaching staff.

6. If I could have my way, the government would get out of the schooling business.

7. If we wish to subsidize education, we should do it through vouchers. Note that this could be done on a progressive basis, with the size of the voucher a declining function of parent’s income.

8. I do not expect educational outcomes to be any better under a voucher system. That is because I believe in the Null Hypothesis, which is that educational interventions do not make a difference.

9. However, a competitive market in education would drive down costs, so that the U.S. would get the same outcomes with much less spending.

A few additional notes:

10. When parents seek out schools with good reputations, they are going after schools where most of the students come from affluent families. The schools themselves do not do much.

11. Even within income-diverse school districts, affluent parents figure out a way to keep their kids from being surrounded by poor children.

12. I have grown increasingly uncomfortable with the leftist ideology preached in government schools.