Arms control agreements occur when there is a divergence between the interests of individual countries and the interests of countries considered as a group. It’s a way of overcoming the “prisoner’s dilemma”.   Derek Thompson discusses the concessions that Amazon was able to extract from state and local governments, and then suggests that a sort of fiscal competition disarmament is needed:

Why the hell are U.S. cities spending tens of billions of dollars to steal jobs from one another in the first place?

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Every year, American cities and states spend up to $90 billion in tax breaks and cash grants to urge companies to move among states. That’s more than the federal government spends on housing, education, or infrastructure. And since cities and states can’t print money or run steep deficits, these deals take scarce resources from everything local governments would otherwise pay for, such as schools, roads, police, and prisons.

I suppose one could argue that tax breaks don’t use up real resources, but they do make the economy less efficient.  And since the location of these investments is roughly a zero sum game, this subsidy competition is wasteful from a national perspective.  If only states could come together and agree to unilaterally disarm.  Thompson suggests several promising approaches:

First, Congress could pass a national law banning this sort of corporate bribery. Mark Funkhouser, a former mayor of Kansas City, Missouri, envisions the law as the domestic version of the Foreign Corrupt Practices Act, which makes it illegal for Americans to bribe foreign officials.

It’s not entirely clear whether that would pass constitutional muster. . . .

Second, Congress could make corporate subsidies less valuable by threatening to tax state or local incentives as a special kind of income. “Congress should institute a federal tax of 100 percent” on corporate subsidies, Jack Markell, a former governor of Delaware, wrote in The New York Times.

PS.  A week ago I said:

The Dems need to adopt a “patriotism, not nationalism” theme.

French President Macron must have been reading my blog, as a few days later he suggested:

Patriotism is the exact opposite of nationalism. Nationalism is a betrayal of patriotism. By saying our interests first, who cares about the others, we erase what a nation holds dearest, what gives it life, what makes it great and what is essential: its moral values.

I like Macron.  Of course if I was French I’d hate him.  The French always hate their presidents.

Speaking of France, here’s an appropriate tweet:

Boston, NYC, DC, Seattle, Bay Area, LA and San Diego.  What do those 7 metro areas have?  What’s their secret sauce?

Aaron Renn discusses the recent (rumored) Amazon decision to add headquarters in NYC and the DC area, and has a number of interesting observations:

Amazon chose not one but two elite coastal cities for its new headquarters.

There’s no other way to slice it: Amazon repudiated the heartland with this decision. This was probably the ideal case for a heartland choice. It was not just a small executive headquarters but a gigantic number of employees. And Amazon, having lower margins than say Google, has to be much more cost conscious. My own analysis turned on the question of whether or not Amazon would be concerned about costs. I thought they would be, but it turns out they didn’t care. No matter what subsides Amazon extracts from New York and Virginia, they certainly won’t offset the labor cost differentials in those locations.

Why not Chicago or Austin?

As one person tweeted, “A friend is the founder of a fintech company. They want to hire more college graduates to their Austin office instead of NYC. New talented recruits have multiple offers & most want to be in NYC, not Austin. Austin isn’t exactly a horrible place to live.”

At this level, cost is essentially irrelevant at present. The ability to attract A+ caliber talent is all.

That’s not to say heartland places can’t be successful in many ways. But it won’t be at the elite tiers of the economy.

The Biggest Loser

The biggest loser in this is Chicago. Chicago had the urban location, transit, a great pipeline of talent from the Big Ten, and lower costs. That’s why I picked Chicago as the favorite in my analysis. It checked every box at some level and had lower costs than the coasts to boot.

I’m too close to this to see the problem.  I grew up in the Midwest, at a time when the Midwest was quite prosperous.  I attended the University of Wisconsin and then Chicago.  The Windy City trails NYC in cultural sophistication, but it doesn’t trail the other 6 coastal stars in that regard.  Illinois has budget problems, but Texas doesn’t.  Why don’t they like us?

My wife told me I’m asking a silly question.  Of course the elite talent want to be on the coast, how could anyone think otherwise?  She has an Asian perspective, specifically Chinese.  In China, everyone wants to be in the sophisticated coastal cities, not the backward interior.  The Chinese associate the US East Coast with sophistication—Ivy League universities, etc. I’d guess the same is true of Indian immigrants.

While Asians are only 5.6% of the US population, they are 40% of the student body at elite West Coast universities.  You know, the ones that don’t discriminate on the basis of  . . . er . . . “personality”.  So maybe the Asian-American perspective does matter.

There’s plenty of work to be done by the bottom 99%, which is why the population of Dallas and Austin is growing much faster than the population of the coastal stars.  But it seems like the attraction of the coastal cities is so great that the elite talent will accept sharply lower real wages to work there.  Is it because the millennials are a post-materialistic generation?  They don’t want a 7000 sq. foot home in a Dallas suburb?  An 1800 square foot home in San Jose is plenty big for their web surfing and euro-style kitchen?  They’d rather walk to a restaurant?

Or is it some sort of environmental factor?  The West Coast is beautiful, and even the East Coast has some climate and scenery advantages over the Midwest.  Or is it cultural—once a critical mass of like-minded people form in an area, it starts snowballing? It’s obviously not crude economic factors like tax rates.

That doesn’t mean supply-side economics is wrong; the zero state income tax places are growing faster on average, just not with the top 1% talent (except Washington state.)

Are these trends important?  It’s not like the Midwest contains a bunch of dummies—they still attract the top 10% to 20% talent:

Having lived in both Chicago and New York I can tell you that the caliber of talent is as different as night and day. Chicago has a ton of solid Big Ten type recruits. They are drawing the top 10-20% type people. But Chicago is very weak in top 1-2% types, and that’s a huge handicap when you are trying to position yourself as an elite player. You can’t do it without elite talent, and Chicago doesn’t have nearly enough of it. I wouldn’t be surprised if this were the key factor for Amazon.

If Boeing didn’t have legacy investments, they’d want to be in Dallas or Chicago, not Seattle.  Elite tech firms seem different.

I encourage people to read his entire piece, and I welcome suggestions as to what I’m missing.  And then read Kevin Erdmann’s new book when it comes out in January.

PS. David Beckworth has a new podcast where he interviews me on monetary policy.  It was recorded at the University of Texas a few weeks ago.

PPS.  I feel sorry for my home state of Wisconsin.  They got conned by Foxconn into massive subsidies for a new TV flat panel manufacturing plant, and now it looks like Foxconn is backing off on its promises.  Scott Walker’s dumping the problem onto the next governor.

I’m very pleased to announce that my 5-year project to write a principles textbook is now complete. Macmillan/Worth has just released the new book I co-authored with Steve Rubb, which is aimed at the mainstream principles of economics market.

Like Hubbard and O’Brien’s principles textbook, it has a business flavor that should make the subject more interesting for many students.  Our book tries to be shorter and more concise, however, as many of today’s students simply don’t have the time to read an 1176 page textbook like H&O.  Ours came in just under 800 pages—with a word count that is probably pretty similar to Mankiw’s relatively concise principles text.  (Ours is actually 100 pages shorter than Mankiw, but each page is a bit bigger.)  This picture shows our new text (in blue) next to Hubbard and O’Brien (in white).

Don’t be fooled by the business flavor, we still cover all the basics of economics, including important public policy issues such as price controls, externalities, labor, inequality, health care, and fiscal and monetary policy.

This book should be of interest to both monetarist and Keynesian instructors.  Obviously my own views lean more monetarist, but we’ve covered the material to reflect the views of the profession as a whole. Thus there is much more coverage of inflation than NGDP, reflecting the consensus of the profession.  Keynesians will find an optional “aggregate expenditure” chapter containing the Keynesian cross, if they are so inclined.  If I were still teaching I would not cover the Keynesian cross, but would cover the part of the AE chapter that discusses the intuition behind Keynesian economics.  Although I’m not a fan of fiscal stimulus, I believe it’s important for students to understand why these policies are so popular.

We also have the normal mainstream macro chapters, including a three chapter sequence of AS/AD, fiscal policy and monetary policy, as well as a two chapter money sequence that looks first at the basics of how the Fed controls the supply of money, and then the classical theory of inflation (i.e. money and prices in the long run.)  I especially like our money/inflation and economic growth chapters.

In my view, the book is most successful at adding a business flavor in the micro chapters, especially those covering market structure.  I believe students will find those chapters to be especially interesting, with lots of good real world examples.  But we’ve tried to add as many business examples as fit at various spots throughout the book.  Many students take economics because they have an interest in business.

As far as my own views, we’ve sprinkled the “never reason from a price change” concept into several of those chapters, including both S&D and AS/AD.  There’s a brief discussion of monetary offset of fiscal policy in the section that covers issues such as crowding out.  And there is some coverage of the logic behind NGDP targeting toward the end of the macro section.  In monetary policy, we point out that low interest rates can reflect either easy money or a weak economy/low inflation.

But again, I didn’t think it appropriate to use a principles text to try to indoctrinate students into my own views where I have not (yet) been successful in convincing my colleagues.  Students need to begin with the well-established basics.  As a result, readers will occasionally run across statements in the text that conflict with opinions offered in this blog.  That doesn’t worry me at all, indeed it’s appropriate.

For instance, you won’t come across “inflation doesn’t matter, only NGDP matters” in this textbook.  You won’t find “fiscal policy is useless” in this textbook.  Both monetarists and Keynesians should be quite comfortable with the presentation.  When I taught at Bentley, most students were not aware of my views on economics—indeed were just as likely to view me as liberal than as conservative.  The book reflects that balance.

If you do like my views on economics, I’d argue that we do a better job of presenting many macro topics than what you see in the other textbooks.  For instance, our transition from MV=PY to the AS/AD model (using Y = C + I + G) is far more understandable than in most other textbooks. Indeed students would be utterly confused by this transition in many other textbooks (although Cowen and Tabarrok are an excellent exception.)  I also like the way we explain topics such as the quantity theory of money, or the challenges of doing monetary policy when interest rates are zero.  The fiscal chapter includes both supply and demand-side perspectives.  Like some other newer texts, the economic growth chapter emphasizes the importance of good institutions, not just a mechanical model with “labor”, “capital” and “natural resources”.

Toward the end we have an optional chapter on expectations, covering issues such as the Phillips Curve and rational expectations.  I believe we do a particularly good job of explaining the concept of expectations.  At the end of this chapter is a brief section on how the Phillips Curve approach could be applied to NGDP growth instead of inflation (Ignore “FPO”, an editorial note not contained in the final version):

In terms of level, I suppose it’s in the eye of the beholder.  In my view our book is aimed at the middle of the market—not too difficult, but not dumbed down so much as to be misleading.  Note that the preceding graph comes in a chapter that has already covered the pros and cons of the basic Phillips Curve, with inflation on the vertical axis.

BTW, if I could do a book with no constraints, I’d make it even shorter.  However, textbooks are expensive projects for publishers and you need to address the preferences of the instructors.  They each have topics that they view as essential.

After the Berlin Wall came down, there was a brief period of liberalism in Eastern Europe:

The contemporary left disdains the open society as a neo-liberal capitalist dream; the right fears its skepticism toward tradition. But for the last five decades, most of America and Europe’s prosperity and peace have been based on an open society consensus, which for a brief moment after the end of the Cold War, it looked like Western thinkers like Soros had succeeded in importing to Eastern Europe. Markets opened to foreign investors. In 1991, Soros founded the Central European University with campuses in Prague, Warsaw and Budapest, a US-funded education center committed to critical thought and the study of democracy. Ironically, given recent developments, the CEU’s headquarters moved from Prague to Budapest when the Hungarian government of the time appeared more welcoming than the Czech.

Today it’s getting much darker in Eastern Europe:

That was then. The current Hungarian government, as Guy Verhofstadt wrote earlier this month, is probably the most illiberal and authoritarian in Europe, shutting down newspapers, corruptly capturing major facilities like water and energy, wrenching control of cultural and educational centers. Just like d’Souza, Barr and Trump Jr., the Hungarian government attacks Muslim migrants and Soros. During last spring’s election, when I was last in Hungary, you couldn’t turn without spotting the ruling Fidesz party advertisements, which featured crude photoshopped images of Soros personally cutting open the Hungarian border fences designed to keep out Muslim migrants. Like most authoritarian regimes, the Hungarian government inspires loyalty by stoking the fires of ethnic supremacy. Hungary, which spent centuries fighting the Ottoman Turks, has seen itself as Europe’s border with Islam since long before the current migrant crisis. The American alt-right laps up this talk of a clash of civilizations.

I know that some people think that it doesn’t matter if people lie about George Soros, if the President’s son calls him a Nazi collaborator.  All that matters (in their view) is corporate tax cuts.  In the short run it might seem like that is true, but in the long run you might say that honesty is all that matters.  A society built on lies will inevitably abandon liberalism.

Lies are a way of dehumanizing individuals like George Soros.  Once they are dehumanized, it’s much easier for troubled people to justify violence against them, or indeed against entire ethnic groups.  Hitler dehumanized the Jews through lies, and Mao dehumanized the rich through lies.  And that’s why for me there is only one overriding issue in the midterm elections.  Lies.  Yes, Hungary and Poland are still a long way from the 1930s, and America is further still, but I’d rather not experiment with how far this demagoguery can be pushed before causing major harm.  The risks are too great.

When I was young, the 1960s seemed like the “space age”—very high tech.  Now that period looks rather primitive in Hollywood films.  Tyler Cowen has a post reviewing the film First Man, and then discusses how it relates to the “Great Stagnation”.  I can’t recommend the film, which is a biopic about Neil Armstrong, but it does have a few points of interest.

Here I’d like to focus on something else, the surprising slowdown in the pace at which these sorts of big projects get done.  We developed three major programs (Mercury, Gemini and Saturn) during the 1960s.  Today, this sort of undertaking would take much longer.  And it’s not just space.

Tyler also has a recent post with a graph showing the speed of skyscraper construction over time.  Some commenters view the graph as indicating a gradual slowdown in the pace at which skyscrapers get built.  To my eye, the graph looks relatively level (it’s pretty noisy, year to year.)  On the other hand, almost everywhere else you look things are far worse.  The speed at which we build other major projects such as subways, airport terminals, expressways, and railroads seems to have slowed dramatically over time.  In that sense, the skyscraper construction industry looks pretty good by comparison.

That might partly reflect the inefficiency of the public sector, but you also see a slowdown in private sector projects such as the newest passenger jets by Boeing and Airbus, which ran far behind schedule.

No single theory seems adequate:

1. Modern projects might be more complex, but wouldn’t that be equally true of skyscrapers?  And are modern subways actually all that much more complex than before?  Maybe they have better electronic switching equipment, but surely that’s not what explains the delay.

2.  Perhaps we go slower for safety reasons.  But even the post-1960s space program had a rather poor safety record.  And aren’t skyscrapers just as dangerous to build as subways, airport terminals, expressways, and high speed rail?

3.  More environmental controls?  Maybe, but that should be less of a problem for subways than for skyscrapers.

4.  A more litigious society?  This sort of relates to safety and the environment.  It’s probably one factor.

5.  Public spending diverted from investment to transfer programs?  This might lead cash-strapped governments to “stretch out” infrastructure projects.

It will be interesting to see if Elon Musk’s “Boring Company” can do an end run around all of these problems.  The early indications are not promising.

My hunch is that there is a complex mix of problems.  One is the growing complacency of a society that is increasingly averse to disruptive change, risk and environmental damage.  Another is an increasingly inefficient public sector, which devotes too many resources to public sector wages, health care and transfer payments, and not enough to infrastructure.

PS.  When I look out my window, I can see a new home being built and several more being remodeled.  All are far behind schedule.  The $3 million home is only half built, and nothing’s been done for 6 months.  The two remodeling projects have each been going on for more than a year (two years in one case).  One was slowed down by government regulations, the other by labor shortages.  And don’t even ask about the time involved in adding a lane to the 405 highway in Orange County.