Slumlords

(Please note that this post is the intellectual chassis for some other work.)

Philadelinquency recently ran an excellent piece on how Philadelphia’s very poor school performance holds it back. Setting aside the chicken-and-egg problem of schools and class, let us focus on the final element in this piece, an element that ties back into the blog’s long-standing focus:

Now, about your suburban slumlord who smells the gentrification coming towards his rental property he was renting out for $600/mo and collecting a string of code violations on for a decade who might decide to sell his house to a rehabber and cash out, leaving that rental at the sake of increasing valuations?  Nobody has come up with a solution for that yet.

While this is a tie-in to pieces such as this and this, there is a more fundamental problem it touches on that needs addressing: Our zoning policy has been an abysmal failure at regulating landlords. Worse still, in its zeal to separate out homeowner and renter communities, it has resulted in a nasty unintended consequence: Slumlords are the result of the system.

Consider it for a moment. Time and again, sociological studies have shown that a landlord’s investment in his rental properties is directly tied to his geographical proximity to them. A landlord who lives in the same city is more inclined to invest in his properties than one who does not; in the same neighborhood, even more so; on the same block, ditto; and by far the most likely on premises. Since a slumlord is a landlord who fails to invest in their property, we can extrapolate that they are inversely correlated with distance: that is, the closer to their properties landlords live, the less likely they are to be slumlords. We can thus extrapolate that landlords of city property who live in the exurbs are likely to be slumlords; those who live in a different metro area entirely even more so. And guess what--they are!

It is not by accident that Philadelinquency spends most of its time chasing paper trails on slumlords who live far from the city. And in many cities, “institutional investors” are quite clearly slumlords-in-waiting.

But our claim, that institutional slumlords are an unintended consequence of our land-use policy, goes quite a bit further. To make this argument, let us recall how modern zoning came to be (see here, here, and here); they were implemented precisely because the homeowners of an affluent Cleveland suburb sought to keep renters out. And so it is unsurprising that modern zoning policy disenfranchises renters; what is a bit more surprising is that the jurisprudence required to get around earlier rulings also disenfranchise small landlords. And much as other side effects of “sorting” by use disenfranchised small businesses--to the benefit of larger malls, hypermarkets, and big boxes--so too has it benefited property management firms, and institutional investors.

Property management firms--companies of the type that run garden apartments--have full-time maintenance staff associated with each property. (In the absence of a landlord, a caretaker is the next best thing.) But institutional investors need not; all they need to maintain is the portfolio. Part of this is the--not unreasonable--justification that since they handle smaller properties (i.e. houses) than property managers, a caretaker per property would be excessive. But another part is that these organizations usually have a strong financial focus, often to the detriment to the properties they’re supposed to be managing. And of course, you also have bona fide slumlords who hide behind “institutional investor” masks.

Indeed, the whole system of institutional investing seems set up to encourage financialization and transactions at the expense of property maintenance. Is it any surprise, then, that to many people, “rentals” has become a dogwhistle for “slums”? Or that small rental properties are reflexively opposed, for the same reason development is in general?

One could say that the irony is that the system has come to disadvantage the small landlord, the homeowner who wants to add a granny flat above his garage, the community-minded owner who wants to fix that house up down the street and rent it out to a nice family, in favor of the institutional investor with Wall Street connections and falling-down flats. But that is just one irony buried in a whole system of deeper ironies. Perhaps it’s time to stand up and take notice.

Whelp, We're Boned

From this article: http://america.aljazeera.com/opinions/2014/2/corporate-welfaresubsidiesboeingalcoa.html

The size and range of the subsidies the tool has uncovered helps explain the burdens taxpayers must bear because so many major corporations rely on welfare for much or all of their profits rather than earning them.

Holy fuuuuuuuuuuck...

If we, the taxpayers, are subsidizing their profits, doesn't that imply that we live in a right-wing socialism?

ETA: Thank God we've got a gubernatorial candidate who gets it, and gets that the only way to win this game (thank you Jon Geeting for calling it the "Ripoff Game") is not to play and play the Economic Gardening* game instead:

Tom Wolf’s Fresh Start plan has a different idea that’s not based on blowing a bunch of money on propping up zombie firms. He wants to invest in Ben Franklin Tech Partners and other regional incubators that have a proven track record of creating new Pennsylvania businesses, and commercializing the good ideas coming out of our many universities into working business models.

This is a slower process than the Ripoff Game, but it actually creates new value, and it’s actually sustainable in the long run. This would be the benefit of having a self-funder Governor. Unlike Tom Corbett, he wouldn’t try to bet the horse on stupid get-rich-quick schemes conveniently timed to the election calendar.

(Keystone Politics)
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*Would you believe there is no Wikipedia page for economic gardening? Now that's ridiculous...

Slow Clap

From: http://www.zerohedge.com/news/2014-02-23/tyranny-models-or-dont-fear-reaper

The tyranny of models is rampant in almost every aspect of our investment lives, from every central bank in the world to every giant asset manager in the world to the largest hedge funds in the world. There are very good reasons why we live in a model-driven world, and there are very good reasons why model-driven institutions tend to dominate their non-modeling competitors. The use of models is wonderfully comforting to the human animal because it’s what we do in our own minds and our own groups and tribes all the time. We can’t help ourselves from applying simplifying models in our lives because we are evolved and trained to do just that. But models are most useful in normal times, where the inherent informational trade-off between modeling power and modeling comprehensiveness isn’t a big concern and where historical patterns don’t break. Unfortunately we are living in decidedly abnormal times, a time where simplifications can blind us to structural change and where models create a risk that cannot be resolved by more or better modeling! It’s not a matter of using a different model or improving the model that we have. It’s the risk that ALL economic models pose when a bedrock assumption about politics or society shifts. If you’re not prepared to look past your model…if you’re not prepared, as Steinbeck wrote, to separate your observations from your preconceptions…then you have a big invisible risk in your portfolio.

I know it’s hard to embrace what I’m describing as a profound agnosticism about the mechanics of how the world works. I know it goes against our biological grain to reject the comfort and succor of a deterministic model and an Answer. In many respects, deep agnosticism is the ultimate Other. It is a non-human perspective on how to think about the world – a Rakshasa – and I’m not expecting it to receive a warm or trusting welcome, particularly when it has the skin of some familiar investment product. But I think it’s the right way to look at a world wracked by political fragmentation, saddled with enormous debts, and engaged in the greatest monetary policy experiments ever devised by man. I think it’s the right way to look at a world of massive uncertainty, as opposed to a world of merely substantial risk, and it’s the perspective I’ll continue to take with Epsilon Theory.

A pitch-perfect example of Hayek's Fallacy in action. Just because something is complex doesn't mean you can just write it off as being complex.

And of course, espousing a "tyranny of the model" is a fundamentally anti-mathematical stance. The core problem he is heading towards--but his own preconceptions force him to miss (ironically enough)--is that it's not necessarily the model that's the problem, it's the inputs. Garbage in, garbage out, as programmers like to say.

Two Types of Debt

One of the most important underconsidered issues in economics is that of debt. While the concept of debt is simple--a good or service extended now, in return for payment later--this hides several difficult underlying problems. One of these is that, when debt is treated as the fundamental economic transaction (as it is today), it creates a growth impetus: payback on credit requires growth, whether the system is interest-based or not; otherwise lenders wouldn't have a viable business model. When this is coupled, as it is today, with debt being the money base--the way new money is made--this results in the particular growth problem I call unsustainable money. But not all debt is monetary. In fact, the most common type of debt transaction historically has been about something else: labor.

Monetary Debt

Debt realized with money--what I call monetary debt--is by far the most common type of debt in the United States. It works like this: a lender institution, or creditor, advances, or extends, a certain amount of money, called the principal, to a recipient, or debtor, in exchange for certain guarantees that this principal would be used for some productive enterprise; the value rendered from this enterprise then allows the debtor to return this principal to the creditor, with a little something extra--usually interest, but in places that equivocate the issuance of interest at all with usury, instead fees. A semi-temporal transaction, the creditor advances money under the expectation that the debtor returns it with value added.

Indenture Debt

Debt realized with labor--what I call indenture debt--is by far, historically, the most common type. It can work several ways.

1. A person can offer, or extend, his labor for a given period of time to a landlord; in exchange, the landlord guarantees the indenture's landownership after a given period of time. This is, for example, how Tidewater's indentured-servant system worked.
2. A person can offer, or extend, his labor for a given period of time to a guild, union, or master craftsman. In exchange, they guarantee training in the relevant discipline, as well as startup help and a not-insignificant bit of prestige. This is the classic apprenticeship system.
3. A person can guarantee his labor to clear debts previously extended, for example, working for a bar for a set period of time to clear a bar tab. Rarely seen in the developed world today, this particular type of debt was one of the two main types of slavery in the ancient world.

Terminology

You will note that, while the creditor/debtor duality is the most common to refer to the two sides of a debt transaction, it is really only valid for monetary debt. This is because creditor/debtor is actually a reference to power, and in monetary debt, the one with the power is the one who extends. To put it another way, there is no difference between the power relation and the temporal relation: The one who advances the principal always has the power.

This is, however, not the case in indenture debt. In fact, in most indenture debt, the power relation is exactly backwards--the one who has the upfront labor is the one without power! So to decouple power relations from temporal relations, let me introduce a second duality, that of the extendor vs. the guarantor. In this, the temporal duality, the extendor (note "o") is the one with a transaction's upfront element; the guarantor holds its delayed element. So,

1. In Tidewater indenture service's temporal relation, the laborer was the extendor, and the landowner the guarantor; however, in its power relation, the laborer was the debtor and the landowner the creditor. 
2. In an apprenticeship's temporal relation, the apprentice is the extendor and the master (guild, union, craftsman, etc.) the guarantor; similarly, the apprentice is the debtor and the master the creditor. 
3. Finally, when someone sells him/herself to pay existing debts, the laborer is the guarantor for one or more extendors. In this case, however, the extendors are the creditors; they control the debt; they can sell the debt to a new owner. But the laborer has to pay: he is the debtor.

Splitting Hairs?

Not necessarily. If using debt as a money base is one of the root causes of unsustainable money, then it follows that for money itself to be sustainable, it must be separated from debt. Since--as the apprenticeship example in particular shows--a healthy economy (even one that is not "growing" in our sense) all but requires a debt element: nearly every type of training for a skill position is a type of indenture debt. This implies the need for a debt base parallel to the money base.


The problem is that it is very difficult to envision such a system. For example, medieval guilds clearly controlled most of the indenture debt base: They were the ones that matched apprentices with their masters, and provided training, contacts, startup wherewithal, and prestige to their apprentices. But in exchange, those apprentices, upon completion of their apprenticeships, were expected to be guild members for life, to pay dues to the guild, and to rely on the guild for most of their social and financial needs (the Church and the Italians/Jews provided the rest). In this latter behavior, guilds resemble a cross between unions and modern banks; the dues system can be interpreted either as the guild facilitating a cross-subsidization network ensuring proper apprentice training, or as a form of rent extracted by the guild in exchange for their extendor services to the apprentice (i.e. the apprentice essentially sells himself to the guild). The reality is, of course, that it is a mix of both.

So the guild comes close to the system we want, but doesn't quite.

And because it doesn't, it leaves us with an open question: If, to fix unsustainable money, we need to divorce our money base from our debt base, what does our money base look like? debt base? Since they'd interact about as well as carbon monoxide and our lungs, how do we keep them separated? And in particular, since training is an integral part of the debt base, how is skill training effected? What, in short, are the necessary exchanges in a healthy, post-growth economy?

Macro Mistakes

Like any good dogmatist, Hayek recently disparaged Keynes. Yet he without sin casts the first stone: perhaps he should try and clean his own house first. It was precisely those qualities Hayek disparaged Keynes for that made Keynes a good economist.

The fact of the matter is that economics as a discipline has advanced little since Smith's The Wealth of Nations, and the person who singlehandedly offered the most advancement was, in fact, Keynes. This is not to say he was all right--indeed, as Jane Jacobs points out, Keynesianism's  principal quantitative instrument, the Phillips curve, had begun to fail as early as 1967,* and his economic corpus left no theory adequately explaining the onset of stagflation a decade thereafter. But when Keynes, a trained mathematician, turned his eye to economics, the field had already rotted away from a century or more of disciplinary decadence, laid bare by the Great Depression's onset. In short, Keynes was a talent in one field who turned his attention to an adjacent one--the paragon of an innovator.

This is not to defend post-1970s neo-Keynesians. Despite the volley between them, the Austrians, and the latter's successor neoclassicals, none of them have offered any real solutions, and all of them have offered a mix of rehashed masters' theories, bullshit, and (in very rare moments of clarity) insights. Nor has the neoclassical's fixation on mathematical modeling helped: many of their "sophisticated" models are actually very elementary, almost childish, applications of iterated operations. And anyway, a model is like a program, and as the programmers like to say, "Garbage in, garbage out".

Perhaps nuggets of wisdom can be found in neoclassicals' pesudomathematical clutter, but so much of the discipline is fundamentally deficient that no matter how mathematically accurate the models may be, they will never return anything more than garbage. Something is rotten in the state of Denmark. Stagflation laid this bare; it was papered over; 2008 laid it bare again. Jacobs offered the single most accurate critique of the economics of her day in 1984; for a generation, it has been ignored. But sooner or later, the reckoning must come, and when it does, I hope that the offer below does some good.

Some Major Fallacies and Other Rational Lapses

Hayek's Fallacy. This one is named after Friedrich Hayek, doyen of the Austrian School. Hayek is credited for several important insights--but this fallacy is closely tied to his realization that economics is both a complex and self-organizing system. More a philosopher at heart, Hayek found himself without the wherewithal to deal with the problems at hand, and much of his work is thus a demonstration of the limits of qualitative analysis in economics. But the real issue comes--and this is why the neoclassicals break from the Austrian School--when Hayek, whose work lies at the very edge of qualitative reasoning's capabilities, becomes suspicious of those attempting to find and apply mathematical instruments to the problems at hand.

Basically, Hayek's Fallacy amounts to an economist (or a scientist of any sort) doing one of two things: either (a) throwing one's hands up in the air and saying "I give up!" when faced with the understanding that a system is too complex to easily be soluble (or at least tamable), and/or (b) embracing that complexity as a thing-in-itself instead of further teasing it apart, finding the internal feedbacks, etc.

For example, a thinker, when faced with the realization that System A is a integrated dynamic agglutinated supersystem over System B, engages in Hayek's Fallacy if he fails to further attempt to find the underlying integrations and agglutinations, or tease apart its dynamics. In rhetoric, Hayek's Fallacy can function as a call-to-arms, a statement that a problem is too big for one mind to solve; it, however, has no place in academic literature.

Smith's Mistake, or, The Anthropological Fallacy. This is the fallacious conflation of nation and state in economic literature. Recall that the definition of a nation is "a people, race, or tribe; those having the same descent, language, and history," whereas a state, in all of its forms, is simply a statement of political sovereignty.

As Jacobs put it, "[Smith] accepted without comment the mercantilist tautology that nations are the salient entities for understanding the structure of economic life"**. But this very tautology is a confusion between "nation" and "state", brought about by a misreading of the special case of Enlightenment Europe. She herself sidesteps this issue: nation in Cities and the Wealth of Nations is actually used in contexts that imply "state" (as it is in Smith's work), and is indeed often paired with "sovereignty".

This confusion has never adequately been addressed in the literature, which is a shame really, because The Wealth of Nations is actually exactly what it says on the tin ... at least until Smith starts discussing issues that apply to the state, not the nation. But the sovereign macroeconomics*** it supports is thus, by definition, a very small subclass of sovereignties--nation-states.

How many of them can you name? In fact, even some of the strongest candidates for nation-statehood, like France, constitute cultural empires^: France includes France proper, Brittany, Languedoc except for the part of Savoy that ended up in Italy, about half the Basque Country, part of the Rhineland aka Alsace, and possibly a little tiny part of Catalonia that ended up on the wrong side of the Pyrenées. About half Germany's Länder are little tiny nation-statelets. Ignoring Northern Ireland, the UK has about half a dozen nations: Scotland, Wales, Cornwall, the Isle of Man, and at least two distinct Englands. Spain includes the nations of Aragon, Andalusia, Castile, Catalonia, Galicia (which is really a northern extension of Portugal), and the other half of Basque Country. Venice, Milan, Genoa, Florence, Rome, Naples, and Palermo are all culturally very different places, anchoring very different places. And so on. So even on a continent where the political boundaries come closest to matching nation-states, they rarely ever are. What do you think this implies for truly large states?

The Energy Golden Calf. A faulty premise underlying a great deal of modern macroeconomics. It is often claimed that, due to the advancement of our economy, energy inputs have decoupled. Not just utter bullshit--the fact that energy crises can be shown to underlie both the 1970s and 2008 recessions alone should tell us as much--but dangerously ethnocentric, to boot.

Funny Money. This is the idea that modern monetary theory (much of it based on fiat currency) has solved everything. In reality, it ignores the underlying problem--limits to growth, particularly viz. debt's role in demanding growth--and allows us to, instead of solving these very real problems, paper them over with nice-sounding bullshit like the Energy Golden Calf or the idea that Bakken and Eagle Ford will make us energy-independent.

While gold bugs are mistaken in holding a metal's value sacrosanct (the natural conclusion of this post is that there is a very real natural money base, and it ain't metal), the fact that they dare question Funny Money dogma--one that especially pervades finance--deserves some credit in and of itself.

Politics Overassignment. An outgrowth of the failure to fix Smith's Mistake, the belief that the sovereign state is the arbiter of macroeconomics often leads economists of all types to assign outsize roles to these entities' politics. But the point of Smith's Mistake is that the sovereign state is not macroeconomics' arbiter! Why, then, should its politics be anything but tangential to (if not a derivative of) its economic well-being?

I have a "razor", a corollary of this mistake. In any given explanation of an economic phenomenon, the one that utilizes politics the least is usually the correct one.

Major Unaddressed Problems

The Growth Problem. Nearly everything in economics is predicated on infinite growth. As any hard scientist will tell you, however, nothing is. This core problem, ignored in most schools of thought, and aggressively denied and papered over in the few that even consider it, refers to the need to reconcile economic health and well-being with an environment that is less than tolerant of infinite growth. This issue manifests in several tight-knit issues:

• The Debt Problem. A simple explanation of debt is a good advanced now, paid back later. It, in other words, adds a temporal element, a half a dimension, to the system. The problem is that, in the financial system that has supported the industrial economy, debt is advanced only with interest: Not just an advance in the now, but pay back with a little extra later. Growth is required to pay that little extra--or--Interest demands growth. But since it is precisely this interest which grows the money supply, this implies that Money demands growth. The inescapable conclusion of this is that due to its debt-and-interest foundation, money is not resilient to a lack of growth, and hence unsustainable. But debt is required in any healthy economy, growth or not! This in turn demands that (a) the money base be removed from the debt base, and (b) the debt base managed so that it does not overshoot its limits. Current economic theory is blind on the latter--infinite growth is orthodoxy--and hence fails to understand the underlying issues that enforce the former.
• The Energy Problem. Energy is the key economic input. Without energy, an economy can't function. While the Energy Golden Calf and Funny Money chronicle the fallacious attempt at decoupling it, it is a certainty that a world with limits is going to have to deal with the this issue sooner or later.
• The Economic Health Problem. If a healthy economy is predicated on infinite growth, how can one with no growth be achieved? And second, if it is possible to have a healthy economy without meaningful growth, how would it have the most equitable distribution of goods?

The Imperial Problem. Pursuant to Smith's Mistake and its attendant Politics Overassignment, the dominant issue in the branch of macroeconomics that focuses on states--sovereign macroeconomics***. While urban, regional, and national economics are relatively well explained, Smith's Mistake has left a key problem with moving from a national level to a state one unanswered. This problem is: How do imperial economies actually behave? For sovereign macroeconomics to have any real meaning, and any real policy input, answering this question is key, as nearly every sovereign entity is an empire^, and while Jacobs offers significant explanatory inroads, her city-and-region focus would need to be scaled up to find relevant causal and feedback relationships.

The National Problem. The second largest outstanding problem in sovereign macroeconomics. Briefly stated: Stripping away statist elements, Smith's is an excellent account of the economies of nations; Jacobs complements that with one of cities and regions. It appears fairly evident that a nation without economic centralization--that is, a single major economic hub aka a large city--is a bypassed place^^--but this demands the questions: If cities and regions, and nations are both well-described, then how exactly does a city and region economy give rise to a national one? And if bypassed places are nations that never developed cities, what causes the catalyzing feedback to fail?

The Markets Problem. The role of the market is paramount in economics. Economists of various schools assign various values to this role, but they all assign a value to it. But it can clearly be seen that, while the market provides for the optimal allocation of resources in most instances, it fails to in at least two types of (related) cases: the tragedy of the commons, and Braess's Paradox. Both of these involve optimal decisions at the individual level--the level of markets--resulting in suboptimal outcomes at the communal level--the level of government. Thus it can be seen that, contra certain schools of economic thought, markets can and often do fail as optimizing mechanisms. The problem is hence: Can we identify which venues markets fail to optimize for? If so, are optimal solutions understood? Can we implement optimal solutions (e.g. with policy)? and finally, Can we build an economic theory that accounts for both when markets are successful and when they are failures? Understanding markets limits is the heart of the Markets Problem^^^.

Conclusion

Between the plethora of lapses in thought and problems blinkered dogma leaves unpondered, is it any wonder that the field of economics is becoming ever more marginalized, much of its previous sway now being intruded on by mathematicians whose models are orders of magnitude more sophisticated, or by finance majors handling Wall Street administration? The field is a flailing colossus, its own extreme disciplinary decadence eating away at it from the inside, its fortified silos and walls refracting fresh innovations and insights from the outside like so much enemy artillery.

Despite its PR'd veneer, its inside has become laughable, worse than pseudoscience--a series of entrenched, never-changing dogmatic positions sniping away at each other and disregarding any fresh insight any Other has to offer. It calling itself the "hardest" soft science is worse than a bad joke: The tripe coming out of economics builds mental blocks against insights from other soft sciences (particularly history and anthropology) and plays an outsize role in the soft sciences' marginalization as a whole. Economics is a cancer in our midst.

And the blogosphere has laid it bare! Before, the walls of academia hid it; today, however, half the economics blogs consist of Keynesians sniping at Austrians, and the other half Austrians sniping at Keynesians, both sides regarding the other with the sort of undisguised contempt you rarely ever see outside of crusaders and jihadists (really the same thing). Then they prognosticate with pearls of wisdom from their masters, and when they invariably turn out, in some way, wrong, spin and backfill them. Blogs like Naked Capitalism and Zero Hedge are good for lots of things, but--just like their discipline--are failures in their stated purpose. It is hard to have any sort of productive discussion with economists, or even economics attachés, when the discipline's core is so riddled with errors, and the practitioners so inflexibly defensive, that gentle prodding only ever yields being shouted out.

Is it any wonder I find engineering more accessible?

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*Cities and the Wealth of Nations, Ch. 1, pp. 17-20.

**ibid., Ch. 2, p. 50.

***That is, macroeconomics at the sovereign-state level.

^Here I am using a very "tight" definition, where an empire means any state that encompasses two or more whole nations. States we often think of as empires can be thought of as large empires, with ten or more constituent nations. The United States, for example, has about a dozen major nations.

By the way, Europe isn't devoid of nation-states. Off the top of my head: Austria, Slovakia, Hungary, the Czech Republic, the Netherlands and Baltic States, Finland, Scandinavia, Iceland, Portugal, and Malta are all, for all intents and purposes, nation-states.

^^ibid., Ch. 9, pp. 124-34.

^^^I'd like to further note that solving the Markets Problem might be the single most important contribution economics has to adapting to a world without limits. Growth dogma assumes there is always more out there, but as is regularly pointed out, this is fallacy. Instead a real solution of the Markets Problem would (should) entail a solution to this question: How do we tap common resources in such a way that we always leave an adequate amount for those who follow? Back at the dawn of the Industrial Revolution, such a question would have been nonsensical; today, it's a requirement.

Koan of the Day

The output quality of a given social science is inversely proportional to its perceived hardness.

Building A Political Coalition

Everything is politics. To do anything, a strong enough coalition must be assembled to counteract the opposition. These kinds of coalitions can take long times to assemble, or coalesce quickly, depending on the scale of the problem.

Let us take, as an example, the road coalition. It took a half a century from the invention of the automobile before a strong road coalition came into existence--a half a century during which the car had to go through an image shift from rolling death machine to tool for freedom--and the development of movements and companies providing improved auto infrastructure (e.g. tire companies, gas companies, Better Roads, etc.) It took fundamentally proscriptive and ultimately myopic urban movements (Garden Cities, public housing) as well as a tapping into Americans' escapist tendencies. And it had to do it all fighting the rail lobby, then one of the most powerful in the country. It ultimately gained the upper hand not due to itself, but rather because the ICC insisted on draconian rail policy, undermining shippers' profitability, while states saw them as rolling banks and incurred high taxation on them, all the while absolutely subsidizing their competition.

Ultimately the rail lobby failed, the roads movement succeeded beyond its wildest expectations, and American railroading began its long half-century collapse from the cream of American pride and culture to a peripheral transportation solution focused on moving bulk goods. Alongside our railroads' collapse has been our manufacturing sector's, to a state where it, too, is now economically peripheral.

The road-based system then established itself as culturally central. Interstates replaced the great rail networks as our country's crown jewels. But it's a system that is internally unsustainable, starting to grind toward its own collapse; a generational shift has begun to reject it; and it's time to build a coalition toward a major transportation shift.

In his Sunday Train blog, Bruce McF began feeling the way toward such a coalition. But a coalition that would ultimately be successful would have to unite a majority of Americans, a majority of American politicians, and (ironically enough) couple into the dominant economic hegemony of the era*. So the question isn't just what vested interests would be interested in his Steel Interstate proposal--it's also what compromises are needed to win over otherwise unaligned interests.

Right now our politics are dominated by a neoliberal/neoconservative ascendency which has been in power, regardless of party alignment, since 1980; these politics are linked to Austrian School neoclassical economics, which favor "free-market" solutions and dogmatically believe in the idea that markets can and always will self-correct--but this hegemony is opposed by those both on the right and the left, by populist movements both progressive and regressive (Occupy v. the Tea Party), by ideologies by both right and left.

The two largest ideologies opposed to the current status quo are the progressives and the libertarians**.

In order for the Steel Interstates to be politically viable in any form, it must be as a coalition between these two ideologies. To do that, a compromise must be reached.

This is not a difficult compromise. Steel Interstates mark a realization that our current transportation paradigm is unbalanced, structured to support ecologically self-destructive means, and that only massive investment or economic/ecologic ruin can rectify this imbalance--just as Better Roads did in its day. Libertarians, too, recognize this imbalance, and (what is today) the radical proposal*** to privatize the Interstates would likewise begin to rectify it.

Granted, the Steel Interstates, as a populist proposal, grew out of a plan opposing a road privatization. We must remember here that that so-called "privatization" was really just a government handout, a boondoggle where the government had all the capex risk, but the private entity all the reward. In a true privatization, the private entity must assume both risk and reward. Leasing the Interstates as-is would do so.

The compromise I offer is that we convert the embodied capital in the Interstates into a financial asset, which we then use to improve our railroads to a like condition (i.e. subsidize the railroads to develop their core mainlines to Steel Interstate standards). In this manner, both major forms of higher-level ground transportation are handled by equivalent enterprise, that is, private enterprise. The alternative is nationalization of the railroads--politically untenable in our day and age.

At this point, the coalition can court interested vested interests, such as what Mr. McF mentioned.

Bring the progressives and the libertarians to the same playing table, and real opposition to the status quo begins to cook--and I would not be surprised if there are many more grounds for progressive-libertarian compromise. If a coalition can assemble a powerful enough policy package, one (this is dominated by Millennial policy concerns) concerned with improving mass and non-motorized transportation, the changeover from fossil fuels to sustainable energy sources, and social policies like some form of universalized^ healthcare, a separation of church and state in the field of marriage, empowering (rather than disempowering) labor policy, and so on.

It is clear that, even in its infancy, Millennial political policy is radically distinctive from the post-Progressive status quo. The work involved in bringing Millennial policy to reality will be fascinating to watch and work for.
____________________
* One could say the current road-based transportation paradigm has been running on its own inertia since 1980, when the economic hegemony that built it (Progressivism 1.0) failed and was replaced by "neo"
-ism and its economic policy, Austrian School neoclassicism. Railroads 1.0 where the product of an era of laissez-faire libertarianism. Our road coalition arose alongside the Progressive ascendency.
** I'm not talking about the status quo that masquerades as libertarianism, I'm talking about that particular branch Republican Party elite enjoy ostracizing.
*** Just like the Steel Interstates are a radical proposal...
^ Note term.

Another Oil Price Shock Is Brewing

Photo: Philadelphia Inquirer

Fun news: another oil price shock is coming.

How can I tell? Simple. The price at the pump is already back above $4/gal. There was a debate last December (on The Oil Drum) about 2012 barrel price projections. But, as Voltaire noted, Les hommes discutent, la nature agit--we can quibble about our projections, but the ultimate arbiter is what actually comes up out of the ground and who gets it.

This is something the U.S. is losing. Oil production began to plateau in 2002; in 2005 China and India became major buyers Hoovering up all the world's excess crude. In 2005 the U.S. ceased to be the world's crude sink.

2005 was peak oil for America. It was the peak of availability, note, not of absolute production. That has not yet indisputably happened. But since 2005 India and (especially) China have been the buyers of choice, those who get first crack at oil, while the developed world has had to make due with decreasing local supplies. This has, unsurprisingly, led to slow but sure increases in U.S. gas prices.

In 2006-7 wanton speculation in the oil futures market (an early reaction to a local collapse of the housing market that actually began in 2006) led to a steep rise in the price of gas, leading to the first price shock, which in turn catalyzed the more general collapse, particularly in the housing market, we saw through 2007-8. With that collapse, the price of gas dropped to unsustainable lows, and has since been increasing in lockstep with the economy's inchworm improvements.

But the final straw that brought about this collapse was the fact that the price of gas became too high to bear. $4/gal seems to be the critical threshold, beyond which non-automotive transportation options, whatever their limitations, become mighty appealing. And we find ourselves back at this threshold early this year, before the spring or summer traveling seasons have even begun.

A key issue is the long-term ramifications of the Arab Spring and the Iranian oil sanctions, both of which have essentially taken Mideast oil supplies off the map. Continuing political tensions there will continue to effect oil prices.

But this is key--unlike with the last price shock, there is no clear evidence that speculation was driving an unsustainable bubble. In fact, it seems the opposite is true. The price of oil is up because (a) production is as flat as it has been for a decade (this is in accordance with realizations of Hubbert peak theory) and (b) China and India have fast become "thirsty" countries. In fact, I posit the supply of oil in China and India will be inversely proportional with the supply in the developed world (the U.S., Canada, Western Europe, Japan, and Australia). In the long run, these two demand blocs will just about evenly split the balance of the world's oil demand, but this is not going to happen without severe economic adjustments in the West.

But--$4/gal is the critical mass beyond which Americans will begin en masse to seek alternative transportation options; we can expect $4.50 or even $5/gal gas over the summer. And, to repeat: this will be the second oil price shock.

Particularly late last year, when the oil price inexplicably dropped (Libyan reserves coming back online?) oblivious or in-denial Americans began to revert to their gas-guzzling ways. This came while at the same time the younger generation, when they could afford it, showed a clear preference for urban living.

The economic reaction to this shock is very much up in the air. America is stronger right now; Europe is knee-deep in the Euro crisis (another debt crisis). But the dominant economic structure right now is deleveraging--each debt crisis is catalyzing another one, and will continue to, until debt burdens are enormously shrunk, if not outright eliminated.

It is very likely the U.S. will have a reaction to this shock the same way the Europeans had the first one--no need to panic, this is just like 2007, only this time we don't need to choose between our house and our car (we made that choice five years ago). To them, though, this could be the one missing brick that brings down the tottering structure that is the Eurozone--or, obversely--be the foundation block that cements a unified Europe...

Urban Emergence

I've been at my childhood home in the far suburbs these past few weekends helping my mom move, and what has caught my eye is the first real New Economy project up there. Some zombie sprawl projects--permitted before the crash--have been ongoing due to the locally-strong economy (thanks Merck), but this is the first project that has been entirely conceived and realized after 2008. It's called Cannon Square, and it's rowhomes.

Here is where it is, at the corner of 2nd and Cannon in inner Lansdale, on the site of old industry with parking lot, and this is what it looks like:

Now there are many ways, of course, to critique the design, especially when you use beautiful, truly urban neighborhoods such as Northern Liberties or Southwest Center City--neighborhoods where the effect of the housing crash was passive rather than pervasive--and of course there's little that can quell my distaste for the builder, W.B. Homes (who seem to put more effort into their subdivisions' signs than the subdivisions themselves), but there are two major things to note here:

1. New Economy projects are urban. They consist of primarily attached housing, an urban format, in urban contexts (utilization of existing infrastructure in preference to its installment de novo), commonly multilevel, with small blocks. They are designed and realized in smaller footprints, and with smaller budgets. This style was pioneered with Southwest Center City builders (such as Metro Impact), who, whatever else they claim or one says about their designs, have succeeded in bringing economies of standardization to the inherently nonstandard nature of infill, primarily by standardizing rowhome design, and is clearly catching on with the bigger builders.
2. Big builders are adapting to the New Economy. They have to. THP's spectacular collapse concomitant with the collapse of the real estate bubble in the Philadelphia area was very much due to their overextension in suburban formats to the exclusion of all others (a trait shared by other major builders). Now other major builders--such as Toll Brothers and W.B. Homes--are finishing up previously-permitted projects and showing a trend of favoring investment in urban-type projects. Toll Brothers, for example, bought large into Philadelphia with Naval Square, and are following up with new projects across the street, at 20th and Bainbridge, and in Society Hill's NewMarket hole. This is also emblematic of a larger shift to more urban environments--environments that these companies are only now learning to build in.

We will have to see whether this is an emergent trend--or just an aberration.