Musings Report #30 7-27-13 Which Cities will Survive/Thrive?
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A Note of Recognition and Gratitude
I just completed the draft of my latest book, "The Nearly Free University and the Revolution in Higher Education," and want to thank each of you for your financial support, which enables me to write books that (hopefully) contribute to the national dialog.
By the end of the book-writing process, I am reduced to "What's the point?", i.e. was all this effort worth it for a book that might at best reach a few thousand readers? At these junctures of exhaustion and despair, I find inspiration, encouragement and fortitude in your support: thank you.
Which Cities will Survive/Thrive?
The bankruptcy of Detroit, though long-anticipated, has unleashed a wave of speculation about the health of other American cities, and indeed, in the world--for example, China:
The Detroit Syndrome - Coming To A Chinese City Near You Soon.
Despite the visible importance of urban centers and cities for thousands of years, it seems our understanding of their dynamics is still undeveloped.
As a young teen, I spent the summer of 1968 in Detroit while our stepfather attended summer school at Wayne State University. Detroit's auto manufacturing industry was at the apex of its dominance, and I recall an odometer-type billboard proudly displayed the total number of vehicles produced year to date in Detroit.
I doubt that anyone predicted Detroit would lose most of its industrial base and half its population over the next 40 years (1970 - 2010). Such a forecast was beyond even the most prescient futurist. Four decades is not that long a time period, and our inability to predict large-scale trends over that time frame reveals intrinsic limitations in forecasting.
Nonetheless, the dramatic decline of Detroit and other industrial cities makes me wonder if there are dynamics that we can identify that could enable us to predict which cities will thrive and which will decay.
Here is my semi-random list of potentially decisive urban dynamics:
1. Since most people live in cities, global trends that appear abstract from 40,000 feet manifest most visibly in cities.
2. Single-industry cities are highly vulnerable to destabilization if that one industry declines.
3. Cities that are dependent on highly centralized institutions and industries are more vulnerable to disruption than cities with a broad base of smaller, decentralized employers and sectors.
4. Cities dominated by highly centralized employers attract people seeking to become employees; cities that are not dominated by centralized organizations but foster rapidly growing decentralized sectors are more likely to attract entrepreneurial talent and capital.
5. Economically and socially vibrant cities' primary industries must pull in profits and capital from the nation and world; this pool of wealth attracts entrepreneurial talent.
6. Highly centralized industries with rigid hierarchies, local political control and vertical supply chains do not foster the same entrepreneurial spirit and ecosystem as decentralized, fragmented industries that are still open to financial and political competition and cooperation.
7. Rigid, centralized dominant political and financial organizations cannot foster the complex ecosystem of innovators and risk-takers that generate new wealth.
8. The Ratchet Effect: it is easy to expand infrastructure, land area, payrolls, benefits and pensions as the tax base and tax revenues expand; it is essentially politically impossible to shrink payrolls, benefits and pensions as the tax base shrinks and tax revenues decline.
9. Cities with dynamic ecosystems of mobile knowledge workers, innovators, risk-takers and mobile capital will tend to attract these same wealth creators from less dynamic and opportunistic cities, in effect poaching the most potentially productive people and capital from 2nd tier and 3rd tier cities.
Here is a relevant quote from the above article on China's cities:
As metropolises such as Beijing, Shanghai, and Guangzhou become black holes for resources, medium and small-sized cites have encountered difficulties in their development. “The most frustrating part about Tianjin [an industrial city an hour southeast of Beijing] is that we don’t own the resources that commonly exist in first tier cities – good resources are all taken by Beijing."
10. Cities that offer cost-effective good governance are attractive to non-elite productive people; cities that skim wealth via corruption and do not provide efficient services offer disincentives to productive people who have a choice of where they live.
11. Wealth is not just the financial wealth of the residents or the tax revenues generated by the tax base. Social and human capital, and the networks that enable flows of information, talent and capital are critical types of wealth. We can adapt Bob Dylan's line here: "Those cities not busy being born are busy dying."
12. Cities are ultimately constructed not just of infrastructure and political policy but of incentives and disincentives and individuals who respond to those inputs. In this view, the infrastructure of transit, parks, libraries, etc., policies and cultural-economic zeitgeist create the incentives and disincentives that people respond to.
Cities that offer incentives--most importantly, a healthy ecosystem of like-minded people--to innovators, risk-takers and mobile capital to fund new enterprises will generate a self-reinforcing feedback loop that attracts more productive people and wealth. Those cities that centralize cartels and political elites that naturally suppress competition as dangerous to their control are vulnerable to systemic decay as the disincentives to the most productive overwhelm the limited incentives of rigid, sclerotic, centralized hierarchies.
The one thing we can safely predict is that technological and social innovations will continue to arise and disrupt the Status Quo. If cities are like ecosystems, then we can see that cities that are static monocultures are much more prone to decay and collapse than cities that encourage a complex wealth of competing and cooperating enterprises and networks.
Market Musings
We're just a few days away from the start of the August-October period that typically exhibits weakness and/or crashes. This weekly chart of the S&P 500 shows such weakness occurred in 2010 and 2011, but Mr. Market reversed the usual second-half trend in 2012 by rising smartly in August and September and crashing in November-December.
So which will it be this year? Neither history nor the charts offer up a surefire answer. The market could roll over here and fall 10% - 20%, or it could keep melting up to a new high in September or early October.
Pundits are discussing the Fed's "tapering" of QE as if that's the decisive factor, while analysts that look at fundamentals see a challenging profit picture going forward and plentiful evidence of a top in high margin debt levels and rampant selling by "smart money" institutional players.
Others point to the possibility of political conflict over the deficit and debt limits.
Any of these could trigger a decline, or they could all form a "wall of worry" that the market climbs, perhaps driven partly by inflows of foreign capital leaving riskier climes.
Just glancing at the chart without preconceptions, one could conclude the 4.5-year advance is still trending higher, and absent any evidence of a breakdown, the trend appears intact.
The part of the chart that attracted my eye was the classic multi-month head and shoulders pattern of 2011. I wonder if 2013 isn't tracing out a similar multi-month pattern. If so, the market could spike to new highs above 1700 and then roll over and decline to the neckline around 1560 or so in the period of typical weakness. The usual strength in November-December-January would trace out a right shoulder that couldn't reach a new high.
Many technicians are calling for a top around 1,775 or 1,800 in the SPX, i.e. an uptrend that will carry the SPX to a new high. They might be right; alternatively, the top will be in once the market surmounts the round-number of 1700. The 4th quarter uptrend (if one develops) would then trace out the right shoulder, setting up a major decline in early 2014.
Nobody knows what will happen; all we can do is ponder possibilities and pare the decision tree as events make one possible pattern more likely than others.
The best thing that happened to me this week
My wife made a homemade cherry pie for a BBQ with our friends. Since our friends are in the middle of a major remodel, they don't have a working oven, so we baked the pie in their toaster oven. Remarkably, it turned out perfectly.
From Left Field
How business decisions are made: Google Reader Died Because No One Would Run It No one took ownership of Google Reader internally because it wasn’t a top priority for Larry Page. And if you aren’t working on something that the boss cares about, then what’s the point?
World’s Tallest Building: Capital Misallocation? (via Maoxian) Could the latest tallest skyscraper be a crash signal? "Historically the commencement of many of the world’s most iconic tall buildings has aligned with serious local or global financial distortion."
"There is no political constituency for degrowth": Paradise Lost (via Steve K.) "The evolutionary fitness role of human intelligence is to act as a limit-removal mechanism, to circumvent any obstacles in the way of making make our growth in terms of energy use and reproduction more effective."
Museum Relaunches Wooden Whaler Built in 1841 (via Joel M.) The Charles W. Morgan, believed to be the last surviving wooden whaling vessel in the world, was restored at a cost of about $7 million at the Mystic Seaport museum in Connecticut.
"Crime once exposed has no refuge but in audacity." (Tacitus, via Prudens Speculari)
Thanks for reading--
charles
