The Bush Institute has, under the leadership of Amity Shlaes, launched what it calls the 4% Project: a massive intellectual and research effort aimed at better understanding economic growth and, ambitiously, pushing the American economy toward four percent annual GDP growth. Part of this effort is a blog and they have recruited an all-star cast of contributors.
Kauffman VP for Research & Policy, Bob Litan, weighed in this week with his thoughts and reactions to topics discussed at the Milken Institute Global Conference. On housing:
The alternative option is for the government somehow to facilitate the writedown by lenders of the principal amounts of underwater mortgages in return for the banks and/or the government (if it is providing funds to lenders) taking an equity stake in the borrower’s house. In effect, this is what bankruptcy courts do for the debt of distressed companies — convert some or all of a class or debt to equity. It is amazing to me that this model has not been widely used for homeowner debt, at least on a voluntary basis (that is, homeowners who are underwater could opt in to having their principal reduced if they agreed to give up some equity, but not be forced into doing this).
I understand some of the limitations that have prevented this outcome, most important the fact that most mortgages now are securitized and thus ownership of mortgage debt is split into many owners rather than held by a single lender, a bank, or a thrift institution. In addition, if the government were to provide funds to encourage writedowns of the first mortgage, how would second mortgagors be treated?
Also this week was former Kauffman Foundation president and CEO Carl Schramm making his debut as a four-percenter with an outstanding essay on the desultory economic fortunes of cities. Carl uses the story of Carrier as a vehicle for insights into how cities do (or don't) work economically:
Cities are a transitory phenomenon made so by social and economic forces. Not the meta-phenomenon of cities — the world continues to become more urbanized with over half of the human population now living in cities — but individual cities, which present a history of growth, flourishing, and decay. People want to live in places that are flourishing, and American history shows we want to like the places we live (even though we keep changing where that is). We grow a network of family and friends in a given place. And we stay there until we need to or want to move. Why do we move? Mostly it’s because economic opportunity compels us.
Along the way is a shout-out to Kansas City, KS, mayor Joe Reardon, who has been an excellent steward of his city:
Perhaps we need those who, like Mayor Joe Reardon of Kansas City, Kansas, see it as their job to “sell services — clean streets, clean water, good schools, nice sidewalks — that’s about it.” In Mayor Reardon’s vision, entrepreneurs will want to stay when they get their businesses going, that is, if the taxes don’t drive them out. Cities are, as noted, social, economic, and political entities; but they are also competition machines, with little to hold them together. Civic culture cannot do it, nor can infrastructure “projects,” and certainly higher-than-market public employee salaries will fail as well.
A persistent disappointment in the urban economics literature is the alacrity with which economists claim to prove the strikingly obvious. Education makes a difference! Housing is important! They identify and talk about the bare elements of growth or innovation in cities, the ones that seem to raise the probability of growth. But they usually stop short of what is really important: how the elements come together, how higher probability gets translated into innovation, which is much rarer than merely the presence of elements. I once compared a list of things that two urban economists had "proven" about cities and archaeologist Gordon Childe's list of characteristics of the first cities thousands of years ago. They were essentially the exact same list, meaning that economists have finally proven the existence or importance of the very factors that were the reasons that cities exist in the first place.
A good deal of research also ignores, or dismisses, other factors in city and regional growth. Much is made of housing supply elasticity as a factor in the rise of the Sunbelt, but housing supply matters zero if people won't move there. To Carl's point, it was air conditioning that made large-scale migration to the South possible, thus triggering the importance of housing supply elasticity.
Some of the best city-related research goes deeper than these sorts of factors and looks at long-term historical trends; there was a terrific paper a few years ago, which I can't locate at the moment, on the path-dependency of settlement along the fall line in the eastern United States, for example.
(By the way, there is precedent for the Bush Institute's ambitious four percent goal. In the late 1950s the Rockefeller Foundation commissioned a study, Prospect for America, that urged, among other things, policies that would achieve five percent annual GDP growth for the United States. Part of this report, including the 5 percent target, were later assimilated into the 1960 Democratic platform.)
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