Tuesday, March 22, 2022

Stuck with the Suburbs

By Kevin D. Williamson

Tuesday, March 22, 2022

 

High fuel prices have many Americans spending an unusual amount of time talking about one term from economics: inflation. But there are two more that ought to be part of the conversation right now: externalities and malinvestment.

 

Externalities are side effects of economic activities that have some effect on a third party. Externalities can be positive or negative, but, like most things in life, we tend to notice them most when they are negative. The textbook example of an externality is pollution: A factory that makes steel or computer chips will produce pollution, and, in most situations, neither the producer nor the consumer pays any direct price for that pollution, provided the factory is operating within regulation. If you drive 35 miles in your Honda Civic, you are going to burn about a gallon of gasoline, which will produce a certain amount of air pollution. That doesn’t impose a direct cost on anybody: not the oil driller, not the refinery operator, not the wholesaler, not the local Texaco station, and not you. But, of course, air pollution matters, and it imposes real costs on society. In theory — and here I mean way, way theoretical theory, sophomore philosophy theory — if we had an efficient way to properly price externalities, then little or no regulation would be needed, because everybody would be paying directly to mitigate the damage he does through his economic life.

 

Malinvestment is a term mostly associated with the “Austrian” school of economics, which nobody knows about in Austria, the key figures of the Austrian school having emigrated to the United States and England as they fled Nazism in the 1930s and 1940s. Malinvestment is what happens when some public policy or other source of economic distortion makes certain otherwise unprofitable investments look profitable or makes them temporarily profitable until the underlying economic reality asserts itself. The (very simplified) Austrian explanation of recessions is that when politicians goose the economy through loose monetary policy, that lowers the cost of capital and makes certain investments more profitable than they otherwise would be, resulting in a misallocation of capital that lasts until the artificial stimulus ends. Think about a real-estate developer: Some construction projects that are economically feasible if he can borrow money at 5 percent are infeasible if he has to borrow at 9 percent. If access to capital had cost Elon Musk three times as much as it did in 2004, building Tesla into what it is today would have been a very different kind of proposition. You would think that what everybody would want would be cheap money all the time — and that is what politicians generally want — but keeping money artificially cheap is a manipulation of prices (i.e., artificially lowering the price of borrowing), and that always causes problems, one of which is inflation like what we currently are experiencing. When central bankers have to raise interest rates to fight inflation — as our Federal Reserve is doing right now — then some investments that appeared to be profitable are revealed as unprofitable. That misallocation of capital is malinvestment. As the Austrians see things, a recession is what happens as those bad investments are unwound and the capital reallocated to more productive purposes.

 

I think those two ideas are helpful as we consider the current push-pull that Americans are experiencing vis-à-vis cities and urban life. On the one hand, Covid-19 and the general normalization of remote work has made suburban or rural life much more attractive to many Americans than it was a few years ago. On top of that, many cities — New York, Los Angeles, San Francisco, Chicago, Minneapolis, and others — have made themselves less attractive through bad policies and misgovernance that have made housing unnecessarily expensive and crime unnecessarily widespread. For many people — especially affluent professionals with children and flexible working arrangements — life in the urban cores has lost some of its allure, while the prospect of a bigger house on an acre of land in the suburbs — or 40 acres in the countryside — has more appeal than it may have a few years ago.

 

Of course, rich people have lots of choices and can afford to have things their own way — that’s the point of being rich — but the same dynamics shape the decisions of people of relatively modest means, and people who are poor. These people have a lot less choice about where they live, and many of them have long commutes to work (or are obliged to drive a lot for other reasons) because housing is less expensive in areas that are (not coincidently) less conveniently located. And those people are right now feeling the pointy end of the stick when it comes to the rising price of gasoline, the burden of which often falls most heavily upon those households that are least able to endure it.

 

There is a kind of long-term malinvestment associated with the post-war pattern of American development. For one thing, it is built on a foundation of cheap gasoline and a norm of personal automobile ownership — and neither assumption is likely to hold forever.

 

American cities — and, more important, the broader metropolitan areas around them — that developed in the golden age of suburbia (between the end of World War II and the beginning of the urban renaissance of the late 1990s) are built to the automotive scale, not to pedestrian scale. As the Missing Persons song rightly put it, “Nobody walks in L.A.” The relatively dense patterns of development that you can see in the older urban parts of the country — Manhattan and Brooklyn, Philadelphia’s Center City, San Francisco’s Tenderloin — are radically different from the sprawl of Houston or Los Angeles County in fundamental ways. The differences are physical, and they are also social, cultural, and economic — and, hence, political.

 

Each model of development has certain advantages. The denser areas are not only easier to navigate on foot but also easier to serve by mass transit; businesses there can engage in more specialization because they are more easily accessed by more customers; older people who walk to their appointments every day stay healthier and independent longer than do their car-dependent suburban counterparts. The GDP per capita of densely populated areas is much higher than that of rural areas, suggesting a powerful economic advantage in urban life. But density also imposes costs that send people toward the suburbs: People used to leave the big cities because of concerns about sanitation and hygiene, a tendency that had just about disappeared until Covid-19 but that has returned with a little bit of a vengeance; densely populated cities tend to have more crime and noise; apartments and rowhouses offer less privacy than do detached single-family homes. Cities generally offer a more immediate experience of diversity, while suburbs enable a higher degree of social sorting and insularity — considerations that may be positives or negatives depending on your own tastes and desires. In many suburban situations, people find it easier to access certain kinds of community life (church, school groups, etc.) and a style of social life that is centered on the home rather than on public spaces such as restaurants or theaters.

 

There isn’t any point in telling people that they should prefer one or the other, or in trying to argue people out of their preferences. One of those abovementioned Austrian economists, Ludwig von Mises, is very eloquent in his Human Action, observing that different people follow different ends in different ways, and that one of the great beauties of human life is its genuine diversity, even if the ends of our fellow men sometimes are mysterious and inexplicable to us.

 

If you have looked at one of those ghastly red-and-blue maps they publish after every election, you’ll notice that the great political divide in American life isn’t nearly as much racial or economic as it is geographic: The big cities are Democratic and left-leaning, the rural areas are Republican and right-leaning, and the battlegrounds are in the suburbs. (That the rural countryside would one day be almost uniformly Republican would have come as a shock to Depression-era American farmers, who thought of the GOP as a big-city party for robber barons. That Wall Street and the other commanding heights of American business should be so strongly associated with the Democratic Party would have seemed unlikely as recently as the 1980s. Things do change.) Cause and effect get pretty mixed up in all that: There probably is something about city life that brings out tendencies that align with what we call (often inaccurately) progressivism, but it also is the case that the sort of people who already lean to the left often prefer city life and seek it out. Likewise, rurality encourages conservatism, and many (though by no means all) people with a conservative temperament (especially the kind of conservative temperament that comes along with five or six children) are more comfortable in rural or semi-rural suburban situations.

 

In the community where I grew up, people talk about gasoline prices the way other people talk about the weather or sports — you drive a lot in West Texas, and most people there are not rich. But other people live differently: One affluent person of my acquaintance reports never even looking at gasoline prices: “What am I going to do? Not fill up my car?” That’s an interesting aspect of class in the United States: I used to work at 7-Eleven, and, in my experience, there is an enormous difference between the customers who just fill up their cars until the pump clicks off and the ones who put in exactly $9.42 worth of gas and pay in cash.

 

Malinvestment breeds more malinvestment. The assumption of cheap gasoline affects much, much more than the household budgets of people who live in the suburbs and have long commutes. A great deal of American economic life — from the kinds of houses that are built and where they are built to the rise of big-box stores, the location of airports, the logistics of everything from small-shop retail to Amazon Prime, and much more — is to some considerable extent built atop that residential distribution. If Joe Suburbia’s economic model doesn’t work anymore, then neither does Walmart’s.

 

Of course, the basic economic issue can be solved with cheap gasoline — which is something you can have if your country happens to be the world’s largest producer of oil. That isn’t necessarily an easy public-policy fix (oil prices are global, not local) but it is far from an impossibility.

 

What complicates this a little more is the issue of the externalities associated with living life at the automotive scale. Some of those are the ones mentioned above — air pollution, climate concerns, etc. — and some are pretty obvious: traffic congestion, which eats up a lot of man-hours and which also has less obvious social and environmental effects; the heavy public expenses associated with maintaining our vast roadway network; the considerable transportation and logistical costs imposed by sprawl. Some of the externalities are less obvious: Progressives, urbanists, and cranky haters of the Dwight D. Eisenhower System of Interstate and Defense Highways (guilty!) have long pointed out that the pattern of road development, especially at the federal level, has been warped by politics and special-interest business patronage, and that many freeways were constructed in such a way as to flatten or fence off poor and minority communities, and that highways continue to operate in many urban areas as socioeconomic Berlin Walls, delineating the modern version of the “wrong side of the tracks.”

 

These are real costs. As the urban-affairs analyst Michael Corleone put it: “That’s the price you pay for the life you choose.”

 

This is the point at which some readers will ask, “Okay, but what is to be done?” But there isn’t anything to be done — not really: It is not as though we are going to unbuild the suburbs and roll up the sidewalks. (And a lot of them don’t have any sidewalks!) And it isn’t even the case that our progressive friends are going to let high gasoline prices act as economic incentives to force people to reevaluate sprawl: Democrats may talk a good game on everything from urban renewal to climate change, but ain’t no way Joe Biden & Co. are going to stick their necks out and take the political hit from $5 or $6 gas — or $8 or $11 gas. It is a mark of Democratic political cowardice that they don’t even want to collect the federal gasoline tax if it means losing a couple of votes in the suburbs. If you think these are the people who are going to turn the world upside-down to fight climate change, think again.

 

On the Republican side, all of the incentives are pretty well united behind working toward cheap gas (just as soon as the Democratic Party is done self-immolating with the expensive stuff) rather than taking on such long-term (and, from the Republican point of view, icky) projects as improving mass transit or opening up residential development in the cities and inner suburbs, mostly ignoring the externalities of sprawl and propping up the malinvestment, mitigating its effects as best as they can.

 

It is interesting, as a thought experiment, to consider what the United States might have looked like if we had followed a different course of development, one in which the cities are cities and the countryside is countryside and there isn’t very much sprawl between them – something like what might have happened if we had, among other things, continued to rely largely on our perfectly serviceable railroad network rather than building a subsidized competitor to it in the form of the interstate-highway system. Not that that was ever going to happen: You tell a car where to go, but a train tells you where you are going. That’s why progressives love trains — they fit perfectly into the progressive conception of the world as a vast Erector Set to be tinkered with by social engineers until utopia has been built. Americans are culturally (if not always politically) far too libertarian for that to have been the way things shook out in the 1950s and thereafter.

 

But there are always trade-offs, and a price to pay for everything — something to think about the next time you are putting $100 into the F-150.

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