Month: December 2016

Thomas Schelling (1921-2016), who died earlier this week, shared the economics Nobel prize in 2005 \”for having enhanced our understanding of conflict and cooperation through game-theory analysis.\” In some ways, he was best-known for his analysis of nuclear strategy, and the arguments expressed in his 19960 work, \”The Strategy of Conflict.\” For example, the New York Times headlined its obituary, \”Thomas C. Schelling, Master Theorist of Nuclear Strategy, Dies at 95.\”  As William Grimes writes in the obituary:

\”Professor Schelling analyzed superpower negotiations in the way that he analyzed the conflicts between, say, a blackmailer and his client, a parent and a child, or management and labor. In each case, he wrote, “there is a mutual dependence as well as opposition,” with each side seeking out tests of strength at less than crisis levels. Among other counterintuitive propositions he put forth, Professor Schelling suggested that one side in a negotiation can strengthen its position by narrowing its options, using as an example a driver in a game of chicken who rips the steering wheel from the steering column and brandishes it so his opponent can see that he no longer controls the car. He also argued that uncertain retaliation is more credible and more efficient than certain retaliation.\”

But Schelling has a remarkably fluid ability to bring strategic and game theory insights to bear on a very wide range of situations. Paul Samuelson, a great economist in his own right who also knew how to turn a phrase, once wrote: \”In Japan Thomas Schelling would be named a national treasure. Age cannot slow down his creativity, nor custom stale his infinite variety.\”

By coincidence, the most recent issue of the Quarterly Bulletin of the Bank of England (2016, Q4)includes an article about \”Agent-based models: understanding the economy from the bottom up,\” in which Arthur Turrell explains one of my favorites in Schelling\’s work: an effort to investigate whether relatively mild discriminatory feelings can lead to quite segregated outcomes.  As Turrell explains, Schelling tackled the problem this way:

\”Imagine there are two species named Econs and Humans who co-exist. Econs are always rational. Humans are emotional and sometimes make mistakes. Although Econs and Humans peacefully co-exist and live in the same city, they each have a slight preference for living closer to the same species. This propensity to want to be near others of their type can be characterised by a number f, which can be thought of as their strength of preference. It represents the fraction of neighbours that they ideally wish to be of the same species, with an f of 1 meaning that they will only be happy if all of their neighbours are of the same species. If agents of either type are unhappy, they can choose to move house and, at random, are given a new property. Over time, more and more agents will be happy with where they live and stop moving.\” 

Start out with a checkerboard in which the two groups are randomly distributed, which might look like this:

Now say that the strength of preference is a fairly high .7. Over time, this preference for one\’s own group combined with the process of random moving leads to a completely segregated outcome like this:

But a striking finding from Schelling\’s work is that much lower levels of preference can still lead to considerable segregation. Indeed, there is often a \”tipping point\”–a concept brought into wide use by Schelling\’s work–where a relatively small change in preference leads to a much larger change in the degree of segregation.  Turrell offers the example of what happens as the preference parameter rises from .25 to .26.

This figure shows that at .25, the two groups are still pretty well integrated. Apparently, a mild but non-zero degree of discriminatory feeling  is consistent with a high degree of integration–which is a useful insight.

 But in this example, the rise from .25 to .26 is a tipping point, in which the degree of segregation (which can be measured by how many neighbors the agents have from the other group) rises substantially.

Of course, you may wonder about many potential tweaks to this approach: what if the two groups had different preference, or each group had a range of preferences; are the outcomes different if one group is numerically larger than another: what would happen be like if the surface was not defined by squares within a larger square, but some other shape (like squares within an elongated rectangle, or triangles within a triangle). Agent-based modelling lets you ask all these kinds of questions, and through simulations of what will happen as the agents move, figure out what makes a difference and what doesn\’t.

Turrell\’s essay uses Schelling\’s work as one example, and then delves into a broader discussion of agent-based modelling. The potential advantages of this approach is that you can see what overall outcome emerge from clearly-specified individual incentives. For example, one can explore stock markets or housing markets with different types of buyers and sellers who react differently to new information and to changes in prices.  There are applications in particle physics, biology/ecology, epidemiology, computer science, military strategy, and others.

Turrell enumerates strengths as well as weaknesses of an agent-based approach. He write:

In many ways, the greatest strength — the flexibility to model such a vast range of scenarios — is also the greatest weakness. The sheer extent of choice in constructing agent-based models as compared to more traditional economic models means that modellers face the problem of selecting the right components for the problem at hand. Simulation results can vary dramatically depending on which assumptions are used, so modellers must take great care in choosing them. Further work is needed to develop objective means for choosing the most appropriate assumptions.

One particular concern is that at least in some circumstances, human agents may be able to perceive where a group dynamic is headed–and then change plans or form coalitions to alter that outcome. 

Ranging from nuclear strategy to issues of segregation and integration suggests the ability of Thomas Schelling to range across a wide array of topics and approaches.  His early work introduced the idea of a \”focal point,\” which is an outcome that many people recognize based on preference and tradition. Thus, he asked people where they would meet a stranger in Manhattan, if they had not previously agreed on a time and place to meet, and found that there was (at that time) a focal point of meeting at the information booth in Grand Central Station at noon. For a period in the 1980s, he focused on how to encourage people to stop smoking. For many economists, the first time we started thinking seriously about carbon emissions and the risks of climate chaange as an economic issue was when Schelling, back in 1992, gave his American Economic Association Presidental Address on the subject \”Some Economics of Global Warming\” American Economic Review, 82: 1, March,  pp. 1-14). Another insight associated with Schelling is that he was involved with formulating  \”The Origins of the Value of a Statistical Life Concept\”  (November 25, 2014). 

For an overview of Schelling\’s earlier work, a useful starting point is a 1989 essay by Richard Zeckhauser in the Journal of Economic Perspectives, on the occasion of Schelling being named a Distinguished Fellow of the American Economic Association. Zeckhauser started the essay this way: 

Thomas Crombie Schelling thinks about the essence of phenomena. In scanning everyday behavior, he sees patterns and paradoxes that others overlook. When each driver slows down almost imperceptibly for a look at a minor roadside distraction, he observes, the result can be a massive traffic tie-up. The world can be divided into weak and powerful parties, but in some situations excessive power can be a handicap. Someone who is overweight may pledge fealty to a strict diet, then cheat at night. Schelling assesses the fat man\’s intramural struggle with the thin man trying to get out, noting that, with variations in the context, the Jekyll-and-Hyde parable may apply to us all. Schelling distills such essences and demonstrates their presence in many important social phenomena. \”It\’s hard to define or categorize Tom\’s work,\” notes James Coleman, the sociologist. \”If you ask, \’Does he do research?\’ I have to answer \’No, not exactly.\’ Then if you ask what he does for a living, I have to answer that he lives by his wits.\” 

The Bank of International Settlements carries out the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, which in 2016 collected data from roughly 1,300 banks and other foreign exchange dealers across 52 countries. Michael Moore, Andreas Schrimpf, and Vladyslav Sushko describe some of the findings in \”Downsized FX markets: causes and implications,\” which appears in the BIS Quarterly Review (December 2016, pp. 35-51).

The headline finding is that the total turnover in foreign exchange markets dipped from $5.4 trillion per day in the 2013 survey to $5.1 trillion per day in 2016. As the figure shows, there had been a dramatic rise in the volume of foreign exchange trading since about 2000, so the dip is especially notable.

Why the decline? The key point to understand is that most foreign exchange trading isn\’t related to exports and imports of goods and services According to the World Trade Organization, total global exports of merchandise and services approached $24 trillion for the entire year of 2014. Clearly, this isn\’t going to explain an FX market of $5.1 trillion per day.  Moreover, foreign direct investment isn\’t the primary drivers of the FX market, either. Foreign direct investment is about $1.0-$1.5 trillion per year.

Instead, the gargantuan FX market is driven by financial investments, both those trying to make money directly from fluctuations in this market, but also those who are buying and selling financial assets in other currencies, as well as hedging the risks of fluctuations in FX rates. Moore, Schrimpf, and Sushko describe in some detail how the FX market is evolving:

Part of the decline in global FX activity can be ascribed to less need for currency trading, as global trade and capital flows have not returned to their pre-Great Financial Crisis (GFC) growth rates. However, conventional macroeconomic drivers alone cannot explain the evolution of FX volumes or their composition across counterparties or instruments. This is because fundamental trading needs only account for a fraction of transactions. Instead, the bulk of turnover reflects inventory risk management by reporting dealers, their clients’ trading strategies and the technology used to execute trades and manage risks. … The composition of participants changed in favour of more risk-averse players. The greater propensity to transact FX for hedging rather than risk-taking purposes by these investors has led to a decoupling of turnover in most FX derivatives from that in spot and options trading. Patterns of liquidity provision and risk-sharing in FX markets have also evolved. The number of dealer banks willing to warehouse risks has declined, while non-bank market-makers have gained a stronger footing as liquidity providers, even trading directly with end users. These shifts have been accompanied by complementary changes in trade execution methods. Market structure may be slowly shifting towards a more relationship-based form of trading, albeit in a variety of electronic forms.

More detail on the results of the Triennial Survey is available at the BIS website.  Here\’s one table that always catches my eye, dividing up the market according to the currency used in the foreign exchange deal. The statistics here include both buying and selling a currency, which of course both happen at the same time, but as a result of counting them separately, the total size of the market is 200%. Measured in this way, the finally column shows that US dollar accounted for 88% of the market volume (although I find it more useful to think of this as 44% out of a market size of 100%). The other nine most traded currencies are the euro (EUR), the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF), the Chinese yuan (CNY), the Swedish krona (SEK), and the New Zealand dollar (NZD).

Clearly, the US dollar still rule the roost when it comes foreign exchange markets: indeed, it\’d size of the market is the same now as back in 1998. Conversely, the share of the euro in foreign exchange markets started strong in 2001 and 2004, but has declined since then. The share of China\’s yuan in foriegn exchange market was essentially zero as recently as 2007, but it has now risen to 4% in the final column of the table–which I find more useful to think of as 2% of all FX transactions.

In theory, the US Postal Service is run by a Board of Governors, appointed by the President and confirmed by the US Senate.. In practice, the USPS Board is now missing all nine of its appointed members. As the USPS website explains:

The Board of Governors of the U.S. Postal Service is comparable to a board of directors of a publicly held corporation. The Board normally consists of up to nine governors appointed by the President of the United States with the advice and consent of the Senate. The nine governors select the Postmaster General, who becomes a member of the Board, and those 10 select the Deputy Postmaster General, who also serves on the Board. The Postmaster General serves at the pleasure of the governors for an indefinite term and the Deputy Postmaster General serves at the pleasure of the governors and the Postmaster General.

Except that the Obama administration has not been appointing new members to the Board of Governors as the terms of previous members expired.  When the term for James Bilbray expired last week and he was required to leave office, the contingent of nine appointees to the USPS Board of Governors is now down to zero members. As Bilbray said in November 2015, rather plaintively: \” “I have the help of my Deputy Postmaster General and my Postmaster General, but I cannot effectively run the United States Post Office by myself. … We are shocked that somebody out there doesn’t hear us, doesn’t hear how badly we are off. [We are down to] one governor: me.” As the USPS website puts it: \”Each governor receives $300 per day for not more than 42 days of meetings each year and travel expenses, in addition to an annual salary of $30,000. Nine vacancies exist on the Board.\”

The Office of the Inspector General for the US Post Office publishes a report on the subject, \”Governance of the U.S.Postal Service\” (November 10, 2016, RARC-WP-17-002). For example, it points out that under law there are certain powers that cannot be delegated by the Board to the Postmaster General. With zero Board members, certain changes and activities are not legally possible. For example, the report notes (footnotes omitted):

\”While the Board of Governors can delegate many things to the Postmaster General, there are items that, by law, only the presidentially appointed Governors can do. These include, but are not limited to

•  Appointment, compensation, term of service, and removal of the Postmaster General
• Compensation of the Deputy Postmaster General 
• Establishment of rates and classes for competitive postal products
• Authorization of rate and fee changes for market dominant postal products
• Authorization of a request to the PRC to add, remove, or reclassify products
• Authorization of a notice to the PRC of substantive changes to product descriptions in the Mail Classification Schedule 
• Appointment and removal of the Inspector General
• Transmission of the OIG’s Semi-Annual Report to Congress
• Selection of a firm to conduct required USPS financial audits …

As part of the executive branch, the Appointments Clause of the Constitution requires the Postal Service to be led by principal officers who are appointed by the president with the advice and consent of the Senate. The Governors fulfill that role, as was confirmed by the Ninth Circuit U.S. Court of Appeals. With no sitting governors, the Postal Service’s constitutional authority to take certain actions could be in question. This would be an unprecedented situation.\”  

The situation with the USPS Board of Governors raises some big questions, along with specific issues related to the postal service. The US President is now required to appoint people to about 3,800 positions, which can be broken down into four categories: \”Presidential Appointments with Senate confirmation (PAS), Presidential Appointments without Senate confirmation (PSs), political appointees to the Senior Executive Service (SES), and Schedule C political appointees.\”

Thus, while most of the attention for the incoming Trump administration is on high-profile appointments to cabinet-level posts, there are bigger issues. For example, who will get appointed to the thousands of less visible jobs? In addition, given that political appointees may move on to other jobs, and need to be replaced, the reality is that the the Office of the President needs to be on a continual hunt for people with the background and interest to fill thousands of positions–and given the turnover, probably needs to be appointing a few dozen people to a wide variety of slots almost every week.

Filling these appointed slots has been an ongoing  issue for the Obama administration. For example, a report in 2010 from the left-leaning Center for American Progress found: \”The Obama administration had in place 64.4 percent of Senate-confirmed executive agency positions after one year, compared to 86.4 for the Reagan administration, 80.1 percent for the George H.W. Bush administration, 73.8 percent for the George W. Bush administration, and 69.8 percent for the Clinton administration. In percentage terms, after one year, the Obama administration ranked last or next to last (out of the five administrations examined) in filling important positions in 10 of 16 major federal agencies.\” Those problems with filling appointed slots continued: for example, here\’s a New York Times article on the problems of not filling appointed slots in 2013, and here\’s a Politico article on the same problems in 2016.

Of course, a structural problem here is that potential presidential appointments are often blocked by grandstanding US Senators, often for reasons that don\’t have much to do with the actual person being appointed. But in many other cases, the situation is simply that no one is being put forward to fill appointed positions.

In the particular case of the USPS Board of Governors, there are a number of reasons the positions could be difficult to fill. Getting people to sign up for a nine-year term–even if they can quit early–can be a hard sell. The pay means that it\’s clearly not intended to be a full-time job. The USPS doesn\’t seem like a stepping-stone to major career advancement or consulting contracts. Perhaps most discouraging of all, the US Postal Service is officially controlled by Congress, and can be overruled by Congress on any decision it makes. As the USPS Inspector General report notes:

The governors of the Postal Service must represent the public interest generally and not any particular group.Yet determining the public’s interest and how best to serve it can be difficult, even in the broadest sense. Some argue it lies in consistent and universally accessible consumer mail services; others in a vibrant commercial mail sector; still others in preserving the dissemination of cultural and civic discourse. When interests conflict, as in the controversies over service levels, network consolidation, and prices, balancing the public’s needs is the classic democratic conundrum. Each governor must decide for himself or herself what serving the public interest means.

Thus, a member of the USPS Board of Governors gets relatively little pay (relative to the qualifications needed for doing the job), has very limited power to make significant changes, and are likely to be vehemently second-guessed if they support any decision that upsets anyone. So I\’m not arguing that these slots are easy to fill.

Still, when such a high proportion of appointed positions across government are going unfilled, and at least one board has completely run out of members, its hard to avoid the conclusions that the current system of presidential appointments is dysfunctional, and that the current White House has not done a particularly good job of navigating through the problems.

David A. Price has an \”Interview\” with Josh Lerner in the Econ Focus magazine published by the Federal Reserve Bank of Richmond (Second Quarter 2016, pp. 26-30), with a focus on topics involving entrepreneurs and new firms, along with method of financing them like venture capital, private equity, and crowdfunding. There\’s lots of interest in the interview, but here are a few of Lerner\’s comments that caught my eye:

On the level of fees charged by venture capitalists and private equity:

\”An interesting thing is that fees in private equity and venture capital are remarkably sticky. The compensation structures don\’t look that different in today\’s era of $10 billion-plus funds than they did back in an era of $10 million funds. They\’ve come down somewhat, so instead of 2 percent committed capital, it\’s more likely to be 1.5 percent. But given the economies of scale of running a larger fund, it means the profits per partner can be staggering. If you look at the history of financial intermediation, you see in general that as more competition has arrived, prices have come down. I anticipate venture capital and private equity will follow that pattern, but it\’s been surprising how leisurely the adjustment process has been.\”

On the potential for conflict in crowdfunding because of disclosure requirements: 

\”I myself am a little bit in the skeptical camp on crowdfunding per se. A lot of my doubts have to do with the inherent contradictions between the entrepreneurial process and disclosure requirements. When you think about what have been the guiding principles of securities regulation, a big part has been based on disclosure: \”Sunlight is the best disinfectant.\” But if you think from the perspective of an entrepreneur, it\’s very important to keep information close to the chest rather than tipping off competitors early as to your business model. When Google filed to go public, people were shocked by how profitable the search business was for them. Yet at that point, they had already established themselves and had an insurmountable lead that Yahoo and the others haven\’t been able to catch up to. The natural tendency is to say, \”Let\’s just make everyone disclose everything,\” but the very process of disclosing things is likely to destroy a lot of the competitive advantage that the entrepreneurs might have. That\’s a tough conundrum to solve.

\”Moreover, when you look at attempts to create entrepreneurial finance models with crowdfunding-type flavors to them, the outcomes have not been great. For instance, there was an effort in Europe during the 1990s to create a whole series of small capitalization models where riskier young companies could list and so forth with relatively lax regulations. They ended up with a phenomenon where the bad drove out the good. All it took was a few scammers to come in and undertake \”pump and dump\” schemes, and the interest in those markets declined precipitously. And I think some of the same danger lurks here.\”

On the question of whether being surrounded by entrepreneurs encourages entrepreneurship: 

\”Ulrike Malmendier and I tried to find a setting where one could look at this question where there was an element of randomization. We ended up looking at the impact of how students spent their first year at Harvard Business School. In particular, what we have here is a system where people spend the first year with a section of 90 people and they take all of their classes together. These sections tend to be powerful connecting devices for people, still binding them together when they come back for their 25th reunion. So we can ask, does having in one\’s section fewer or more entrepreneurial peers — people who were entrepreneurs prior to business school — end up affecting the willingness of people who didn\’t have an entrepreneurial background to start a new venture themselves after school?

\”When we ran the analysis, we were shocked because we got exactly what we thought was the wrong answer: Having more entrepreneurial peers makes people less likely to start businesses. When we broke it down, however, we discovered that the individuals who had lots of entrepreneurial peers were less likely to start unsuccessful businesses but were as likely or lightly more likely to start successful businesses. So it seemed that having the entrepreneurial peers was scaring people away from doing ideas that subsequently turned out to be unsuccessful, but if anything, encouraging people to go out and start businesses that proved to be successful. That suggested that peers really do matter, but in perhaps a more complicated way than we would initially anticipate.\”

On venture-backed firms taking longer to go public: 

The role of US women in the (paid) labor force has shifted dramatically in the last half-century or so. For example, the figure shows the labor force participation rate (which includes both those holding jobs and those who are unemployed and looking for work) for men and women since the late 1940s. Circa 1950, almost 90% of men were in the labor force, compared with about one-third of women. But the labor force participation of men has sagged, while the labor force participation of women rose strongly until about 2000, when it flattened out and even started tailing off a bit.

The Russell Sage Foundation Journal has devoted its August 2016 issue to the overall topic \”A Half-\”Century of Change in the Lives of American Women,\” The issue contains a short introduction followed by 10 readable essays. Many of the themes are captured in the first essay, \”Five Decades of Remarkable but Slowing Change in U.S.Women’s Economic andSocial Status and Political Participation,\” by Martha J. Bailey and Thomas A. DiPrete. They summarize some of the changes that have happened, and not yet happened (citations omitted):

Women made up less than one-third of all U.S. employees in 1950, but today make up almost half. In the 1960s, they earned around 60 percent of what men did, but this figure has risen today to about 80 percent. Currently, more women than men enroll in and complete college, and changes in women’s roles as mothers and partners have redefined the “typical” American family. …  Despite these advances, other evidence suggests that women’s progress has slowed or stalled. Pay gaps at the top of the income distribution are large. Women make up less than 10 percent of corporate boards and less than 2 percent of CEOs. The integration of women into the so-called STEM fields has been slow since 1990.  The odds that a woman earns a physical science, engineering, or economics major have hardly changed in the past twenty years. 

It\’s well-known that the female/male wage gap has been falling over time, and Bailey and DiPrete provide this figure along with some discussion of possible explanations for what has happened and for the remaining gap.

In considering the range of reasons for the remaining gender pay gap. I was struck by the essay by Kim A. Weeden, Youngjoo Cha. and Mauricio Bucca, called \”Long Work Hours, Part-Time Work, and Trends in the Gender Gap in Pay, the Motherhood Wage Penalty, and the Fatherhood Wage Premium.\” Taking up some themes that recur in a number of the other papers, they write (citations and footnotes mostly omitted): 

\”Gentrification\” arises when a neighborhood in a city that has in the past offered relatively low-cost housing to relatively low-income people experiences the entry of a wave of higher-income buyers. The new entrants often buy the older housing stock and rebuild or refurbish it, pushing up housing prices in the rest of the neighborhood. On one side, this process offers lower-income people who own their homes a chance for a financial windfall, and can also offer benefits to the neighborhood like improved local job opportunities, shopping options, and public safety. On the other side, gentrification also disrupts existing neighborhoods and can displace low-income residents, some of whom may have been living in the neighborhood for a long time.

Cityscape, which is published three times each year by the U.S. Department of Housing and Urban Development,  has published a 10-paper symposium with various perspectives on gentrification in its most recent issue. Ingrid Gould Ellen and Lei Ding,  the editors of the symposium, offer a short overview essay called \”Advancing Our Understandingof Gentrification,\” which includes some evidence that gentrification did indeed become more common from 2000-2010.

They divide cities into US Census \”tracts,\” which are areas that typically have about 4,000 people, give or take a couple of thousand. They focus on low-income tracts, defined as those tracts where the average income is below the 40th percentile for the city as a whole at the start of the decade.  They then look at what proportion of those tracts have seen large gains in the share of the population that is college-educated, the share of the population that is white, or substantially higher-than-average gain in rents. The figures show the share of low-income tracts that have seen larger-than-average gains the share of college-educated residents, in the share of the population in the tract that is white, and in rents.

Gentrification is part of the ebb and flow of urban life, but all of its effects–for better or worse–seem to have been more powerful in recent years.  Indeed, a writer in the 1980s referred to the gentrification of cities during that time as “Islands of Renewal in Seas of Decay.” Something more powerful and sweeping is happening now.

A number of the causes seem to trace back to a revival of interest of higher-income people in living in central city and downtown neighborhoods. Jackelyn Hwang and Jeffrey Lin describe some of the patterns in in \”What Have We Learned About the Causes of Recent Gentrification?\”:

In sum, since 2000, U.S. cities have seen greater increases in the SES [socioeconomic status] index and other measures in downtown neighborhoods and an expansion of SES index increases to more cities and neighborhoods. Compositional shifts toward White, prime-age, and college-educated households—not population growth—are more characteristic of recent changes. Although lower-skilled or lower-education jobs continue to suburbanize, jobs employing college-educated workers have stopped declining or have even increased in traditional downtowns. Downtown safety and amenity values appear to have increased. A sizable number of downtown neighborhoods in big cities, however, have not seen increases in our SES index at all, and a number of peripheral neighborhoods in smaller metropolitan areas have seen dramatic changes. Despite improving fortunes, the average downtown neighborhood is of lower status compared with its metropolitan area as a whole. Moreover, gentrifying neighborhoods exhibit a strong spatial dependence on historical patterns of income, and, on average, downtown revival has still improved the SES of only those neighborhoods within relatively short distances of U.S. city centers (but more so in big cities). Finally, changes in neighborhoods with middle-SES indexes are similar in big-city downtowns compared with small cities or peripheral areas, but neighborhoods with high-SES indexes in big cities have shown remarkable persistence since 1960.

A number of the papers that follow look at specific dimensions of urbanization in neighborhoods in particular cities, like effects on local jobs, local business, the financial health of long-term residents in gentrifying neighborhoods, and a potential role for subsidized or public housing. Derek Hyra offered a compact summary of consequences of gentrification (citations omitted here):

\”Perhaps the most controversial gentrification topic is its residential displacement consequences. There is near empirical consensus, however, that mobility rates among low-income people are equivalent in gentrifying versus more stable low-income neighborhoods. This fact should not be interpreted as evidence gentrification is unrelated to a shrinking supply of affordable housing units (which it often is), but rather that low-income people tend to move at a high rate from all neighborhood types. 

\”Although understanding the relationship between gentrification and residential displacement is critical, other important gentrification consequences exist. Gentrification, in some places, is associated with political and cultural displacement. Some gentrifying areas once dominated by low-income minorities demonstrate an association between the movement of upper-income people and a loss of minority political representation. Remember, it was presumed upper-income people moving to low-income neighborhoods would bolster civic society, and it appears, in some circumstances, it has. Often, however, newcomers take over political institutions and advocate for amenities and services that fit their definition of community improvement. This process of political displacement can be linked with cultural displacement, a change in the neighborhood norms, preferences, and service amenities. In certain respects changing norms may be positive in terms of counteracting norms of violence or a lack of health-producing amenities and activities, but do the new norms and incoming amenities in gentrifying neighborhoods sufficiently cater to the preferences of low-income people or do they predominately represent newcomers’ tastes and preferences? 

\”Through my gentrification research, I have witnessed how political and cultural displacement breeds intense social tensions, limits meaningful social interactions between longtime residents and newcomers, and results in microlevel segregation. Without ample social interactions across race and class, the promise of mixed-income living environment benefits for the poor seems unlikely. … [I]t is clear that we must look beyond residential and small business displacement impacts to understand how to effectively facilitate community conditions in economically transitioning neighborhoods to better support social cohesion and interaction among traditionally segregated populations.\”

I was also interested in the arguments by Lance Freeman that gentrification has not just grown in size, but also changed in form.  As one example, Freeman points out:

\”This latest wave of wave of gentrification may also be qualitatively different inasmuch as the 1970s-to-1980s gentrification was much more closely tied to the physical renovation of dilapidated housing. Indeed, news media in the late 1960s and 1970s often described young, White professionals who moved into poor inner-city neighborhoods as “brownstoners,” because this movement almost always involved the renovation of older brownstones. …  The recent wave of gentrification, however, may be less attached to renovating older dilapidated housing. … It may be that after nearly a half century of gentrification there are few old distinctive houses in urban areas to be had for a steal. If this latest wave of gentrification has indeed uncoupled housing renovation from upper class movement into the inner city, this change may have implications for our understanding of gentrification. For example, the type of person drawn to renovating and restoring old, distinctive housing may be different from someone who wants to live in a high-rise condominium with concierge service and proximity to his or her office job.\” 

Freeman also introduced me to a bit of intellectual history and etymology: \”The term gentrification was initially coined a half-century ago by the British sociologist Ruth Glass. She wrote, “One by one, many of the working class quarters have been invaded by the middle class—upper and lower…. Once this process of ‘gentrification’ starts in a district it goes on rapidly until all or most of the working class occupiers are displaced and the whole social character of the district is changed” (Glass, 1964: xvii).\”

\”Most recent statistics indicate that two-thirds of the Arab region’s population is below thirty years
of age, half of which falling within the 15 – 29-year age bracket. This age category defines “youth”
according to the report, which estimates the number of young people in the region at over one hundred million. This unprecedented demographic mass of young people at the prime of their working and productive abilities constitutes a huge potential for advancing economic and social development if given the opportunity. … The report asserts that today’s generation of young people is more educated, active and connected to the outside world, and hence have a greater awareness of their realities and higher aspirations for a better future. However, young people’s awareness of their capabilities and rights collides with a reality that marginalises them and blocks their pathways to express their opinions, actively participate or earn a living. As a result, instead of being a massive potential for building the future, youth can become an overwhelming power for destruction.\”

This comment comes from a report just published by the  United Nations Development Programme, the Arab Human Development Report 2016, which is subtitled \”Youth and the Prospects for
Human Development in a Changing Reality.\” The report ranges over a wide array of issues, including gender, health, armed conflict, the role of religion, and others. Here, I\’ll focus on the economic challenge. The most visible problem is a need for job creation to reduce sky-high levels of youth unemployment in the region. But the solutions require confronting what this United Nations report calls the \”failure of the Arab development model.\” Here\’s the unemployment problem in Arab countries (footnotes omitted for readability):

Unemployment among youth in Arab countries is the highest in the world, 29 percent in 2013, versus 13 percent worldwide. First-time job seekers account for around half the unemployed, also the highest rate in the world. Youth unemployment is hugely costly to the region’s societies and requires a major turnaround in policy thinking about jobs. The region needs to create more than 60 million new jobs in the next decade to absorb the large number of workforce entrants and stabilize youth unemployment. … 

Job creation, particularly decent and sustainable job creation, is the most challenging issue facing the region. If the workforce continues to grow at current or similar rates, 60 million new jobs will need to be created in the next decade to absorb the large number of workforce entrants. Informality is one of the characteristics of employment in the region, and a large number of youth work in the informal sector where jobs are unstable and offer low wages and poor working conditions. For instance, over 2000–2005, 75 percent of new labour market entrants in Egypt were employed in the informal sector, a startling jump from only 20 percent in the early 1970s. Similarly, during 2001–2007, 69 percent of new jobs in Syria were in the informal sector.18 In 2011, vulnerable employment across the Arab region accounted for almost 30 percent of all jobs. The problem is even serious among low-income youth, who are more likely to settle for informal or unpaid family work.

The report argues that the underlying problem here is a development model which has placed too much reliance on government favoritism and government employment, in a way which has strangled the private sector. But the government isn\’t going to be able to pay for the 60 million new jobs that are needed. For a UN report, the language describing these issues is unsparing, even harsh. Here\’s a sample (again, footnotes omitted, along with references to figures):

\”Countries in the Arab region share much more than a common language and social and cultural traditions. They have long pursued a model of development that is dominated by the public sector and turns governments into providers of first and last resort. This flawed Arab model of development depends on inefficient forms of intervention and redistribution that, for financing, count heavily on external windfalls, including aid, remittances and rents from oil revenues. The reliance on unearned income is sometimes dubbed the original sin of Arab economies.

\”Since independence, most countries have seen little change in economic structure. Manufacturing—the primary vehicle for job creation in emerging economies—has registered painfully slow and sometimes negative growth. The public sector has either crowded out and manipulated the private sector or forged uncompetitive and monopolistic alliances, while inhibiting the development of viable systems of public finance. With few exceptions, the private sector is weak and dependent on state patronage, and the business environment hampers the rise of young and independent entrepreneurs. Because of their limited size and scope, the investments of the private sector have not been able to pick up the slack created by the more recent rollback in state employment. The sustainability of this system has been increasingly eroded by the rising costs of repression and redistribution.

\”The state-led development model has created contradictions. It has expanded access to key entitlements, whether public employment or food subsidies, thereby raising some levels of human development. Thus, partly because of the entitlements, societies have been able to lower the incidence of poverty and income inequality, shielding disadvantaged groups from some of the worst economic pressures of our times. However, these ostensibly favourable outcomes have entailed a deeper trade-off in the long run. …

\”While the model has created an adverse legacy of entitlement that aims to sustain some individuals from conception to coffin, it has also fostered political marginalization, economic deprivation and social exclusion. Thus, the associated trade frictions push firms without political or social connections to the margins of the economy, and opportunities for absorbing young entrants to the workforce are lost. The model thereby hobbles promising enterprises, discourages economic efficiency and deters young talents because its goal is not to promote innovation or competition, but solely to preserve access to wealth and power among a few. The result is a top-down model that is based on hand-outs, undermines individual agency and encourages short-term consumption at the expense of long-term investment in human capabilities and competitive production.
The contribution of private investment to growth in the region is among the lowest in the world. This is especially the case because entrepreneurs consistently face anticompetitive and discretionary practices that favour incumbent or large firms at the expense of new entrants, small businesses and young entrepreneurs. These practices go beyond opportunistic corruption; they reflect a deep structural alliance between political and economic elites to secure economic interests. … Resource rents in the region have been channelled into lavish and conspicuous real estate projects,  unproductive public sector spending and military expenditures, but the spending benefits a tiny slice of society.\” 

Conflict across the Middle East has many causes. But the combination of an interconnected world in which young people can see and hear how others around the world are living, combined with a system of political and economic governance that makes it extremely difficult for many of them to attain even a modestly secure middle-class economic future, is a recipe for social turmoil.