Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Saturday, March 24, 2018

"Innovations gap" as a concept both for the economy and for understanding adoption of or not adopting best practice

Simon Wren-Lewis is an economist at Oxford and among his activities, he writes the blog Mainly Macro. A current entry,"The Output Gap is no longer a sufficient statistic for inflationary pressure," discusses what he calls the "innovations gap."
what I call the innovations gap: the difference between actual output and the level of output that firms could achieve if they started using the best technology available to them. Because there is currently a large innovations gap, firms are likely to meet additional demand not be raising prices but by investing in these more efficient techniques. ...

Why have most firms not been investing in the most productive equipment and techniques since the GFC [Global Financial Crisis]? I think the simple answer is fixed costs and demand. Investment projects almost always involve a large fixed cost element (disruption, retraining), and with static demand those fixed costs may exceed any efficiency gain. But in a normal recovery from a recession, where demand is growing rapidly, firms are happy to incur that fixed cost because they need to expand capacity anyway to meet growing demand. In a weak recovery, on the other hand, many firms may not need to expand capacity, with any modest increases in demand going to leading firms, firms that do invest in the latest technology. Hence the divergence noted above.
It's a great term, very succinct, which usefully describes the difference between adopting best or leading practice, adopting better than what you're doing but still laggard practice, or changing nothing, when it comes to government operations.

It's the flip side of what Alexander Gerschenkron called "the economic advantages of backwardness," which Wren-Lewis calls the "fixed costs" of current operations--the investments in the technology and practice you have versus the cost to adopt new practices and technology and the retraining that is required.

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At 11:03 AM, Anonymous charlie said...

(More a response to earlier comments on debt/austerity/macro)

RE: Macro. I don't understand it either. It is a an upside down world. But I am more convinced these days that "macro" as an invention of Keynes is really about currency and value and not about the real world.

So my point of provoking you on macro is 1) to learn myself; and 2) to make the point that the issues of debt/austerity are greater than what the public debate we can allow.

In regards to this post -- I was modeling a a world where Obama "Stimulus" worked as a government program (clean energy, electric cars, pollution reduction, etc) and realized that is what China has done since 2008 is a massive debt infusion.

And that is one of the big problems with debt -- that ultimately it works until it doesn't * and that then your debtors have a lot of control over your life.

And that is the big issue with expensive housing in DC. We don't have anything like a housing crisis. What we do have is very expensive housing, reflecting a region that is the highest income averages and a city that is on the rebound.

But what that expensive housing does is constrain choices. The argument on affordable housing isn't about choice economics -- if your bartender can't afford to live here, he/she will get a higher salary or we lose bartenders to robots. But having everyone pay 30-40 of their income to pay off debt removes the engines of commerce from a city.

And to jump back to macro for an instance, that is exactly the issue/problem with a weak recovery, or a highly distorted one like we are having. Hence uber, which knows that in a weak recovery condition it has an endless supply of people willing to work for $5/h if their credit scores can support getting a car.

* unless your debt is so large you can bully your debtors. CF Trump.

At 1:35 PM, Blogger Richard Layman said...

The problem with Jane Jacobs' _Death and Life_ is that I don't think it considered a tripling or more of the US population, nor did it consider the creation of multi-market and cross national real estate machine.

So she kinda figured that what is now called filtering, what she called "a large stock of old buildings" would be enough for things to work out, to always provide a variety of types/prices of housing.

I was thinking about this in the DC context because I am revising (probably for nought) my comments on the Cultural Plan and I was thinking about one point I reacted to, their supposition that odd/marginal spaces in office buildings could be captured by arts uses at lower rents, and the thing is because of the height limit and the way it constrains the market, real estate firms are constantly keeping buildings upgraded so that there is no such thing as long term class b or c buildings and/or space, unless they are "poorly located" that is, outside the core, and even then, if close to a Metrorail station, they'll mostly get upgraded.

For awhile, the way you could "arbitrage" DC house prices and buy (once the interest rates dropped so deeply) was to not own a car, because the cost of a maintaining a car is equal to a minimum of $125,000 of a mortgage. But now prices are escalating to a point where freeing up that amount of cashflow doesn't make much difference.

2. The funny thing is that for all the complaints about displacement (separate from gentrification) the bulk of the new housing added to the market hasn't come at the expense of demolition of existing housing. It's been added on previously commercial or unused lots, such as at Metrorail stations.

That being said, there has been displacement in terms of (1) deconcentration and addition of mixed rate housing to HOPE6 developments and (2) conversion of previously rental properties to owner occupied or to market rate rents.

So there has been a reduction in affordable units and without subsidy, there isn't production of new affordable units.

At 11:15 AM, Anonymous charlie said...

2. Car free; yeah basically the prices in DC (and the lack of similar increases in suburbs) have moved that goalpost.

The benchmark I use is when otherwise useful people start to look at real estate jobs rather than do something useful. We are getting there as well.

RE: displacement; yes, well that is a key difference between DC and Arlington and reveals a lot about DC.

DC has a weak government and can't do much -- despite having a lot of law. Arlington is very strict about doing additions outside those corridors -- the only thing they can't seem to regulate is building mcmansions to the full extent of the property.

So while the larger developments don't do much displacement, the small scale stuff is what is killing cheap market rate housing.

Of course, one of the reasons is that there ins't much to preserve. As much as people might see shaw as a haven for middle class blacks it has not been one since the 1960s. NE and other places with other actual middle class families are slower to turn over.

At 3:27 PM, Blogger Richard Layman said...

didja see the saturday real estate section main article, about venturing afield "one or two neighborhoods over" because of the pricing?

The point you make about mcmansionization is why the neighborhoods no longer have a mix of prices.

It's like the class b and c office buildings with the height limit. Rather than filter (and actually it's what the Chicago School called "ecological succession" back in the 1920s) owners constantly upgrade, helped by demand being greater than the (constrained) supply.

Shaw... hmm, yes, other areas of the city were more middle class like up where I live now, Near Northeast where I used to live, etc. But there was still proximity and problems with crime.

But as we've discussed, I argue that Shaw only "resisted" gentrification because people were more focused on living in the better places, plus the delay in Metrorail service. Once more preferable areas were absorbed, people shifted their "oneoverness" to Shaw. Of course, the developments by Donatelli, EYA, etc., facilitated this.

E.g., I've mentioned in comments the story of Fresh Fields/Whole Foods. The U Street people were trying to recruit them. Then the Logan Circle people jumped in, and FF shifted and agreed to the P St. location, realizing at the time it was much better positioned, basically a part of Dupont Circle.

Of course now the U St. area has almost fully caught up. except for the lack of that circulator...

At 8:33 PM, Anonymous charlie said...

Did not see article.

Big big read (and the guy writes more than you ;-) ) but he also focuses on 1973 and the swing point.

I'd say because what we value (money) then became flexible.


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