Arnold Kling  

The Outlook for New York

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If there are no objections, I am going to interrupt my non-blogging to offer a downbeat economic prognosis for New York City in the wake of the storm. I can imagine that the disruption to patterns of sustainable specialization and trade could be significant and long-lasting. Even granting that this was a smaller flood than New Orleans, New York is more multi-layered and complex. The recovery process could be quite challenging.

To start with, my guess is that restoring the transit system and the electrical grid will involve a lot of interdependencies. You cannot solve problem A without first solving problem B, which requires solving problem C, and so on. Meanwhile, because A is not working, problems X, Y and Z emerge. Even when you think you have things working, there might be weeks of inspections and testing to be completed. Unless citizens and public officials are willing to accept a whole new level of risk in everyday life.

So my guess is that it will take much longer to get back to normal than most people are assuming. In fact, the process will take so long that in the meantime "normal" will have been redefined. Perhaps some transit routes will never re-open.

The loss of key transportation infrastructure raises the cost of imports (food, construction materials, etc.), even as exports (financial services) go down. This drives down equilibrium real wages in many secondary industries (food service, for example), but the adjustment process is not at all smooth. Many small businesses fail and many jobs are lost.

In order to remain ongoing concerns, many financial services firms will "temporarily" relocate to suburban offices and to virtual offices. These "temporary" adaptations will become so well entrenched that many of these businesses will not return to Manhattan.

I live in Maryland, and I know nothing about the on-the-ground situation anywhere else. But my experiences with the New York subway system, from the painful squeals of trains descending the Queensboro bridge to the labyrinthine thicket of wires that you see underground, have always provided a sense of lurking danger. I look at the maintenance challenge of the New York subway as something akin to an old COBOL program that no one wants to touch, because anyone who ever understood its inner workings has long since departed.

I hope that I am wrong. I hope that we see spectacular feats of civil engineering and remarkable returns to social capital, resulting in a robust recovery. Above all, I hope that there are no further repercussions for New York City from the storm, such as flooding from rain-swollen rivers. But at this point, my instincts lean toward gloomier scenarios.


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CATEGORIES: Supply-side Economics



COMMENTS (49 to date)

Being a former Manhattan resident, it will be interesting to see if a politician will emerge who is willing to take on the entrenched interests--unionized public employees--who will hamper the needed reconstruction.

This might be a good time for New Yorkers to be reminded how they came to have the subway in the first place. It originally was built by a profit seeking entrepreneur named August Belmont (also a famous horse breeder). As the NY Times put it at the time (1904);

"...at the expiration of a shorter period (fifty years [with an option to renew for another 25]) the city will own this tunnel railroad that will have cost $36,500,000, and which is the key to the rapid transit situation, without the expenditure of a single dollar for construction or interest, it having simply used its credit under carefully guarded guarantees for the time being to the advantage of the lessee, who meanwhile pays the interest as it falls due and provides for the liquidation of the bonds at the expiration of his lease."

That is, the city floated the bonds for the construction, but the entrepreneur was obligated to repay them from fare box revenue. He also had to buy all the rolling stock and electrical equipment from his own funds. He was required to put up between $5 and $8 million (1904) as a surety bond.

Belmont managed all this and made a profit...until NYC's politicians decided that was too good a deal to be left to the private sector. They insisted on being partners for the next line, which planted the seeds of destruction for the system as it is today. Belmont's heirs eventually gave their interests away to the city.

Will they learn? I'm betting 'no'.

John Voorheis writes:

It will be interesting to see if any unionized public employees will emerge who are willing to take on the entrenched interests - politicians - who will hamper the needed reconstruction.

David R. Henderson writes:

@Arnold,
Welcome back, Arnold. I've missed you.
I think you make a lot of good points in this post. I think your COBOL analogy (metaphor?) is beautiful.

ed writes:

Hmmm....I doubt it.

I put this in the same category as Tyler Cowen's absurdly overdone prediction that the Haiti earthquake would be a really huge deal for U.S. politics, making Obama a one term president. (Was the word "Haiti" ever even mentioned in any of the conventions or debates?)

http://marginalrevolution.com/marginalrevolution/2010/01/haiti-whats-at-stake.html

Seth writes:

I object. :)

I believe you made a comment that you opted for exit rather than voice when you departed the blogosphere.

But, now you've proven that was a stated preference and you have now revealed your true preference.

By all means, write your essays and blog less if that's what you prefer, but blog. As you have demonstrated, there is a time and place for it.

Of course, I'm just busting your chops.

I once worked storm restoration at an electric utility after a storm knocked out power to about 60% of its customers.

They started to execute a highly-centralized playbook that was written in response to a similar previous storm that occurred a decade earlier. That process broke down quick in favor of informal processes.

One example, in that decade, communications technologies improved so much that crews could communicate with each other directly in the field. They no longer needed to radio dispatch to be directed where to to go. If the crews got into a bad patch of work, they'd just get on the radio and call nearby crews that might have a few guys finishing up and ready to move on. In the old days, those guys may have sat for 2-3 hours waiting for the 'war room' to decide where to send them. Now, they could decide for themselves and waste much less time doing it.

sartke writes:

Considering that the last time a train of any sort "descended the Queensboro bridge" was in the 1950s, I think we can safely assume that this man has extensive experience with NYC transit.

nzgsw writes:

My only objection to your return is that I have no idea where to go to follow your essays as they are published. I've stumbled across a couple, but would appreciate something like an RSS feed.

[FYI: Arnold's Econlib articles have been announced on our twitter and facebook pages, http://twitter.com/Econlib and http://www.facebook.com/Econlib and they are also available directly via Econlib's Articles page at http://www.econlib.org/library/forum.html (or our Archive page http://www.econlib.org/library/Browse/articlearchivebyauthor_K.html#Kling ).]

NYU Mom writes:

I think your predictions are excessively gloomy, although I don't think anyone can estimate any kind of timeline for return to business close to usual. My concern is the security of the city. With it empty, they need to roll in some national guard troops or else it's going to be chaos. Sure, many small businesses went south after 9/11. Here it's different. Restoration of the transit systems and obviously the power are going to be key. Son goes to NYU (flew him home on Saturday, dorm currently without power and only two dining halls open on campus). I don't know how they can have classes without the transit system working for employees and commuting students...

Arnold Kling writes:

Sartke, I was referring to subway trains coming into Queensboro Plaza, which is at the Queensboro bridge.

RPLong writes:

I think this is a great post. Perhaps not everything described above will definitely occur, but it highlights how a major, economy-wide event can be the impetus for a major change to the organization of labor and resources. Local businesses on the brink of bankruptcy will certainly be done-in. Marginal businesses with expiring leases and a high-tech workforce could surely opt to downsize the physical office and allow more employees to work from home. Any major disruption to the transit system that extends for too long in a city as dynamic as NYC can permanently alter trade routes. It happened to Petra, it can happen to a small but significant corner of Manhattan...

How many hurricanes would it take to topple NYC as the financial hub of the world? The value of this post isn't in the exactness its predictions, but in the issues revealed.

paul writes:

Your argument makes sense for a smaller, less important city than New York, or a much larger disaster.

Most of Manhattan is fine, and will be at 99% by Thursday. Those places have such high productivity that the value of operating businesses in the flooded areas will remain high. Transit disruption may slow down the recovery, and some small businesses may leave. But they will be replaced.

This "disaster" is not near large enough to change patterns of specialization in ny.

Sherman Dorn writes:

Too bad no one's done any research on the effects of 9/11 on the NYC economy. Well, no one except the BLS (http://www.bls.gov/opub/mlr/2004/06/art1full.pdf). And probably others.

Chris Wage writes:

"I live in Maryland, and I know nothing about the on-the-ground situation anywhere else"

You should have put this at the top of the post, so we could have stopped reading there.

Methinks writes:

Patrick Sullivan,

As a former fellow Manhattan resident, I assign a very low probability to that. Just look at the state of lower Manhattan going on 12 years after 9/11.

Andy McKenzie writes:

Care to make an actually falsifiable prediction that I could put on http://predictionbook.com/?

Pietro Poggi-Corradini writes:

Arnold stepped off the wagon! Yess!

D. F. Linton writes:

Welcome back. Your analogy to an old COBOL program made me laugh and wince at the same time. As the poet Wodehouse often had Jeeves say rem acu tetigisti!

Mike Gibson writes:

Arnold, first off, please come back and keep blogging. Your essays are great, but these little gem posts are very dear.

I'm not as pessimistic as you if only because Bloomberg is a pretty good tyrant. We shall see how well his team responds.

Roxy writes:

Arnold has a classic case of hedgehog syndrome. Hedgehogs are notoriously bad at prediction (google "Tetlock" for the research). But when they're right, they can be spectacularly right. I'm siding with the foxes and against Arnold on this one.

N. writes:

I am on the ground here in NYC, and I'm actually quite confident that, subways perhaps notwithstanding, we'll be "back to normal" by Monday of next week. I think that in many ways this will be something of a boon to the MTA, who I think are delighted to be able to take the entire system offline all at once and may very well roll a number of much needed repairs, etc. into the disaster recovery process.

Nor do I foresee entrenched union rent seekers as standing in the way of recovery. What will they want? Double/triple golden overtime? They'll get it. If they seriously drag their feet the papers will make them so unpopular and the pressure will be so intense that they will become rapidly more cooperative. This is something that Occupy Wall Street learned rather quickly -- the surest way to enrage a New Yorker is to stand between him and his daily commute.

Besides, we've been without the subways before -- the MTA has gone on strike, the grid blacked out, etc. So, yes, if someone wants to get on the other side of this bet, I don't think we are going to be so very bad off at all.

Also, it's good to hear from you Arnold, even if it is just dire predictions. Your contributions here are very much missed.

Lauren writes:

There is a major incentive to get power and transportation running quickly in the form of the Presidential election a week from today.

NYC is the main reason that the state of New York votes Democratic. If you can't get all those Democrats to the polls next week, or if new electronic voting machines aren't workable in wide swaths of downstate, power-outage, Democrat-heavy areas, New York state could conceivably just barely vote Republican. That would be way too much of an electoral college swing for the government to allow. Of course, Obama could come up with some idea to change Election Day. Hmmmm.

[Disclaimer: I grew up in the NYC area, and I think Arnold is likely over-estimating the delay regardless. If anything, 9-11 and the destruction of the World Trade Towers caused NYC to pour a lot of resources into planning for catastrophes. The coordination costs have largely been assessed already in the form of years of high state and local taxes, along with the credible assumption that the Federal government will kick in plenty of national taxpayer dollars for anything that gets played up by the press as a disaster.]

David E writes:

Arnold,

Please come baaaaaaaaaaaaack

Arnold Kling writes:

If you believe that things will be mostly back to normal by Monday, then you might want to check out this roundup.

The blackout of 2003 lasted about 12 hours. I don't think that is a relevant precedent.

The 2005 transit strike was Christmas week, and it lasted two days. I don't think that is a relevant precedent, either.

9/11 was a major shock, and clearly there was more loss of life. However, one can argue that it directly affected many fewer people than this year's storm. The power situation and the transit situation directly affect hundreds of thousands of people. In that sense, the storm could be more disruptive.

N. writes:

Arnold,

Name your terms, tell me the odds, and I'll put money on it!

Or how about this -- if I'm right, you gotta start blogging here again. We miss you!

Lauren writes:

By way of clarification: I definitely don't think things will be back to normal in NYC within a week. I totally agree with Arnold that abnormalcy will drag on interminably, the more so because of the extensive reliance on government for coordination rather than on the private sector. I'm just arguing that there is a good-sized political incentive in the form of the upcoming election to get basic power and basic transportation going there within a week. To be cynical, but perhaps testably so, particularly in heavily Democratic neighborhoods.

Joe Cushing writes:

Nobody is going to drag feet on purpose. The problem is it requires too much red tape to get anything done in America anymore and the more densely populated the place, the worse it is. They built the Empire State Building in less than a year but have been working on the freedom tower for 6.5 years and it is not predicted to be done til next year. So that's more than 7 times as long with technology that is 80 years more advanced.

On a similar note: it takes longer to get permission to build a house than it takes to build a house. The reason so few builders build subdivisions anymore and instead build site condos is because it takes half the time to set up a private association on a single piece of land for site condos as it does to subdivide the property for houses.

Speaker writes:

My guess is that an AP high school economics student in Rockville can see a stretching, simplistic argument for what it is; a speculative case waged against a straw man masquerading as 'economic analysis.' Is this really titled 'The Outlook for New York'? What 'outlook'? The point of this seven paragraph speculation under the subject heading 'supply-side economics' appears to be that it will take longer to get subways running and power restored than the unnamed 'most people are assuming.' Two 'guesses', two egregiously condescending 'hopes' and one 'instincts' later, we get 'gloomier scenarios.' Nothing quantifiable, and nothing that belies the admission regarding knowing nothing about on-the-ground situations outside of Maryland. I sense lurking danger. It is former academics trading on a faux following on the Internet to comment on issues about which it knows little. This is lazy intellectually, and in every other way. It will be challenging. Thanks. We know.

daubery writes:

Granting that the FRANKENSTORM that killed fewer than 100 people was far less destructive than, say, the London Blitz, I think we'll have forgotten about it in a month or two. Do you think NYC is going to look radically different in, say, five years because of it?

Were Tokyo or Berlin ever rebuilt - does anyone know?

Ben writes:

You are badly overstating the case here and underestimating the resiliency of people and the city. New York City will be back to normal very quickly. I live in midtown and was biking around downtown today.

First off, the city above lower Manhattan was barely affected at all. Electricity is off up through 39th St, but that will be back in a few days.

I clicked on the "roundup" link you sent. This gives a very skewed perspective, similar to that of the television news. It is mostly shots of areas that were flooded at the peak of the storm surge. This flooding was basically just the combination of the high tide and the storm surge, and all that water is now gone and those areas are fine, albeit with a fair amount of light debris. An aside, it barely rained in New York at all.

Getting the subway and electricity back is mainly just an exercise in clearing debris and fixing some damaged equipment. I would be very surprised if both were not more or less fully operational within a week.

another bob writes:

Yay! Arnold is back.

But, hold on just a New Yawk minute. I lived through Hurricane Gloria, while writing COBOL code for Swiss Bank Corp downtown in a building that is no longer standing.

NYC will be back. Some old businesses will leave or die. Some new businesses will start. Some will move in. Much as happened in 1984 (was Gloria '84 or '85? my old memory is failing).

Mark Bahner writes:

Hi,

This all could have been prevented if the U.S. had a portable hurricane storm surge protection system.

The U.S. should build a portable storm surge protection system

Mark Bahner writes:

Andy McKenzie, "Care to make an actually falsifiable prediction..."

Knowing virtually nothing about the situation, I'm guessing that NYC subway ridership will be at greater than 60 percent of pre-storm ridership by November 10th, and greater than 90 percent by the end of November.

sartke writes:

Arnold Kling writes:

Sartke, I was referring to subway trains coming into Queensboro Plaza, which is at the Queensboro bridge.

Posted October 30, 2012 1:12 PM

Yes, Queensboro Plaza is near the Queensboro bridge. But trains do not 'descend from Queensboro bridge' any longer - after the 3rd avenue subway and the trolley was shut down, the bridge is not used for train traffic. The trains you saw were actually coming from an entirely different underground tunnel, and are in fact, ascending to Queensboro plaza.

The idea that the people who currently manage the MTA subway system have no idea how it works is just kinda laughable. What, uh, exactly do you think they do? It's just a magic system that nobody touched for 100 years?

Please stick to subjects you know.

Steve Sailer writes:

Dear Arnold:

Glad to hear from you again. Hope your other project is going well.

Steve

Liam McDonald writes:

Arnold is back. Glad to see it.

Your COBOL comment actually had me burst out laughing!!

And I not only do I agree but I just increased my steel stock position.

OH! There would be a good blog topic. What stocks will increase sharply (or moderately) due to Sandy?

andy writes:

I don't know. I saw the floods in Prague in 2002. I don't know if this is comparable - the 'russian-type' subway system is much simpler and smaller than the one in New York and the number of buildings to be demolished wasn't that high thanks to the way the buildings are built here. But everything was more-or-less normal within a few weeks, it took several months to get the subway going and a few years to cleanup the river banks and fix all the buildings but actually the result wasn't that chaotic. Quite many people volunteered to at least clean up the worst.

Shayne Cook writes:

Arnold:

Indeed, you are "gloomy". What's up with that? (It's not like you.)

A few days after 9/11, when New Yorkers were tackling problems no one had ever anticipated would exist, Jerry Seinfeld made a comment on one of the talk show programs. When asked about 9/11 and the response in NY to it, he said, "New York ain't no candy-a$$ town!"

I suspect that's still true. I further suspect that New Yorkers will more than rise to the occasion, and the city that emerges will be better than it was before.

daubery writes:

Following expectation of rapid rebuilding - I don't think there's anything special about NYC or the people who live there. It simply hasn't sustained much damage - including 9/11 - compared to unimaginably greater calamities suffered by other cities that have completely recovered.

N. writes:

At the danger of being way too cocky, after making the commute to work this morning from Brooklyn to Midtown (where I am presently) I would be willing to double down on that bet. So far the biggest disruption to my day was having to put sugar in my own coffee because the cart I usually buy from wasn't there (I hope that doesn't come across as New Yorker arrogant as it sounds).

Transportation is going to be the biggest problem, but I think it will be mainly load balancing -- people will adjust by changing their mode of transport, adding extra time to their commutes, working remotely (more people can now telecommute than I think the wider world realizes), etc. Supply chains have not been broken. There is no reason for a significant price increase on imports.

Well -- my offer for a bet still stands, if we can find a way to agree on what constitutes an acceptable level of "normalcy."

Failing that, when all is said and done, and we're back at 100%, I would be more than happy to pen a guest post on why it went so much better than you had expected.

Charlie writes:

It's cool to have PSST make some falsifiable predictions. I will upgrade my priors about PSST as this unfolds. Right now, though, they are against Arnold.

IVV writes:

It will be interesting to see if any New Yorkers will emerge who are willing to take on the entrenched interests - New Yorkers - who will hamper the needed reconstruction.

Daublin writes:

Most of New York's value is in its human capital, and that capital was not harmed by the storm. I would think they just take the hit and go on doing things the way they always have.

I do like the COBOL comparison, though!

Zach writes:

Must disagree with some of this conclusion. The transportation network has taken some major hits, but the effect on freight should be minimal [NYC moves something like 6% of its freight by rail].

Most of the roads are already reopened [and links to all regions are available]. While traffic is heavy, incurring manpower costs, it's worse, but not an order of magnitude worse, than an ordinary day for your average truck driver.

Roxy writes:

"Limited subway service will be restored to 14 of MTA system’s 23 lines tomorrow."

Wait, what about that labyrinthine thicket of wires that nobody at MTA could possibly understand?! You know, the lurking danger, etc.?

I love how Tyler Cowen somberly intoned that this is a "very important post." I think it's sort of important too but for what I suspect are different reasons.

N. writes:

Let's not be too hard on Arnold; I understand from where this post came and I think if anything it will provide a number of very interesting PSST-like case studies. Hopefully, it will also dispel a little of the gloom. New York is not Washington. America is not Washington. Not yet, and not by a long shot.

Also, while I remain very optimistic, I don't want to start crowing just yet. It ain't over 'til it's over, and we still have millions without power, significant structural property damage, etc.

Jim Glass writes:

"normal" will have been redefined. Perhaps some transit routes will never re-open.

As a NYCer writing from the thick of it and sending this via power from an emergency generator, I say three things:

1) Glad to see you back on the blog, hope you stay!

2) I'm pretty sure you are far too pessimistic. This is not any kind of inflection point event. 9/11 was far far far greater as to both death & trauma and destruction of physical infrastructure in lower Manhattan.

This is just a storm where a lot of stuff got wet/blown down, and has to dry off/get put up again. New Orleans times one-tenth.

3) Transit routes are determined by politics. As with Amtrak, many that should have been closed years ago are kept running for purely political reasons. If this forces some of them to close, good -- but I fear you are too optimistic in this regard.

the labyrinthine thicket of wires that you see underground, have always provided a sense of lurking danger

In reality the surface wiring is both *much* more dangerous, and much harder to maintain and restore when damaged.

Manhattan (and my apartment) will have power back in a couple days (my wife, who is at Con Ed HQ, assures me) after flooded equipment dries out. Nobody was hurt there.

I was up in the 'burbs to look after my elderly entitlement-collecting mother when the storm hit. We here are expecting 10 days with no power/heat (with 30s-degree nights predicted starting now) as they try to straighten out the Gordian knots of blown down/knocked down wiring, which has *killed* people.

Dang, *I* ran into a blown down line in the dark just after the street lights failed as the storm was hitting, it wrapped half way around me, and that was a thrill I can tell you! If it had been live I'd have melted down like the Wicked Witch of West.

The lines were put underground when they proved to be much too dangerous and difficult to maintain above ground during big storms around the turn of the prior century. They operate much more simply and safely underground.

I look at the maintenance challenge of the New York subway as something akin to an old COBOL program that no one wants to touch, because anyone who ever understood its inner workings has long since departed.

The maintenance problems have much more to do with monopoly government union work rules and the dreadful cost inefficiencies of a politically managed system, I can assure you about that.

After the Roman Empire fell, people forgot such things as the formula for cement. Technology went backwards.

But technology is not going backward today. Nobody has forgotten how electric signalling equipment or railroad machinery works, or how to dry it out after it gets wet.

You don't seem to have much faith in the flexibility and resilience of distributed social systems. When way #1 to do something is disrupted, ways #2, #3, #4 appear much more quickly than you seem to appreciate*. I am looking at that (and engaging in it) right now. Your take is I think far too pessimistic there, especially for someone with a libertarian bent.
~~~
*That is, if the government does not prevent them.

I just listened on the radio to a spokesman from the New Jersey AG's office saying "We are warning businesses that price gouging during an emergency event is illegal in this state. And we are warning citizens to stay away from flood of 'profit chasing' contractors who are pouring into the state purportedly to help people rebuild but really only to charge high prices, more than they could get doing honest business at home. We don't have the resources to keep them all out, so you have to look out for yourselves."

Breaks writes:

Jim Glass,

How do union rules hurt the infrastructure repair process?

Ben writes:

80% of the subway system in NYC is running today, Monday, November 5.

http://nymag.com/daily/intel/2012/11/how-did-the-mta-restore-subway-service.html?mid=twitter_nymag

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