Russ Roberts

Romer on Charter Cities

EconTalk Episode with Paul Romer
Hosted by Russ Roberts
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Paul Romer of Stanford University talks with EconTalk host Russ Roberts about charter cities, Romer's idea for helping the poorest of the poor around the world. Romer envisions a city where the rules about property and safety and contract and so on are rules that allow individuals to flourish in an urban setting in contrast to the cities they live in now where so many aspects of economic and personal life are dysfunctional. Charter cities would be havens for the world's poor and could be created on uninhabited land in either rich or poor countries. This concept raises many difficult practical questions--some of them are discussed here along with how Romer came to be interested in creating the concept and how he hopes to bring it to reality.

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0:36Intro. [Recording date: April 19, 2010.] Championing a whole new way of economic development: charter cities. What are charter cities and why might they make the world a better place? Practical, then more abstract and academic. Practical suggestion: we could identify unoccupied pieces of land somewhere on earth that are good locations for building a city of maybe 5-20 million people; could establish a system of rules that would apply in this new city; and then people would have the choice as to whether to opt in to live under those rules. Unoccupied land, charter that specifies rules, choice for residents, investors, employers to come in or not. In practice, would take some governments to come together: what piece of land, how would we set up some government structure that would be enforced credibly into the future the rules specified in the charter. What's the academic motivation here? Very broad recognition amongst people thinking about development that the bottleneck here is systems of rules that hold people back--rules that could be different: we have demonstrated cases of better rules--but people are very far away from the efficiency frontier. If we shifted the rules, everybody could be better off. People living in poor countries could be better off; people living in the rest of the world could be better off. Urgent priority for us as economists to understand the dynamics of rules, what we used to call "institutions"--but "institutions" is too vague a term. We need to understand how people can move from inefficient rules to more efficient rules. One should think of a charter city as a practical proposal for speeding up the rate of improvement for the rules people live under. Let's start with the academic understanding about better rules. Give us some examples; and, if there are such good rules, why aren't there more of them? Haiti, for example. Paul Collier wrote a report for the United Nations just before the earthquake. Specific about the kinds of rules that hold Haiti back. For one thing, it was against the law in Haiti for a private firm to produce [electric] power for sale to others. Also the case that even if they had gotten rid of that law, there was also a pretty significant risk that if someone came in and built that power plant to sell power at lower cost that the rules could lead to expropriation of the returns to that power plant. Or conversely, a chance that the firm might come in competitively and then ex post use its monopoly power to hold up the residences of Haiti. What's missing in Haiti right now are rules that would allow the kind of win-win deal that would let Haitians get access to much cheaper electricity than they can get right now and would let foreign investors come in and earn a return on investment.
5:02We have a lot of bad rules in the United States. People might disagree about which are the bad ones, but we have some bad ones. What makes the United States different from Haiti? The United States has political forces that keep the price of sugar artificially high, that keep labor expensive, that give the government a monopoly over schools in much of the country--not everybody is going to agree on which are the bad rules but everybody agrees that the United States could be much better. Now you are saying we know how to make Haiti move in the right direction but they can't get there from here though we can sometimes. What's the difference in the underlying political structure that keeps us on a better path than Haiti? First, have to keep the magnitudes in mind. Specifics help clarify, facts on the ground help clarify. The fact that electricity costs Haitians two to three times what it costs us is telling you something about worse rules in Haiti than in the United States. Another example: if you take a Haitian worker and move her from Haiti to the United States, her wages go up by a factor of five or ten almost immediately. She can get access to cheap power, road access, other firms to trade with, reasonable export opportunities. The rules in the United States are dramatically better than in Haiti. If those don't persuade you, think about the probability that a child is going to get kidnapped and held for ransom. In Haiti, they couldn't prevent that kind of kidnapping from taking place; in the United States we do that quite well. The second thing is: there's no suggestion here that outsiders are going to come in and steer Haitians and tell them what rules to live under or what to do. The only suggestion here is to give Haitians a choice. Right now almost none of them can move to the United States and live and work under the better rules here. But we could create places with different rules. Let the market operate, basic utilities, sanitation, securities against crime--evidence is very clear that millions of Haitians would want to go there. Charter cities: take rules that basically work--not perfect but better than the rules people in poor countries live under--create places with those better rules and give people a choice.
8:30Raises a couple of questions. Start with the one hinted at: Why wouldn't the Haitian government put these rules in right now, create this city; and then they could capture some of the gains? That's exactly the question we need to be thinking about. Very deep and difficult question; we as economists have not paid enough attention to it. Haven't thought hard enough about what motivates voters when they vote, express preferences about changing rules. Not just a question about Haiti. For United States, think about our existing traffic systems and moving to ones that have congestion pricing: we charge cars for the times when they use roads when road capacity is scarce. We could move to that kind of rule, redistribute the benefits that would come from that even to those who use public transport, time-shift when they drive. Right now, the evidence suggests it is very hard to persuade people in the United States to move from an existing equilibrium to something that could clearly be more efficient. Another example: fisheries all around the world, we know how to make everyone better off by changing the rules, but we can't get people to agree to the rule change. Big puzzle. Charter cities may force people to think about and say something about our usual political process. Don't think that's the best example. In the back of many economists' minds is some concept of costless redistribution to take care of the people who have vested interests in the status quo. Extremely difficult to do in the case of congestion pricing; most of the benefits of congestion pricing would be captured by rent seekers who would get the expansion of funds. If you look at how Stockholm used the funds associated with their congestion charges to supply more public transit, you can see that there are ways to move to the Pareto frontier. Not the people who drive a lot and have to pay higher taxes. Yes, because they drive with lower congestion; and they have the option of taking public transit that they didn't have before. Disagree. Think about the fishing problem. The people who do the fishing typically get allocated the tradable quotas when you move to such a system. But you have to distribute them proportionately to the stake they have in the current system; and that's hard to do. Missing the deeper point: there's something else going on here about how people decide the rules they want to live under. Tied up with notions about right and wrong--people have notions about the right way to do things independent of the instrumental value of those rules. We need to understand that dynamic and why it can get in the way of a move to a much more efficient equilibrium. Agree; but thought talk about credibility and keeping promises in a non-democratic system--as big a problem as the ones we are talking about. Credibility important; let's come back to that. The reason I like rules instead of institutions is it helps to break things down. You can look at specific rules. As soon as you do that you see there are some rules that are formal rules, enforced by courts and police officers; and other rules that are part of people's norms. Normative in the sense that it's the right thing to do, and normal, in the sense that everybody does it so that it's the right thing to do. A lot of evidence now that people will individually seek to punish somebody who violates a norm. Without a formal system of enforcement, we establish certain rules of behavior based on norms. Trivial example: In New York City the norm is that it's okay to jaywalk--if you can get across the street without getting hit by a car, that's an efficient thing to do. In Zurich the norm is that it's wrong to jaywalk, and people will scold you if you try to cross the street even when there's no traffic it it's against the light. Two different equilibria, both enforced by norms; have to ask ourselves what can change a group of people from a NYC norm to a Zurich norm or vice versa? How do we make that kind of transition when we are dealing with a much more important issue, like let's allow for private provision of utility services instead of let's make sure all utilities are provided by the government. That's the piece economists haven't grappled with: norms as they play out in the political process.
15:32One economist who grappled with it was Hayek. Understood that there are lots of laws that are not legislated but that emerge from social interactions and competition among other rules; and they become part of our lives. Understanding that is important. Story, told before: Friend knew someone who had made reservations for a conference to be held in Russia, shortly after the end of the Soviet Union. As the conference approached, the hotel contacted him and said there was bad news--can only give half as many rooms as promised. Friend said, "What do you mean? We have a contract!" Hotel said, "Well, sue me. I've got a better offer and don't feel like keeping the contract." That kind of thing has happened in America, but not very common. For one thing, it's easier to sue people here; but that's not the main reason. Main reason is that somebody who does that feels lousy about himself. Our culture punishes people through reputations and informal mechanisms. Helpful cultural norm. If we establish an option for people in a poor country to live under a different set of rules, is it really imaginable that we--that anyone--could design those rules from the outside or internally and create what we would call a city? A city as Jane Jacobs has written about--Hayekian bent--what makes a city pleasant to live in is not usually urban planning but all kinds of intangible things that emerge and make a city civilized. A charter city is at least to some extent designed. How would these problems get solved? Going to dispute the presumption in the question, so play it back in a different context. There is no nation and no economy in the United States--if people want to come over and start a new nation here it can't possibly succeed because if you are designing new rules in the United States, that means the economy is going to be organized according to central planning. William Penn set a charter for Pennsylvania and said this is going to be a place where you can have guaranteed freedom of religion. That attracted a bunch of people who believed in freedom of religion; a lot of other details grew up supporting the system of laws in PA. But it didn't mean that Penn had to be a central planner of the layout of the streets in Philadelphia. For some reason when you talk about cities people have trouble distinguishing this notion of: we could have something that says you could have freedom or religion or freedom of speech or protection of contracts. We could put those into the rules of a place without deciding whether the minimum square footage for a shop at the entry level of a building has to be at least 500 square feet. Why do people want to leap from rules that are obvious, sensible, and easy to apply to ones that are problematic? About Haiti: not just protection of contracts, but also, your kids will not be kidnapped and held for $20-$60 in ransom and killed if you don't pay the ransom. If you want the city to be organized with no zoning rules like Houston or Jane Jacobs run wild, that's great; if you want it to be like Housman's Paris when he built the sewers and the grand boulevard, can do that too. But all of that is quite different. Aren't going to be a lot of rules; but in your ideal for the first five charter cities, who is going to make those rules? You and I might agree on a small list of rules; but who is going to make the decision in practical terms? Another context: new cities, as startups, are a lot like new firms. When new firms are created they have internal rules, including informal rules that are the corporate culture of the organization. Do we worry who will write the internal rules for all the new startup firms? Not too much. We just let firms start up and compete; and if people want to go work for them and they are productive, that's all we need. Some won't succeed; some will. Should have entry of cities with various kinds of rules; the real test is, do people want to move there? And once they move there, do they thrive, so do people want to stay? Can talk about: Who is the entrepreneur, like who is the William Penn--but that's really a detail. Want to unleash competition about sets of rules at city level like those at the level of a corporation.
23:39Don't have to worry about whether there will be Casual Friday; but we have to get to some of the nuts and bolts. How would we get the first one? How might it emerge and what would its functioning be like? Three conceptual rules that nations can play here. One is the role of a host--a nation has some land. Another is the role of a source--could be a nation from which people who go to the city come. A third is the role of a guarantor. These roles can be mixed and matched in a bunch of ways. For example, India might try and copy what China did with its special administrative zones where cities grew up very quickly. Could have the Indian government being the guarantor, saying "we're going to protect contracts in this city. Could also have Indian being the source of the people. And it could be the host. Could say to the various states they are going to run a contest: compensate the states that put together a parcel of land big enough for a city and then set up a special governance regime for this city, and here's the charter that specifies how things will operate within that city. Very close to what many nations have done when they've created special economic zones, where in those zones they allowed different kinds of rules to operate. Also a good way for the nation to reform its rules--if you do it for the whole country you get opposition, but if you create a new place where the new rules are established people have the choice about opting in. India example continued: then have to set up the kind of local governance they want in those cities. They might opt for something that looks like the kind of governance we have in central banks: you appoint a strong leader--strong mayor movement in the United States--you have accountability and mandate for what they person is supposed to do, and that leader gets reappointed periodically by someone in the center. Could have a different model: competition within the city in some political process to elect the head of the analog of the central bank. Could run cities both ways and see which turns out better. A more interesting case would be to take a case like Haiti right now. Imagine that Brazil was the host--invested in Haiti but not sure they can enforce the rules in Haiti; we've got some land here in Brazil and are going to create a special area where Brazilian police enforce the rules and where Haitians are free to come. Brazil would take the initiative and create the charter. The United States could do the same thing; could even do this in Guantanamo Bay, hardly anyone living there; could set up a special structure there, specify how it's going to be governed and then give Haitians the choice. The charter would be the outcome of either the initiative of a single existing government or a negotiation between existing governments; and that charter would almost always specify some kind of executive position and some kind of process for succession and a mandate for that executive.
28:18Could also just let Haitians come here freely. Presumably most people find that politically unpalatable. Welfare system a handicap. Hard to think of Brazilians or Americans giving space for people giving space for poor people outside of their borders. The Guantanamo Bay example interesting. The Brazilian example: Brazil could operate much like Guantanamo: could set aside some land, even maintain border controls around this land, and say you could come and live in this zone; doesn't give you the right to live in Brazil or to all the laws of Brazil. Conceivable that the ability to customize the rules would make it possible for us to be more open, give us access that work pretty well. But part of the reason to come to the United States is the ability to trade with 300 million people. You don't really want to create an independent tiny little place. Hong Kong was this independent, tiny little place and it traded with everybody. But much of the service trade would be internal unless you let people move in and out. Guest workers. We as economists often say we're in favor of more migration by poor people, but there's a political impediment, so our ideas are going to be stymied. That's kind of a dodge. Right now, 700 million people say they are ready to move permanently to another country. A lot of the people who say they aren't ready to move probably would agree to move if they thought it was a realistic prospect and they knew somebody who lived someplace else. There are a lot of people in the world who are desperate to get away from bad rules. And it's pretty predictable where they come from. If you just look at the worst-governed, poorest places in the world. Need to think about scale. We could take a couple thousand more people in the United States, but that's just a drop in the bucket. We need to think about a billion people. If you had a hundred cities of size 10 million, that's something we could contemplate.
32:18What might be a practical path that could get us from here to there. One would be really good. How might we get from zero to one? Hong Kong was in a sense number 1, but it was done incorrectly in the sense that the deal was forced on China. The people in China now will say it turned out so well they'd do it over again. Pennsylvania is another illustration, but that's even more remote historically. To do one today, what you need is a leader of a country with a lot of land and not that many people who sees the importance of providing manufacturing and service sector jobs and therefore sees the importance of having a city, but can tell that just with his own residents, he's unlikely to get to a city of sufficient size to make it an attractive city for the world. Set of conversations, going to be relatively public in the next few months, with the previous President of Madagascar, who said this would be a great idea for Madagascar. If there were a special zone in the south of Madagascar where almost nobody lives, people from Madagascar and from sub-Saharan Africa could move there and have it be a hub, major connecting point between Asia and Africa. If he had a partner who joined in with him, he could solve this problem of long-term commitment in infrastructure. Risk of political unrest in the future; knew that investors wouldn't come in if the only guarantee of their investments was by the President of Madagascar. How would the partnership work? Talked about partner-countries. Structure he would be comfortable with would be a treaty which would assign administrative rights over a piece of land for some period of time to either another nation or consortium of nations of which the host nation could be part of that consortium. The treaty would assign administrative rights--the legal system and regulatory enforcement--would be provided by that entity. Depending on how it's set up, it could be that the city returns to governance under Madagascar, but have to plan ahead--citizenship--or could continue indefinitely. European nations could help serve as guarantors; but then there was a coup in Madagascar and he got thrown out, so that one's not going to go through. There are other countries like that where the leaders see the same potential; that's the path where we'll get the first one.
36:37Developing world: the United States. There are a lot of states with some serious budget problems. Have you thought at all about California starting a charter city? Or, there's a free state movement: a bunch of folks would move to a particular state--New Hampshire has been suggested--where they could use political influence to change the rules in those states. The United States is rather inflexible; we don't see that kind of experimentation. Health care. Any thoughts? The first point is that as unhappy as we are with them, the rules in the United States are just dramatically better than most places on earth. This is where most people who want to move permanently want to come. To find a dynamic that would improve our existing rules is less pressing a problem than to improve something in Africa, Haiti, southeast Asia. Second, as a practical matter, we've had pretty free entry into city-building in the United States, and open and free movement. Cities are not scarce in the United States, so building a whole new city probably doesn't create all that much additional value. If a whole bunch of people move to this new city, its land would increase in value, but it would come at the reduction in value of land in other places. The total gains for the United States are probably not that large. Whereas, in developing countries the gains are enormous, and those gains can be used to finance things like infrastructure. Much easier to pull off this huge move to the efficiency frontier in the rest of the world. It's still worth asking these questions about how do we change our rules. Is there any way to create something that looks like a startup dynamic. In a way, the United States right now is a little like Sears Roebuck when discount retailing was coming in, or maybe IBM when the PC revolution was coming. World's changing, we've got to change our rules. Slow process for existing system to change its rules. If you could create more opportunities for something that looked like a startup and then different rules could be tried, which are more effective, some value would come of that in the United States. Might not be tied to cities. Another thing that should be tied to our discussion in the United States is other ways we can change our rules for changing rules. Stockholm is an interesting example. They made the change to congestion pricing, implemented system and extra bus lines for 7 months and agreed they would turn it off; and then held a referendum about whether to go back. Clever way to use the democratic process, try before you buy; and it actually passed. That's one kind of initiative. Could give legislatures more of an up-down vote to pass a matter and less ability to logroll and negotiate over the self-interest of the particular legislature. The Base Relocation and Closing Commission, which brings proposals to Congress, just votes them up or down. Much better for deciding which bases to close. Creation of the Federal Reserve Board, Congress gets to vote about which governors sit on the Fed but doesn't get to vote on a day to day basis about what interest rates should be. The Fed has worked better as well. Cities are moving toward this strong accountable mayor system and away from a whole bunch of elected bodies where every elected player can get involved in some piece of pork. Changes in the structure of democratic decision making that could move us toward some more sensible rule-setting.
43:01The fact is, that the United States was established in a way--and people can disagree--that we have a lot of inertia in our system. Easier at the state level, but at the Federal level, hard to change the rules; might be frustrating in any one year on any one issue. Example about Stockholm: in the United States we have a lot of mythology around majority rule but we also have a lot of respect for the minority. For a smaller, more homogeneous society like Sweden that might be a more effective method. Thinking about formal and informal rules. Our informal rules are determined by what we see others doing; determines our sense of normal and usual. Then what we think is usual influences the political sphere. This framework gives us a much richer basis for thinking about tweaking the rules, the meta-rules, in a way that takes us in a more positive direction. More subtle in the United States; but in the developing world the single most effective thing we could do is give more poor people the chance to move permanently with their families to other systems of rules that they choose as being better than the ones they currently live with. If in doing that we facilitated the transition from largely rural to urban settlement, more efficient productively, leads to more stimulating life, could make a huge difference in the quality of life for millions of people. Is that the major reason that China has seen the massive migrations out of rural areas into cities? Two things that held back urbanization in China. One was restrictions that held back movement by people, especially as permanent residents. The other was local restrictions on things that you need to make a livable city for people to move into. In the last couple of decades the country has been removing those restrictions; people are flooding into cities, which is where they want to live, where they find the jobs exciting to them. The government is removing rules that kept people out of cities. But it takes some rules to make a city work. You've got to have some rules about sanitation, traffic congestion, air pollution--even Jane Jacobs would say we've got to have rules on this stuff. Mixture of formal and informal rules. In Paris, people whose job it is to ticket men for urinating on public walls. You need government to get out of the way and create a structure that will enforce the rules that makes the quality of life better for all of the people that live there. Can be any mixture but got to work.
48:24How did you come to be involved in this line of work, and why is it a passion for you? When starting graduate school, we didn't have any tools for thinking about progress. We had this thing we called "technological progress" and just this black box. Thought: Progress is the most interesting thing in history, just explaining how it happened and then bringing it to more people, being able to speed up progress--we need to understand that process. First thing to understand: discovery of new technological ideas. What does it mean to have an idea people can share instead of a physical object? What are the economic consequences of that? Quite profound when you can share. Valuable to trade with people, also valuable to live next door to people. Urbanization and globalization both finds of the sharing of ideas with people. Worked for a dozen years on the sharing of technological ideas. When you look at development: technological ideas should say that countries should be able to catch up really fast. They don't have to reinvent the wheel--they just copy it. You see that in some cases; but glaring counterexamples where they don't catch up. Became persuaded that you have to understand--at the time, that you had to understand institutions, politics, what's going on inside people's heads when they decide to stick with rules that clearly make everyone worse off, even though given the chance they'd move to someplace that has different rules. That shift away from technological ideas, and to ideas as rules and this distinction between rules as rules versus rules as norms that came out of this thinking of this notion. Very unusual career: productive academic; became an entrepreneur, founded an education company, Aplia; now involved in social entrepreneurship, strange category. What percentage of your time do you spend on this? There is a cerebral aspect to this; but also a noncerebral aspect, kids getting kidnapped or people working a dollar a day. This isn't just some provocative idea you are writing on with mathematical equations? What is the practical likelihood of this happening? Initial phase in career--curiosity-driven, basic ideas. Then entrepreneur--went out for a while; promised self would get out of line of work after about ten years. After you've been in a line of work for about ten years, you start to become a bottleneck instead of an innovator. Did a reset, entrepreneurial thing on education. Now working full time on charter cities. More time devoted to flying someplace to meet somebody who knows somebody who knows the Minister in Madagascar. Once there are a couple of countries that want to come together on some site and run with this idea all the subtle intellectual ideas will come into focus. Slow to write papers pushing people on how to change preferences to change right and wrong mostly because talking about these ideas with people. Most important thing is to make this into a reality in a particular place people can imagine. Think in a year or two we will have a place. Do a lot of people express skepticism about that? Plus or a minus that you are an academic? Probably a small minus. Concern when someone from a university says we could do this in practice. People want to see some buy-in from others on the ground. Spending any time on what that first charter might look like? Experience in the last decades writing Constitutions. How can you make that happen? If this profit succeeds--non-profit called Charter Cities--it could be a think tank, could be important nations. Nations have to be the key actors here. Important to bring the various governments in and let them decide. Then as a member of a think tank, you may have a lot of trouble attracting investors, employers. Once there are some national actors involved, the role of advisor becomes pretty clear; but presumptuous to get too far out in front of the national actors. The details could be quite different in different places.
57:12Marketing question, conceptual question. Diane Ravitch podcast, disillusionment with educational reform movement. Disillusioned about charter schools--haven't set the country on fire; haven't done well on test scores; horrible ones disappear. Rules: different and better rules. Don't know if the choice of name was a wise one. More influenced by William Penn, but more people probably think of charter schools when they hear about charter cities. Does suggest flexibility. Gets the idea across. Not finding at the moment that it's a disadvantage to have that name. On charter schools: notion of coherence: curriculum, actual schools and rules; assessments, higher level schools; training for teachers. All these parts need to be coherent, work together. What we are trying to do in the United States is pull out one piece--school building--but not necessarily align it with other pieces, which is too small. Worth asking the same thing about a city. There the case is much stronger. Special zones, but typically not self-contained--depended on roads and power from nearby city. Great thing about cities is they really are components, modules, really self-contained. As long as you hold those constant you can do pretty much anything. With charter schools, it's a component where fixing one piece along doesn't fix the rest of the system. What can someone read or do who is intrigued and wants to discover more? Try www.chartercities.org, news accounts; something we're calling a blog. General questions about cities and the dynamics of rules. Congestion pricing in Stockholm; also Phnom Penh. People can contribute inquiries through email.

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COMMENTS (30 to date)
bill writes:

I've heard similar ideas from Dan Carlin, he does a podcast called common sense. I won't link it, so I don't get flagged for spam.

He mentioned a few months ago that the states of this union are supposed to be more like independent laboratories for rules and law. He's not a secessionist, but the idea is that people in Arkansas have different views from people in California who see things differently from people in Maine.

The idea is that each state comes up with its own set of rules, and if it works well, other states can adopt them. When the federal government decides on rules for all, then we have the issues like abortion or immigration that are now hot-button.

Unfortunately, our government is too big to move, it has atrophied and become too immobile. We cannot change things to meet new situations as fast as the situations arise.

Thanks for reading all that.

-Bill

[N.B. Only 1 in 1 in 20 legitimate EconTalk comments gets waylayed by the spam filter. Including a link is not usually cause for a comment being flagged on EconTalk. The requirement of a legitimate, validated email address to post comments is sometimes cause for being flagged. Those who do not respond or are not willing to have their email addresses verified do not post comments at all. The possibility of being checked does of course annoy some who are legitimate. Checking--in the form of automated spam deterrence including email verification in cases that look borderline legitimate, plus random email verifications--prevents over a hundred false comments for every legitimate comment that appears on EconTalk. The average delay for which a legitimate comment gets held up is only a few hours even if it's being verified--and it's usually only a matter a minutes for legitimate comments.--Econlib Ed.]

Guthrie Q writes:

While the idea was intriguing, as a Hayekian-libertarian, I was constantly noticing how the language of design was replete in Romer's comments.While he made nominal reference to choice and competition, I heard a distinct bias for centralized, planned institutions (sorry...RULES). The foundation metaphor of charter schools is sadly appropriate since a charter school can innovate or be iconoclastic only insofar as it can convince the existing establishment (not the market) that its ideas are worthy.

I see 'charter cities' as being less driven by competition and more driven by the political motives of the existing states that retain control over them. In short they are top-down order rather than bottom up.

The whole paradigm of design is hamstrung by the need to agree on the rules a priori. It is also weakened by the fact that there is no mention of self-determination by the residents of such a city. So those living in the city would live under rules enforced by some autocrat who answers to a cabal of technocrats who may not even reside in the city? Dr. Romer's preference for 'strong executives' modeled on the Federal Reserve chairman is not exactly a selling point in my book.
Maybe I am too naive, but a far better solution would be to grant or auction these plots of land (with sovereignty attached) to groups wishing to create 'start-up' city-states. Only then would you get any real competition, and only then would you see a real free market in governance take hold.

Trent Whitney writes:

I found Prof. Romer's ideas interesting from a theoretical point of view, but impractical. I don't think he gave a good answer to the basic question if charter cities are such a good idea, why don't they exist already?

But the bigger problem is how do you stop the rules of a charter city from being changed for the worse? When the story of Pennsylvania was brought up, I kept waiting for the discussion of how those initial rules got changed over time to the point where it's just like any other state (the Blue Laws being lifted, for example).

This may be too romanticized, but I think you could build some sort of case for the USA as being a charter country...freed from the oppressive rules of England and with few rules put in place at our onset. And, over time, our system has been changed/corrupted to the point where we are living under a government that is once again oppressive, at least in some areas. So what are the failchecks in Prof. Romer's charter city idea to prevent that from happening?

There were a lot of parallels between this podcast and the one with the floating cities in the ocean (as best I recall, that was with a grandson of Milton Friedman's). I believe his solution was if things changed to the point where you didn't like the rules, you could just move to a different floating city. Again, I'm not sure how practical that is.

But what was a key difference is that if the agreement between a charter city and, say, the Madagascar government broke down, the experiment would be over...you couldn't just float away, as in the case of the floating cities. You'd be subject to Madagascar law. So again, I'm not convinced as to the practicality, given that the proverbial Sword of Damacles would always be hanging over your head. I'd think that the charter city would have to pass some rules favor to its host country, as, for instance, Monaco has had to change some laws over time to placate France.

bluhawkk writes:

Did the Resettlement Administration project of the 1930's prove successful in its relocation of poor families to planned communities?

vt writes:

Freeport, Bahamas is a charter city established in 1955

Doc Merlin writes:

On the driving issue:

People can already change their drive times to avoid congestion if the costs of congestion are too high. The cost of congestion is lower than the cost of changing their drive times, so they don't. Romer's suggestion only increases driving costs.

Doc Merlin writes:

Leader of a country with a lot of land and not a lot of people:

Try Russia? Canada?

Guthrie Q writes:

I also think the virtues of cities are a bit overstated. Cities concentrate resources in a small area, often at vital trading points such as deep water ports or rivers (observe how many great cities are located in the middle of a jungle or a desert-not many). There is a natural scarcity of such sites. That is why development tends to cluster around them. That is why it is beneficial to live in a city. The idea that there are such plots of land going unused would seem counterintuitive. Unless there are other factors at work, like political instability which negates the benefits of the location.Somalia has a great coastal area on the major shipping routes (just ask the pirates), but I don't see a rush of OECD development people setting up shop.
Since there would be huge capital costs for infrastructure that is not very liquid (hard to move out and take a highway or tunnel with you); the investors in such a city would logically have to consider that the host (especially if it is a dubious developing nation) would have every incentive to encourage the investment and then re-appropriate the property once it is successful, in order to gain exclusive control of the economic benefits.

Maybe Canada or Russia...But Russia is lacking in institutions, and that would scare investors,and they are paranoid of foreign interference. Both are short on warm water ports they are not using.

Mads Lindstrøm writes:

@Doc Marling

There is a big difference between congestion charging and the cost of driving in a congested lane. The latter is just waste, as nobody benefits from the waiting drivers. The former is not waste, but wealth transfered from the drivers to the state.

For most scarce resources we use the price mechanism to limit consumption, and it works really well. Why should roads be different?

That said, I do not get why we have to use congestion charge income to public transport. I would rather that we used the income to lower the (income) tax burden.

Jake Russ writes:

In the discussion I felt the indirect effects of a successful charter city abroad were overly discounted. There might be good reasons for that, but if one of these cities gets off the ground and achieved what Dr. Romer envisions, I don’t think the American people would stand idly by watching a third world country “catch up.” I think that would unsettle our domestic political landscape.

As long as Americans view America as best in the world, it doesn’t matter what horrible policies we debate over and then codify as legislation, we’ll continue to accept second-best solutions if everywhere else they also have second, or even third-best policies in place. At this point no one wants to leave. But should another country, or charter city, start to look more attractive than the US as a place to live, because it was free to select a few well chosen first-best policy options, I have to think that Americans will stop accepting the set of false choices being offered by our politicians. Call me naïve, but I believe that once Americans saw what they could have, instead of what they do have, they’d be a lot less satisfied with our political leadership.

That makes me sound like Arnold Kling, repeating his narrative that exit matters more than voting.

####
@Trent Whitney
The car was a good idea, but we had to have someone come along to invent it and then build it. Currently, the transactions costs of getting a charter city off the ground are exceedingly difficult, which is why it doesn't exist. Dr. Romer noted that he is having to travel around and talk to friends of friends of friends to get these ideas heard by political leaders. And then a gov't coup wipes out his progress. Dr. Romer believes that this will work, but he never said it was going to be easy.

@Doc Merlin
The question is why are the costs so low? Because people don't face the true costs of their actions. We don't (directly) pay for the roads. The decision to drive at the margin is artificially lower than it otherwise would be, because we subsidize driving. Congestion pricing aligns drivers with the true cost of driving. If a system like this were instituted, you could bet that more people would get off the roads which would then offset some of the congestion costs. Roads would be more expensive, but we'd spend a lot less time on them.

I'm not sure the net benefits of such a policy outweigh the costs, but it would be worth trying out.

Ryan Vann writes:

@ Jake Russ

Of course we internalize the cost of congestion; it's called a longer drive time. Invoking a "true price" in this scenario seems a bit clumsy, unless you are making an argument from environmental quality, in which case a simple emissions or gas tax covers this cost. I think Doc is right, congestion pricing won't do much, especially considering peak times coincide with start and end work hours; people aren't going to get off the road simply because their commute cost them a bit more. They still have to get to work.

Noa Resare writes:

Some info about the Stockholm congestion tax:

Just listened to your show about charter cities and thought that I would give some general input about
the Stockholm traffic congestion tax and it's consequences.

1) It turns out that it is surprisingly expensive to implement vehicle identification. This could be because
of the general lack of project management skills of our elected officials, of course. According to DN, one of the major newspapers, the total cost is about $350 million. Compared to the tax revenue of the first two years of operation totaling at about $100 million this is an expensive piece of tax.

2) According to some optimistic calculations the system will have a positive net revenue at the end of 2011. The cost of operating the system was originally estimated to $13 million annually. In reality it costs about $55 million to operate yearly.

3) The amount of traffic passing through the payment stations went down with about 20% when the initial trial period started. The latest numbers indicate that traffic volumes are slow increasing however, a study released in early 2010 indicates a 2% increase in traffic between 2008 and 2010.

Jeff Ankrom writes:

Detroit Mayor Dave Bing should be interested in this podcast. He has recommended an aggressive housing removal program, with the hope that the city will eventually come back to life. Large chunks of Detroit are now vacant and it might be worth establishing a charter city called New Detroit. Would the State of Michigan allow it?

Mike Montchalin writes:

Detroit would be a natural for a charter city. The existing city council might very well follow Chavez' Bolivarian model. I guess that is why Romer looks to the establishment of a new city.

In the 1930s about 400 Mennonites established Filadelfia, Paraguay after receiving a concession from the Paraguayan government that they and there descendants be exempt from military service.

Also in Paraguay, there is Ciudad Del Este, established in 1957 and is now Paraguay's second largest city. It has a Free tax commerce Zone, third largest after Miami & Hong Kong. Ciudad Del Este is said to generate 60% of Paraguay's GDP.

As Guthrie Q noted, Romer

TheRidge writes:

How will the optimal rules stay optimal ? What political structure will be used to both determine and enforce such rules ? How do we know the optimal rules will not be subverted for suboptimal rules that benefit political allies. How will culture keep the political system in check ? How will the education system work when the majority of the students do not speak the same language ? It seemed to me there we a whole lot of optimistic assumptions in the charter city idea.

Guthrie Q writes:

I think all the discussion of Stockholm was a distraction to the main point. It was offered as an example of an effective social engineering project that created functional incentives that actually changed behavior. I am mostly skeptical of such projects. They are meant to give us faith in urban planning. But cities, like corporations (or any other social construct) must evolve and change.
The question that several people raised is the right one: if this is such a great idea (and I agree it is intriguing) then why do you have to sell it so hard? The mayors of New Orleans, Detroit, Buffalo, and Cleveland should all be jumping on it. Except that the type of statist bureaucrats who run those cities tend to be most wedded to top-down, centrally planned 'urban renewal' that have thus far done nothing.
The answer is control. No one not mayors, governors, or leaders of nations wants to give up control, but that is the sine qua non of any meaningful innovation.

Jake Russ writes:

@Ryan Vann

You're right to say that congestion time is part of the costs, but that still leaves the external cost to other drivers of your car being on the road. And you note the environmental impacts et al. Though I'm skeptical of the greenhouse concerns. The driving decision at the margin is artificially low, due to the way we've decided to pay for it. It's like a game of split the check for roadways.

To make matters worse the value of that lost time is just thrown away.

I can't speak to the evidence cited by Noa Resare, but the London experience was called a success by the BBC, congestion down some 30%.

Maybe that's not enough, but again, this is a policy worth trying out.

Russ Roberts writes:

The reason congestion taxes aren't more popular in the US is that they tend to hurt drivers while increasing tax revenue. Though politicians like more revenue, a lot of voters drive.

The logic goes like this. True, there is an externality when a driver is added to a congested road. It slows everyone down a little. The driver rationally ignores this cost and enters as long as his gain from driving is worth it.

A tax discourages driving and lowers travel time. But the gain in travel time can't offset the tax. If it did, then more people would enter the road and that contradicts the tax reducing congestion. In other words, the tax has to be large enough so that when you include the effect of brisker travel, drivers are still punished. That's what gets people off the road.

So drivers are worse off. The gains in tax revenue from the toll are big enough to compensate drivers for their loss in foregone travel and higher taxes but you have to return the revenue in a way that isn't correlated to much with how much people drive. Otherwise there's no tax. In economics jargon, you have to return the tax in a lump sum fashion. That is not so easy to do.

Of course some drivers will benefit from the new situation. Drivers with high value of time will find that the gains to them from lower congestion are not offset by the tax. For them, it's a good deal. But it can't be a good deal for most drivers or even the marginal driver. If it is, the tax is too low.

There is an easy graphical proof of these claims when all drivers have the same demand to travel and the same value of time. Of course that is an unrealistic assumption. But it illustrates why the politics of tolls isn't so straightforward.

John Berg writes:

Clearly, Dr. Roberts has "the heart of teacher" and encourages his friends and associates to examine their ideas in a positive and supportive manner. Indeed I found myself raising questions within the first five minutes of this podcast only to find that Dr. Roberts asks most of them before the podcast is done. A recent essay by Jason Goldberg, "What kind of socialist is President Obama?" attempts to parse socialism into its many facets and find a way it might fit under the US Constitution. I would suggest that Charter cities might be incorporated under 50 different state laws or, perhaps, in the District of Columbia. Given Dr. Romer's apparent intent, I suggest reading http://www.lewrockwell.com/orig4/ellis1.html would be appropriate.

John Berg

M. Prout writes:

Great topic choice! Next, continuing with a cities theme, a discussion on Jane Jacobs? Perhaps with Sandy Ikeda or Peter Gordon as guest? Robert Nelson, Mathieu Helie, or Joel Kotkin would also be interesting speakers on issues of cities and urban organization/economics. Thanks, Russ!

Justin P writes:

@Guthrie
"The foundation metaphor of charter schools is sadly appropriate since a charter school can innovate or be iconoclastic only insofar as it can convince the existing establishment (not the market) that its ideas are worthy."

I was thinking the same thing. The Madagascar story was revealing, in that they had a Coup. Any Charter City will always be fearful of changing political winds, the Sword of Damacles that Trent talked about.

That's the fatal flaw to Romer's argument for developing countries. Why are third-world countries so poor, because they have bad rules, but rules imposed by Government.
Would Romer think about setting up a Charter City in Venezuela? I don't think so. Why? Because he know Chavez will only nationalize it, if it were successful.

I love the idea and theory behind a Charter City, we could charter, Hayeksberg, an Austro-Libertarian city, based on free market principles. Yet, when the city flourishes, the collectivists would come in seeking rents to extract. Then we'd have to charter Misesville, then Mengerville...then....

John Berg writes:

On the 26th, Guthrie Q wrote in part:

I think all the discussion of Stockholm was a distraction to the main point. It was offered as an example of an effective social engineering project that created functional incentives that actually changed behavior. I am mostly skeptical of such projects. They are meant to give us faith in urban planning. But cities, like corporations (or any other social construct) must evolve and change.

end Guthrie comment

The beauty of the US Constitution is in the fact that it recognizes the foibles of man and allows for change in a very controlled and limited way. If you except the concept of the Federal government being limited to specific powers and being denied all others with deference to the States, they you immediately see the limits to the changes the Federal government can make at the Federal level. It is the inefficiency that provides the freedom that the States need.

George Will recently regreted the 1910 change to a popularly elected Senators. This change upset the important balance of powers at the Federal level. But many more important changes have been made since 1930. Perhaps we need to reexamine the unintentional effects, especially those made by regulation rather than legislation. The thoughts of Romer all seem to lead to elitist despots, none of whom have the inclination of William Penn, or Benjamin Franklin.

John Berg

Stan S. writes:

I'll start off by saying that I'm a big fan of the blog, it makes my commute enjoyable, and this is my first comment. Russ never fails to ask the questions that I have in my head when listening to guests, and it's a satisfying learning experience.

The discussion will Paul Romer was different. Some of my questions were answered, many others lingered. I'd like to apologize in advance for not fleshing out my points more carefully.

0. Just as a note, Neal Stephenson has described a very similar structure in his book, Snow Crash.

1. Rules are difficult to change in a democracy for a reason. With flexibility comes responsibility.

2. If one deli makes better sandwiches than another, I can vote with my dollars immediately. But I can't move myself, my job, my house, and my family every time my city changes the rules it plays by.

3. Economy thrives on predictability. As an example, land use zoning is critical for attracting developers because no one would invest in a house if a paint factory may be built next to it next month. Businesses need to know what the rules are before starting a business, and they need to be confident the rules are relatively stable.

4. Changing of social norms is as difficult as it is mercurial (e.g. disco.)

5. Voters typically have a short-term outlook. Short-term outlooks rarely play well with long-term sensibility. Do you want a cheap SUV now or clean air in a 100 years? Creating a system by which governmental change is easy and swings with the voters is unlikely to result in long-term, healthy growth.

6. We all love Jane Jacobs, but her view is almost entirely West Village-centric. We're not all white, well-educated activists. She plainly admits that it is easier to plan in homogeneous environments.

7. A city is born out of diversity of views and opinions. Much like health insurance, you can't only insure healthy people. Other examples include Scientology and yoga. The self-selection that results out of people being only among other people that share their views would not result in a healthy city.

8. Imagine a well-functioning charter city. Now another charter city comes along that has all the same rules, except taxes are lower and slavery is allowed or church-going is a requirement. It is easy to see the self-selection play out.

9. Similarly (and this was mentioned in the discussion), which cities would house the poor, the handicapped, the elderly?

10. Finally, you can't overlook interaction between global cities. If anything, rules are becoming smoothed among not just cities, but countries.

I cannot possibly imagine that a system in which cities are allowed to become more competitive with each other for the tax base will result in a better-functioning economy. This is similar to edge cities, that pulled businesses away from central cities through tax incentives. A mall built just outside the municipal boundary is not an efficient use of resources. Although in the short-term I am sure that different people benefited from the arrangement.

One of the main reasons for any system of governance is to be able to provide services to all, that not all would be able to provide to themselves (e.g. security from barbarians.) We have extended this concept to be able to provide other subsidized services such as street cleanup, water, transportation, health, education and so on. This only works because a few pay for the benefits of the many. To advocate for a system in which people can opt-out of this framework would simply create stratified cities.

David Zetland writes:

How about giving everyone (every family) in the world a second passport? To another, randomly-chosen country?

That allows people to move to existing system and make evolutionary improvements...

Not sure if this is more or less realistic than charter cities, which are easier to start but less likely to succeed.

John Berg writes:

How about telling every one that they must stay in their own sovereign country and fix it--even if it means violence.

And allow me finish by saying that the moderators do a great job and I find the podcasts addictive.

John Berg

V writes:

It would be worth trialling the charter city idea in Australia. Perhaps somewhere on the Northern Coastline, it could initially provide workers for the mining industry, but also for service industries to SE Asian nations. It may also provide greater opportunities for the indigenous population.

Matt H. writes:

I wonder if the idea of charter cities could be tested using virtual worlds? Games like World of Warcraft are immensely popular and detailed; they create extensive networks of people who play for endless hours. If a game was setup to explore city-state building and the players had to collaborate on what the overarching rules and guidelines would be for each state we might be able to reach some interesting conclusions on how new, real world city-states would evolve. The gamers would be given the opportunity to migrate if they didn't agree with one city's rules and the consequences of each city's decisions would be similar to those in real life. Basically, it would be analogous to a Sim-City game, with only one world containing all gamers.

Paul Romer writes:

1. Pesky Facts
Noa, the numbers you report are very different from the published data. See for example:

http://www.stockholm.se/PageFiles/70349/Sammanfattning%20eng%20090918_.pdf

Can you point us to your source?


2. Pesky History
To those who argue that Hong Kong would never work in theory (Sword of Damacles, Jane Jacobs wouldn't want to live there ...): How do you explain the fact that millions of people actually moved there? And stayed?


3. Revenge of the Philosopher King
Mr. Zetland, what exactly is your plan? Force immigration on voters who don't want it and never let them have any say? (Have you been getting political advice on this from Gordon Brown?) Mr. Berg may have a different view about how realistic your plan is.


4. Resistance to Congestion Pricing
I stand by my claim that the failure to adopt it more widely can not be passed off as rational behavior by voters and government officials.

- Let T1 be the travel time with a fee.
- Let T2 > T1 be the time with a fee F.
- Let w be cost of time for any driver who stops driving when the fee F is imposed.

We know that for such a driver, the net cost of driving with the fee, F+w*T1 must be greater than the cost before, w*T2. Russ's point, which is correct, is that people who don't drive are worse off with the fee.

But as along as the cost of time w' is higher than w for people who continue to drive, the theory tells us nothing about whether they are better off or worse off after the fee is imposed. If we use the wage as a proxy for the cost of time, we know that there is enormous variation in w. We also know that the people who are likely to be on the margin are also likely to be low income workers. For realistic commute times and differences in wages, for most workers, w'*(T1-T2) could be much bigger than the actual fees that people have to pay. (Even at peak hours, the fee to enter Stockholm is about $3.)

The other thing we know is that it takes a very small reduction in the number of drivers to have a big reduction in travel time. See for example:

http://www.impresaconsulting.com/node/55

So even if you don't rebate any of the revenue, the number of people who are worse off with the fees may be small compared to the many, high wage individuals who are better off with lower travel time. And all it takes to win an election is a majority of the voters.

JSStewart writes:

The concept of Charter Cities is interesting and doable. Have location-tropical/good harbour/lots of land/ English speaking--if properly presented- gov't might go for it-might have to buy some land (cheap) and permit some tenure for present locals.
Big questions--has anyone drafted a charter?
How does one fund the establishment?
Who rules? Private Board? Where I am thinking of could be done--yes or no in one year
Comments please
JS

Nathan writes:

The question of opportunity cost seems not to have been handled. All land on earth is owned/administered under some legal system. Having seen how many indigenous peoples have been taken advantage of with new city projects (like Brazilia) the question of how to find the "empty" land needs urgently to be addressed in this discourse.

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