Economics Professor Dan O’Flaherty – DT005
Dean’s Table Podcast Episode
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About the Episode
The Dean’s Table is visited by Dan O’Flaherty, Professor of Urban Economics at Columbia University and member of the Columbia University Senate. Professor O’Flaherty has published widely on urban politics and public finance, authoring numerous books including Making Room: The Economics of Homelessness, City Economics, How to House the Homeless, and most recently The Economics of Race in the United States.
Professor of Economics
Economics Professor Dan O’Flaherty – DT005
Dan O’Flaherty is professor of economics at Columbia University, specializing in urban policy and public finance. He is the author of several books, including Making Room: The Economics of Homelessness, City Economics, How to House the Homeless, and most recently The Economics of Race in the United States.
Here’s why I wanted to talk with Dan: he has put together a comprehensive look at the connections between race and economics, which is a rare contribution within his field of economics. And his scholarly credentials are matched by his deep commitments to the civic life of his hometown of Newark, New Jersey. Welcome to The Dean’s Table, Dan.
Dan O’Flaherty: Thank you, Fred.
Fred: You have written that your parents made sure that you live in a racially-integrated world. You were the only white kid in your first grade class in Newark.
As you know, 1967 was a very crucial year in the United States. There were two major race riots that occurred in the United States. One in Detroit, and one that you should know a lot about, and that happened in Newark. What do you remember about the Newark riots?
Dan O’Flaherty: I was going into Junior year in high school then.
My mother was the secretary of the local assistance board. So, that was the general assistance at that time. She had to sign the welfare checks, so the police came with shotguns sticking out the windows to get her to sign them.
The atmosphere was a little crazy, was tense in the first week of school.
And then throughout the fall there were rumors and rumors and rumors that there was going to be another riot, which didn’t happen.
Fred: And how did the Newark riot start?
Dan O’Flaherty: It was a cab driver, John Smith, was arrested on South 19th Street. He was brought to the 4th District, which was next to Hayes Homes. It was a large housing project.
There were lots of rumors about what was going on. People from CORE, especially my good friend, the late Bob Curvin were there.
Fred: From CORE?
Dan O’Flaherty: From CORE.
Fred: The Congress of Racial Equality-
Dan O’Flaherty: The Congress of Racial Equality.
Fred: It’s a civil rights organization.
Dan O’Flaherty: Yeah.
There were stones thrown and shots fired. And then for the next three or four days, they were doing a great deal of shooting. Probably mainly by the National Guard.
Dan O’Flaherty: I mean Detroit and Newark were close to the largest incidents of police killing of civilians in the past 50 years.
Fred: Oh really?
Dan O’Flaherty: We don’t quite know about the California, the two Los Angeles riots, which had more deaths, but the proportion of civilians killed by police in Detroit and Newark were very high.
Fred: I didn’t know that.
Dan O’Flaherty: The main story, as the Kerner Commission tells it, is that almost all of the firing was done by police. It was panic. A lot of the activity was concentrated around three or four large apartment projects with 15-16-story-high buildings, that the National Guard, especially who were totally scared, believed were the scene of snipers. They heard shots. It turns out mainly those were shots fired by other National Guardsmen. Quite a few civilians were killed.
Same thing happened in Detroit, although it’s not high rise.
The interesting thing too to, to even me, is that one section of Detroit did not have National Guard. Instead, it had paratroopers, who were well-trained, and their section of Detroit was very peaceful once they arrived. The National Guard in Newark fired around 11,000 riot rounds of ammunition in two or three days. The paratroopers in Detroit fired around 200, and were much more successful because they knew what they were doing.
And this is, Rajiv and I are interested in these, as game theorists, and we’re interested in these escalation situations where people kill in order to avoid being killed.
I want you to think more about how did that, the rebellion in Newark, influence your understandings of race.
Dan O’Flaherty: It influenced my understanding about race I think because I no longer saw it as something that just happened every day, but something that could cost people their lives and was dangerous and was an area where things could go in ways that were not day-to-day at all.
I got accepted to Harvard.
Fred: Well, yeah. So –
What is it like for you when you got to Harvard? When you ended up there, you knew you wanted to be an economist?
Dan O’Flaherty: I thought so.
Basically, I stayed in economics. And I was interested in city things.
Fred: So that’s where you began to become interested in urban economics?
Dan O’Flaherty: Yeah.
Fred: Do you remember who you worked with or the courses you took?
Dan O’Flaherty: There was no undergraduate urban economics course.
Dan O’Flaherty: In graduate school, I took an urban economics course.
Dan O’Flaherty: The problem was I was working full-time in Newark and commuting back and forth-
Dan O’Flaherty: … in graduate school. Just about full-time.
Fred: How did you manage that?
Dan O’Flaherty: With difficulty. I wasn’t always that awake.
It was just after going to a couple of classes and staying awake for less than 10%, I decided this was not for me.
I started working in City Hall with Harry Wheeler, who was director employment and training, and Ken Gibson.
Fred: And Ken Gibson, by the way, is the first African-American to become mayor of Newark.
Dan O’Flaherty: Yeah.
Fred: So what that experience was like? Did you gain understanding about urban-
Dan O’Flaherty: It was incredibly good learning experience.
Fred: What were you doing there?
Dan O’Flaherty: Mainly, the employment and training things.
Dan O’Flaherty: So partly it was interesting because it was the large public employment programs coming in. That gave me exposure to the rest of city government. I remember my first experience when I’d been there for just a couple of weeks, we was getting the first public employment money. My job was to go talk to the director of Public Works to see what he wanted to do with it. The mayor had told Harry Wheeler, my boss, that he was concerned, that he had been getting lots of complaints from Madam Jeritza who was an opera star who lived in the Forrest Hills section of Newark. There was a problem with the storm sewers in her neighborhood. I went to talk to the Public Works director about this. He told me about this and not the other things that he needed. I said, “What can we do about Madam Jeritza?”
He said, “The problem is that there’s a backup with the storm sewers flowing in Newark Bay because they have to get over the New Jersey turnpike, which is right along Newark Bay. And so we really need to build a pumping station so that the water can get to Newark Bay. That’s the hold up. I’m sorry we can’t do anything for Madam Jeritza except get the pumping station.” And that sounded good to me because this is my first time in the mayor’s office. 19 years old or something like this. I got it all together. I’m going to see this famous, important person.
He asked me about Madam Jeritza and I explain, ‘Sam, told me all about this, and he needs the pumping station. Can’t do anything for Madam Jeritza.’ And so the mayor just took out a little pad of paper. He’s always got his little pens and little pads of paper. He draws a topographical map of Newark and he says, “Water flows downhill. If the problem that Madam Jeritza is having is caused by the lack of pumping station, we would be under water now.” So I learned about equilibrium.
Fred: Which is an important principle within-
Dan O’Flaherty: Economics.
Fred: So, what was like though being a graduate student at Harvard in economics at the time that you were there?
Dan O’Flaherty: It was challenging and interesting. I don’t know how much attention I paid to it. I followed the rules. I learned things. There were lots of good courses. I learned none of the culture. There were good people. I was influenced by many people. Tom Schelling-
Fred: Oh, you worked with Tom Schelling?
Dan O’Flaherty: Little bit. I took his classes in undergraduate. That was the best class ever.
Fred: For our listeners, because we know who Schelling is.
Dan O’Flaherty:Thomas C. Schelling was an economist who won the Nobel Prize as one of the leaders of game theory. He had enormous insight and incredible ideas of how the world works. I think a large part of my friends have spent their entire careers developing models that Schelling wrote in a paragraph or so.
Fred: You would say he influenced you a great deal?
Dan O’Flaherty: I think he influenced me a great deal.
Fred: So as an economist though, you’ve written a lot of books.
Dan O’Flaherty: Yeah.
Fred: Most economists just publish their research and journal articles, never writing one book. Why have you written books as an economist?
Dan O’Flaherty: Because I wanted to. Because it turned out my ideas were more book sized than-
Fred: Article size.
Dan O’Flaherty: .. article size. And because I liked really long projects. And partly because I wanted to communicate with large numbers of people. They never work for that purpose, but …
Fred: Mm-hmm. Okay.
Dan O’Flaherty: For many purposes it strikes me as the best way of doing things.
Fred: Mm-hmm (affirmative). Okay. Getting at the question of writing about homelessness, how did you get interested in that?
Dan O’Flaherty: This was early when I didn’t quite know what I was supposed to do as an academic. I was teaching principles. Principles of economics, and this is early ’90s, late ’80s. I thought that I wanted to tell students that economics had something to do with real life problems that they see every day in the world. At that time, the real life problems that they see every day in the world included homelessness to a large extent. So, I decided I would talk about homelessness and principles. So I read the literature about homelessness and economics. After 15 minutes, I decided, I have my thing.
It was a huge crisis when the family homeless population hit the 5,000 level.
Fred: 5,000 where?
Dan O’Flaherty: 5,000 families in New York City.
Dan O’Flaherty: The National Bureau of Economic Research is major empirical group, had started a project on extreme poverty in developed countries. Richard Freeman and David Blume, who was then the chair at Columbia, were running this project. They decided they needed somebody to write a paper about cross national comparisons of homelessness.
There was only one person they could think of, so I started on that project.
In writing cross national comparisons in different cities, I got together huge amounts of literature. I wrote lots of theory.
Fred: What’s the theory on that?
Dan O’Flaherty: The theory is filtering, which was big in housing at that time. The basic story in the United States is that poor people get almost all of their housing as hand-me-downs from middle class people.
So what was happening in cities like New York where the big growth in homelessness was, was the middle class was shrinking. If the middle class shrinks, then you lose your … the amount of housing that can be filtered down to poor people, because poor people stay in the same size. And it increases the price. And that’s what we saw.
Fred: Okay. What do you want people to know about your research on homelessness?
Dan O’Flaherty: I just published a review paper after 20 years.
Fred: Oh, really?
Dan O’Flaherty: What we know about homelessness now is that it responds to housing subsidies. The only thing we know that it responds to is housing subsidies. Most of the other kinds of interventions don’t have much of an impact.
We don’t know whether the housing subsidy … The powerful element of the housing subsidy is the housing or the subsidy. We don’t know whether money would do the same thing. But whatever you’re going to do with housing, with homelessness is some arrangement of housing subsidies. That arrangement, has also some problems of moral hazard and also some problems of adverse selection, which makes it a very difficult problem, which is why you need economists to think about it and not about other stuff.
It is doable. The bad thing is that homelessness is decreasing in most of the United States, except in the two biggest media markets, which are New York and Los Angeles, both of which have extraordinarily poor policies.
Fred: What have you learned from your research on homelessness that you think listeners will find surprising?
Dan O’Flaherty: That the number of mentally ill people outside of institutions did not increase during the time that homelessness rose.
Fred: Oh, now that’s a surprise.
Dan O’Flaherty: Now, homelessness began rising in 1979, 1980 in New York. Most of the institutionalization was over by the mid ’70s. The deinstitutionalize, the reduction in mental hospital population that took place after that period was primarily the elderly. The early ’70s would bring in Medicaid. And with Medicaid, elderly people can go to nursing homes. So the nursing home population shot up among the elderly. At the same time, although not the most desirable thing, starting in late ’70s, the incarcerated population shot up. I mean now the jails are the largest mental institutions around.
Dan O’Flaherty: If you put those state numbers together with the nursing home numbers, basically it was a trans-institutionalization rather deinstitutionalization. Whether it was wise or not, did not put people on the street.
Fred: Yeah. So I want to talk a little bit about your most recent book, The Economics of Race in the United States. So I find it interesting that you didn’t start with the classic text on race and economics; Gary Becker’s The Economics of Discrimination, which was published in 1957. Becker, who won a Nobel Prize in Economics, argues in that book that whites have a preference, what he described as a taste for discrimination. Right? In your book, you start not with Becker, but with classic arguments from the turn of the century Black leaders, Booker T. Washington and W.E.B. Du Bois. You also draw from the mid-century titans of Martin Luther King and Malcolm X. Why these thinkers as a way to frame your book and not Becker?
Dan O’Flaherty: Why did I start with Booker T. Washington rather than Gary Becker? One, Booker T. Washington is before Gary Becker.
Dan O’Flaherty: Two, Washington and Du Bois are debating what I think are the major issues that people care about in race in the United States. They care about whether the situation of African-Americans is a residue of bad things that happened long ago, or whether continuing discrimination and other kinds of phenomena are as important or more important. Booker T. Washington and W.E.B. Du Bois set that out very, very clearly. They care about which markets, what areas matter. Becker deals with labor because everybody at Columbia was dealing with labor at the time. Labor actually does not appear as a major issue, especially to Du Bois. Du Bois is more concerned about politics. Washington is more concerned about education. And if you read Myrdal, labor is a secondary issue.
To white southerners, labor – labor is like 15th or 16th of importance after anything to do with black bodies and white bodies touching. So it seems that the central issues of race are not in Becker. To me, Becker really isn’t about preferences. Becker doesn’t care why – what causes white attitudes.
He’s doing something very much in the Schelling tradition, which is he’s asking, ‘how do these attitudes get translated into actual outcomes?’ And Schelling is the one who has taught us that attitudes and outcomes are not the same thing. Becker has become a story about some of the mechanisms in labor markets that attitudes either get changed into outcomes or not.
Fred: Okay. In your book, you examine racial disparities in detail from employment and earnings, home ownership, education, health, to wealth. What does your analysis tell us about how we can close the gap in wealth and social well being between blacks and whites?
Dan O’Flaherty: I think that the first thing is that it probably makes sense to work in all dimensions simultaneously, because each dimension is a constraint on the others. What happens, as you tell the story of each, you say, “Oh, if you’re talking about labor, I really have to know about health because health matters to labor. If you’re talking about health, I really have to know about implicit attitudes, and I have to know about education of doctors.” And you go around in these circles. And the circles are interesting. On policy is says things have to be done, and lots directions at the same time.
Wealth by itself is not a solution that will work. Housing by itself is not a solution that will work because the other things happen around it.
Fred: Okay. So what’s your thoughts then on reparations as a policy prescription to close the wealth gap between blacks and whites?
Dan O’Flaherty: That’s easy. I think there are good arguments for reparations. Closing the wealth gap is not one.
The wealth gap will return in a couple of generations to where it is now if the world continues to work the way it does. A one-time infusion of cash will not make a difference for very long. If you look at the equations, you look at the intergenerational things, as long as the intergenerational process is what it is, as long as the United States works the way United States works, then wealth disappears – wealth differences disappear in a generation or two.
The strongest one is Altongy’s finding that the marginal propensity bequeath out of current wealth is about 2%.
If I gave you $100, your kids would see $2 of it.
Fred: Okay. Because?
Dan O’Flaherty: Because you have a life to live.
Fred: But it depends. Well, $100 is different from 200 million, right?
Dan O’Flaherty: Yeah. If you were to get 200 million, it would make a difference to your life
Fred: Right. The point is, is that it depends on what the infusion is.
Dan O’Flaherty: It depends on what the infusion is, and it doesn’t appear that there are archives of magic numbers or the magic numbers are really pretty big. This is really a terrible story, but it’s well documented in economic history.
Fred: What’s that?
Dan O’Flaherty: This is about the Trail of Tears.
Fred: Mm-hmm (affirmative). Native Americans.
Dan O’Flaherty: Native Americans were … The Cherokees were sent out of Georgia in the 1830s. As a result of that, Georgia held a lottery on the land in which all white males could participate, and gave out, randomly, large chunks of Cherokee land to randomly chosen white males. Current worth, I think, would be about half a million. Two generations later, the descendants of lottery winners were indistinguishable from the lottery losers.
What we inherit from the past is attitudes and belief and how we treat each other and what we think of each other, not money.
Loury’s argument on reparations is something – to paraphrase is, is that our attitudes about race, our beliefs about stigma are the most important things we inherited from the past, not monetary things.
Fred: Okay. So what about your views on baby bonds as a policy prescription? Can you tell our audience what baby bonds are?
Dan O’Flaherty: Baby bonds are giving relatively small amounts of money to people either at birth or being invested to age 18. Again, I’m reasonably skeptical of it. The amounts of money that we’re talking about are like $1,000 or $2,000 to $3,000, which are probably not going to make a difference. It’s always good to give money to poor people, but if you think that will make major differences, I suspect that it won’t.
Fred: Okay. So let’s talk about your public service a bit.
You’ve worked for and advised various mayors and the city of Newark. What has that experience been like for you?
Dan O’Flaherty: It’s a learning experience.
All of them have been very, very bright. And sometimes they listen to me and sometimes they don’t. In some ways I think I have the healthiest relationship with the current mayor.
Fred: Okay. Who is …
Dan O’Flaherty: Ras Baraka, in that if he wants to listen to me, that’s fine if he doesn’t. We talk when we want to talk. We don’t talk when we don’t want to talk. If agrees, fine. If he doesn’t, disagree, fine. With Sharpe James, we ended up in sort of an antagonistic relationship.
Sharpe James is not someone you ask for advice. Tell what to do, if he listens. Similarly, Cory Booker and Ras Baraka. That’s sort of the distinction.
Fred: You were critical of Cory Booker, weren’t you?
Dan O’Flaherty: I ended up, yeah. I originally drank the juice, but over time his performance on the MLA, on the budget, on the water system, on the budget, on the Watershed Corporation just convinced me that he was not up for the job.
Fred: You wrote a op-ed titled “The Curse of the Celebrity Mayor”. What was that criticism really about? Was it about what you just described of him not being up to the –
Dan O’Flaherty: Yeah. It was less emphasis on water, because I had written a lot about water. More emphasis on other things. And also, an analysis of why he wasn’t a success mayor.
Fred: You think he failed Newark in some ways?
Dan O’Flaherty: Yeah. Yeah, he was not a successful mayor.
Fred: Why was he not successful?
Dan O’Flaherty: Why do I say or why wasn’t he?
Fred: Yeah, why do you say?
Dan O’Flaherty: Why do I say? Okay, so if you look at the banner issues of Newark politics, it’s crime and taxes. For the most part, crime went up a little bit. On burglary and murder it wandered around. Relative to the rest of the United States, crime went up in Newark while he was mayor. This was a time of declining crime in the United States and Newark was wandering around, and in fact, going up relative to the rest of the United States in a lot of dimensions.
On financial administration was really horrible. He came in with several million dollars in the bank. He left with a huge $34 million cash deficit. It’s very difficult to do a cash deficit in New Jersey. People talk about budget deficit. Budget deficit means I would like to spend more money than I have, but New Jersey you have to submit a balanced budget, apparently balanced budget to the state for approval. Before he left for the senate, his budget for the calendar year 2013 was approved around October. And it ended up with like a $40 million hole in cash.
So, on that realm, his financial management was very poor.
The water situation I thought was originally bad, but as time has evolved, it’s turned out to be much worse.
Fred: Wow. So you’re really committed, it seems, to Newark.
Dan O’Flaherty: I’m kind of boring.
Fred: No, but more people do not live in a place or near a place, at least, they grew up. Why do you care so much about that city?
Dan O’Flaherty: I mean why do you care so much about yourself?
Fred: So Newark is so much a part of you?
Dan O’Flaherty: I mean it’s things that I know. Partly, I think I have comparative advantage in Newark. And it’s very interesting.
And there are a lot of good people there who probably aren’t being as well served by a lot of things that are going on as they should be. And a lot of those people who aren’t being well served are people I know.
Fred: Lastly, what’s your hope for the future of Newark? What do you hope for?
Dan O’Flaherty: I hope for a good school system, which is possible, and I hope for changes in how race is looked at in the United States. It would allow a city that has a large proportion of Hispanics and African-Americans to be looked at as a normal place.
Fred: Okay. We’ll end there, but I do have a congratulations for you.
You recently won a senate seat on the faculty senate, which is Columbia’s-
Dan O’Flaherty: A tough election.
Fred: Columbia’s university-wide governing body, and you won by a landslide.
Dan O’Flaherty: One to zero.
Fred: So, congratulation Senator O’Flaherty.
Dan O’Flaherty: Thank you. Thank you.
Fred: Thanks for coming through the Dean’s Table.
Dan O’Flaherty: Thank you.
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