Didier Sornette at TED: Predicting Financial Crashes, Dragon Kings

Links for Later 10-16-12

1. The Desert of the Real: when quantum finance shows up, things get weird
2. Medical devices pipelined from academia to industry
3. Why the tea party won't just die
4. Vikram Pandit ousted at Citigroup. Citigroup stock still down 89% from peak.
5. Art heist: Where was Thomas Crown at the time?
6. William Carpenter interviewed by Days of Yore
7. La Serrrata ("the closing"), the downfall of Venice, and the self-destructive impulses of the 1% by Chrystia Freeland

1% Feeling Put-Upon

Max Abelson reports some solipsistic quotes from members of the 1% who are quite unhappy with their lot in life. Income inequality will do that to a person, especially at the top. The more you make, the more insecure you are that you're going to be able to keep making it--your income volatility goes through the roof, and small changes in your relative ranking have big impacts on how well you do.

Nassim Taleb's fragility of the power law hits hard no matter where you sit. Joshua Brown (Reformed Broker) sees this other side of inequality. Being smart about investing (or anything) is no longer any guarantee of success. The market will eat your lunch.

This common problem of the rich and poor under conditions of high inequality is an idea I'll be working with over the coming year.

Chancellor Katehi Walks to her Car

Following the UC Davis pepper spray incident, Chancellor Katehi held a press conference this weekend. The students surrounded the building, waited for her to come out, and greeted her with eerie silence.

Quote of the Day

Mark your calendars: The corporate media died when it announced it was too sophisticated to understand simple declarative sentences. While the mainstream media expresses puzzlement and fear at these incomprehensible “protesters” with their oddly well-worded “signs,” the rest of us see our own concerns reflected back at us and understand perfectly.

-Dahlia Lithwick

Marine Veteran Shot in the Head by Police at Occupy Oakland Protest

Militarized police action against peaceful protestors. People should lose their jobs over this.

Max Udargo's Response to the 53% Guy

From Max Udargo at the DailyKos, reprinted in here in full because it's worth keeping, and should probably be reprinted in high school civics textbooks and such:

Hello,

I briefly visited the “We are the 53%” website, but I first saw your face on a liberal blog. Your picture is quite popular on liberal blogs. I think it’s because of the expression on your face. I don’t know if you meant to look pugnacious or if we’re just projecting that on you, but I think that’s what gets our attention.

In the picture, you’re holding up a sheet of paper that says:

I am a former Marine.
I work two jobs.
I don’t have health insurance.
I worked 60-70 hours a week for 8 years to pay my way through college.
I haven’t had 4 consecutive days off in over 4 years.
But I don’t blame Wall Street.
Suck it up you whiners.
I am the 53%.
God bless the USA!

I wanted to respond to you as a liberal. Because, although I think you’ve made yourself clear and I think I understand you, you don’t seem to understand me at all. I hope you will read this and understand me better, and maybe understand the Occupy Wall Street movement better.

First, let me say that I think it’s great that you have such a strong work ethic and I agree with you that you have much to be proud of. You seem like a good, hard-working, strong kid. I admire your dedication and determination. I worked my way through college too, mostly working graveyard shifts at hotels as a “night auditor.” For a time I worked at two hotels at once, but I don’t think I ever worked 60 hours in a week, and certainly not 70. I think I maxed out at 56. And that wasn’t something I could sustain for long, not while going to school. The problem was that I never got much sleep, and sleep deprivation would take its toll. I can’t imagine putting in 70 hours in a week while going to college at the same time. That’s impressive.

I have a nephew in the Marine Corps, so I have some idea of how tough that can be. He almost didn’t make it through basic training, but he stuck it out and insisted on staying even when questions were raised about his medical fitness. He eventually served in Iraq and Afghanistan and has decided to pursue a career in the Marines. We’re all very proud of him. Your picture reminds me of him.

So, if you think being a liberal means that I don’t value hard work or a strong work ethic, you’re wrong. I think everyone appreciates the industry and dedication a person like you displays. I’m sure you’re a great employee, and if you have entrepreneurial ambitions, I’m sure these qualities will serve you there too. I’ll wish you the best of luck, even though a guy like you will probably need luck less than most.

I understand your pride in what you’ve accomplished, but I want to ask you something.

Do you really want the bar set this high? Do you really want to live in a society where just getting by requires a person to hold down two jobs and work 60 to 70 hours a week? Is that your idea of the American Dream?

Do you really want to spend the rest of your life working two jobs and 60 to 70 hours a week? Do you think you can? Because, let me tell you, kid, that’s not going to be as easy when you’re 50 as it was when you were 20.

And what happens if you get sick? You say you don’t have health insurance, but since you’re a veteran I assume you have some government-provided health care through the VA system. I know my father, a Vietnam-era veteran of the Air Force, still gets most of his medical needs met through the VA, but I don’t know what your situation is. But even if you have access to health care, it doesn’t mean disease or injury might not interfere with your ability to put in those 60- to 70-hour work weeks.

Do you plan to get married, have kids? Do you think your wife is going to be happy with you working those long hours year after year without a vacation? Is it going to be fair to her? Is it going to be fair to your kids? Is it going to be fair to you?

Look, you’re a tough kid. And you have a right to be proud of that. But not everybody is as tough as you, or as strong, or as young. Does pride in what you’ve accomplish mean that you have contempt for anybody who can’t keep up with you? Does it mean that the single mother who can’t work on her feet longer than 50 hours a week doesn’t deserve a good life? Does it mean the older man who struggles with modern technology and can’t seem to keep up with the pace set by younger workers should just go throw himself off a cliff?

And, believe it or not, there are people out there even tougher than you. Why don’t we let them set the bar, instead of you? Are you ready to work 80 hours a week? 100 hours? Can you hold down four jobs? Can you do it when you’re 40? When you’re 50? When you’re 60? Can you do it with arthritis? Can you do it with one arm? Can you do it when you’re being treated for prostate cancer?

And is this really your idea of what life should be like in the greatest country on Earth?

Here’s how a liberal looks at it: a long time ago workers in this country realized that industrialization wasn’t making their lives better, but worse. The captains of industry were making a ton of money and living a merry life far away from the dirty, dangerous factories they owned, and far away from the even dirtier and more dangerous mines that fed raw materials to those factories.

The workers quickly decided that this arrangement didn’t work for them. If they were going to work as cogs in machines designed to build wealth for the Rockefellers, Vanderbilts and Carnegies, they wanted a cut. They wanted a share of the wealth that they were helping create. And that didn’t mean just more money; it meant a better quality of life. It meant reasonable hours and better working conditions.

Eventually, somebody came up with the slogan, “8 hours of work, 8 hours of leisure, 8 hours of sleep” to divide the 24-hour day into what was considered a fair allocation of a human’s time. It wasn’t a slogan that was immediately accepted. People had to fight to put this standard in place. People demonstrated, and fought with police, and were killed. They were called communists (in fairness, some of them were), and traitors, and many of them got a lot worse than pepper spray at the hands of police and private security.

But by the time we got through the Great Depression and WWII, we’d all learned some valuable lessons about working together and sharing the prosperity, and the 8-hour workday became the norm.

The 8-hour workday and the 40-hour workweek became a standard by which we judged our economic success, and a reality check against which we could verify the American Dream.

If a family could live a good life with one wage-earner working a 40-hour job, then the American Dream was realized. If the income from that job could pay the bills, buy a car, pay for the kids’ braces, allow the family to save enough money for a down payment on a house and still leave some money for retirement and maybe for a college fund for the kids, then we were living the American Dream. The workers were sharing in the prosperity they helped create, and they still had time to take their kids to a ball game, take their spouses to a movie, and play a little golf on the weekends.

Ah, the halcyon days of the 1950s! Yeah, ok, it wasn’t quite that perfect. The prosperity wasn’t spread as evenly and ubiquitously as we might want to pretend, but if you were a middle-class white man, things were probably pretty good from an economic perspective. The American middle class was reaching its zenith.

And the top marginal federal income tax rate was more than 90%. Throughout the whole of the 1950s and into the early 60s.

Just thought I’d throw that in there.

Anyway, do you understand what I’m trying to say? We can have a reasonable standard for what level of work qualifies you for the American Dream, and work to build a society that realizes that dream, or we can chew each other to the bone in a nightmare of merciless competition and mutual contempt.

I’m a liberal, so I probably dream bigger than you. For instance, I want everybody to have healthcare. I want lazy people to have healthcare. I want stupid people to have healthcare. I want drug addicts to have healthcare. I want bums who refuse to work even when given the opportunity to have healthcare. I’m willing to pay for that with my taxes, because I want to live in a society where it doesn’t matter how much of a loser you are, if you need medical care you can get it. And not just by crowding up an emergency room that should be dedicated exclusively to helping people in emergencies.

You probably don’t agree with that, and that’s fine. That’s an expansion of the American Dream, and would involve new commitments we haven’t made before. But the commitment we’ve made to the working class since the 1940s is something that we should both support and be willing to fight for, whether we are liberal or conservative. We should both be willing to fight for the American Dream. And we should agree that anybody trying to steal that dream from us is to be resisted, not defended.

And while we’re defending that dream, you know what else we’ll be defending, kid? We’ll be defending you and your awesome work ethic. Because when we defend the American Dream we’re not just defending the idea of modest prosperity for people who put in an honest day’s work, we’re also defending the idea that those who go the extra mile should be rewarded accordingly.

Look kid, I don’t want you to “get by” working two jobs and 60 to 70 hours a week. If you’re willing to put in that kind of effort, I want you to get rich. I want you to have a comprehensive healthcare plan. I want you vacationing in the Bahamas every couple of years, with your beautiful wife and healthy, happy kids. I want you rewarded for your hard work, and I want your exceptional effort to reap exceptional rewards. I want you to accumulate wealth and invest it in Wall Street. And I want you to make more money from those investments.

I understand that a prosperous America needs people with money to invest, and I’ve got no problem with that. All other things being equal, I want all the rich people to keep being rich. And clever financiers who find ways to get more money into the hands of promising entrepreneurs should be rewarded for their contributions as well.

I think Wall Street has an important job to do, I just don’t think they’ve been doing it. And I resent their sense of entitlement – their sense that they are special and deserve to be rewarded extravagantly even when they screw everything up. Come on, it was only three years ago, kid. Remember? Those assholes almost destroyed our economy. Do you remember the feeling of panic? John McCain wanted to suspend the presidential campaign so that everybody could focus on the crisis. Hallowed financial institutions like Lehman Brothers and Merrill Lynch went belly up. The government started intervening with bailouts, not because anybody thought “private profits and socialized losses” was fair, but because we were afraid not to intervene - we were afraid our whole economy might come crashing down around us if we didn’t prop up companies that were “too big to fail.”

So, even though you and I had nothing to do with the bad decisions, blind greed and incompetence of those guys on Wall Street, we were sure as hell along for the ride, weren’t we? And we’ve all paid a price.

All the” 99%” wants is for you to remember the role that Wall Street played in creating this mess, and for you to join us in demanding that Wall Street share the pain. They don’t want to share the pain, and they’re spending a lot of money and twisting a lot of arms to foist their share of the pain on the rest of us instead. And they’ve been given unprecedented powers to spend and twist, and they’re not even trying to hide what they’re doing.

All we want is for everybody to remember what happened, and to see what is happening still. And we want you to see that the only way they can get away without paying their share is to undermine the American Dream for the rest of us.

And I want you and I to understand each other, and to stand together to prevent them from doing that. You seem like the kind of guy who would be a strong ally, and I’d be proud to stand with you.

Debt Ceiling Deal Roundup

I think Paul Krugman gets pride of place for expressing disgust with a President who has abandoned not only his principles, but also his dignity in a rush to make a deal, any deal, no matter how bad. Obama has failed to fight again and again. He has failed to use skillful means to achieve what is achievable.

Like Krugman, I'd have to vote no on this deal, and push for alternative resolution of the crisis. Despite protestations to the contrary, I think that non-bad deals are still possible, and that failure to reach a non-bad outcome in this fight increases the chance of having non-bad outcomes in future fights.

Why is it so important to look ahead? Tim Duy has a good summation of the strategic consequences of the deal:

Four thoughts come to mind:

• The debt-ceiling has been proven to be a very effective weapon, simply because there exists a non-trivial contingent of Republicans willing to push the button, but not a single Democrat. With that dynamic, the Republican goal of dismantling the social safety net looks achievable. They only need to chip away at it one debt ceiling at a time.



• Obama's attempt to stabilize the political system by moving to the center has failed utterly and completely. The problem for Democrats is that Obama's "center" keeps moving to the right. Obama thought that as he co-opted Republican positions, such as Romney care, he would gain Republican support. Instead, he pushed the Republicans even farther right as the only way to differentiate themselves from Obama. Then Obama thinks he needs to meet in the new "middle" - and hence we get a deficit deal with no revenue triggers, but only after a near-debacle that leaves the rest of the country, if not the world, shaking their heads. Will this episode bring sanity? No - expect the Republicans to move further right in the next debate.



• Is it futile to vote Democratic? Seriously, it is obvious now that your vote will deliver the same policy outcomes should you choose Democratic or Republican - but by voting Republican (at least on a national level), you also get the satisfaction of being on the winning team.



• Finally, it is utterly unbelievable that we are about to pursue an obviously contractionary policy course when the White House is held by a Democrat and in the wake of a GDP report that vividly illustrates the weakness of the economic recovery. Yet here we are. Team Obama must believe that deficit reduction worked in the 1990's, and thus should work now. Would a Republican president have seen the unemployment rate and the pace of growth and thought the odds of reelection where greater with a debt ceiling plan that couples long-term cuts with near term stimulus?

Tales from the Meltdown

Patrick Rodgers, the Philadelphia man who foreclosed on Wells Fargo, turning the tables nicely, is apparently also a vampire undead American. How cool is that?

Tales from the Meltdown 21: the Recap

Felix Salmon points us to Moe Tkacik's essay in the Baffler that reviews the review books of the meltdown, and mercy has he none. Andrew Lahde comes out looking smart (again) but not many others do.

Good times, good times.

Tales from the Meltdown 20: The Lower Third, The Smart Guys and Wall Street

Felix Salmon on Calvin Trillin on why Wall Street blew up.

“Don’t get me wrong: the guys from the lower third of the class who went to Wall Street had a lot of nice qualities. Most of them were pleasant enough. They made a good impression. And now we realize that by the standards that came later, they weren’t really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn’t feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht.”

“So what happened?”

“I told you what happened. Smart guys started going to Wall Street.”

Trillin’s right. Bankers have made money for centuries, by doing essentially what their fathers and grandfathers did before them. (They’ve lost money, too, but nearly always in the same way: by lending money to people who can’t or won’t pay it back.)

So, smart people, go back to making rockets and surging brains, before we all go broke.

Quote of the Day

“But the EMH, if you don’t take it too literally and get carried away about axiomatically defining strong, weak and other kinds of efficiency as though you were dealing with axiomatic quantum field theory, does recognize one true thing: that it’s #$&^ing difficult or well-nigh impossible to systematically predict what’s going to happen. You may think you know you’re in a bubble, but you still can’t tell whether things are going up or down the next day. The EMH was a kind of jiu-jitsu response on the part of economists to turn weakness into strength. 'I can’t figure out how things work, so I’ll make that a principle.' ”

-Emanuel Derman

(via Paul Krugman, via Felix Salmon)

Tales from the Meltdown 19: The Lawsuits Begin

CALPERS is going to jump up and down on top of the ratings agencies. As Barry Ritholz says, CALPERS doesn't really need the money and can't be bought off. They want to spank the unruly.

Tales from the Meltdown 18: The Olympic Diving Committee

Austan Goolsbee responds to Jack Welch's call for fiscal restraint, and other criticisms of the Obama Administration's approach to dealing with the meltdown. As quoted by Henry Blogett:

Context: Jack Welch has just opined that Barack Obama's budget is "from the moon."
Goolsbee: The budget is from the moon, Jack is from Mars and Joe [Stiglitz] is from Venus.

Look, we enter the government essentially in a hotel that is on fire. We’re throwing people from the windows into the pool to save their lives and this is the evaluation of the Olympic diving committee: Well, the splash was too big.

...

[L]ook, we were facing in the fourth quarter of 2008 and the first quarter of 2009 epically horrible declines in GDP, every measure of the economy falling through the floor, completely on fire.

Joe will tell you, in every Ph.D. program, students - in economics, students must take an economic history class and in every economic history class, the professor says, “There could never be another Great Depression because we’re smarter than we were then and we would never allow that to happen.”

We were put to the test to answer that question. If you had asked people in 1929, “Here is what is about to happen. How much would you pay to avoid the Great Depression from occurring?” The answer is they would have paid a lot.

They would have borrowed money if it could be used to prevent the Great Depression.

The fact that we are here to bitch about the economy and about this policy and that and the budget forecasts for GDP growth are 1 percent too low, I’m thrilled, I’m overjoyed that we aren’t all out of our jobs and we prevented the Great Depression. That in itself is an overwhelming accomplishment.

So, yeah, we haven't had to nationalize the banks, which is a good thing; instead, the banks are recapitalizing. That means that the toxic asset buyout program doesn't need to happen either. Also a good thing. Now, the banks need to go forth and sin no more.

Tales from the Meltdown: Obama's Conservatism

Martin Wolf notes the essentially conservative nature of Obama's banking policies, and wonders if the Administration is even asking the correct questions:

“If we want things to stay as they are, things will have to change.” Thus wrote the Sicilian writer Giuseppe di Lampedusa, in The Leopard. This seems to me the guiding principle of the Obama presidency. To many Americans, he seems a flaming radical. To me, he is a pragmatic conservative, albeit one responding to extraordinary times. In his own way, Mr Obama is following the path trodden by Franklin Delano Roosevelt.

Nowhere is his conservatism more obvious than in the handling of the economic crisis. What we have seen unfolding, from the president’s choice of Lawrence Summers and Tim Geithner as his principal policy advisers, to last week’s “stress tests”, is classic conservative policymaking. The aim is simply to get the show back on the road. As Mr Obama told The New York Times: “I’m absolutely committed to making sure that our financial system is stable.” Stability is a quintessentially conservative aim. Many radicals on the right and left insist that undercapitalised banks should be recapitalised right now. But Mr Obama sees this as far too risky.

The results of the stress tests were a big step along the road the administration is taking. They impose enough pain to appear credible, but not enough to be disruptive. The 10 affected banks will easily raise the needed money: a total of $75bn (€55bn, £59bn). Their market valuations duly soared.

Has the government done enough to get the banks back on their feet? It depends on who you ask, and on what you mean by "on their feet".

There are two important numbers in the above analysis: possible losses, and the buoyancy of earnings. Yet there is a final number of no less significance: how much capital does a bank need? The answer is: how long is a piece of string? Since many of these banks are deemed too big to fail, taxpayers are risk-bearers of last resort. The capital requirement depends partly on how well the government wants to be cushioned against possible losses and partly on how well bond-holders want to be insured against the possibility that government might refuse a rescue.

...At the end of 2008, the ratio of total common equity to US banking assets was 3.7 per cent. Without the explicit and implicit insurance provided by government, it would surely have been higher. As the IMF notes, in the mid-1990s, before the leverage boom, the ratio was 6 per cent. In the 19th century, before deposit insurance, it was much higher still.

The conclusions are three: first, the government’s exercise is more conservative on losses than that of the IMF, albeit far less so than Mr Roubini’s; second, most of the capital to be raised will come from the earnings of a banking system able to borrow on the favourable terms arranged by the central bank and then to lend more expensively to its customers; and third, the target capital ratios – Tier 1 risk-weighted capital of 6 per cent of assets and Tier 1 common equity capital of 4 per cent – are not especially onerous.

The purpose of the exercise was indeed conservative: to make it credible, though not certain, that the existing banking system and assets can survive the likely battering. This has been done well enough to satisfy the markets. But these banks will also be unable to expand their balance sheet significantly in the near future.

...The more the crisis unfolds, the more evident it is that incentives in the financial system were (and are) badly distorted. I sympathise with the conservative approach to crises, but not if it leaves in place the plethora of perverse incentives that created them. At the end of this, then, there will be one big test: will the number of institutions thought “too big to fail” be as large as now and, if so, how will they be controlled? If the answers are still not clear, there will need to be yet more change.

(via Brad DeLong)

Tales from the Meltdown 16: "Ten out of Three is a Pretty Good Record, Actually"

Daniel Kahneman, one of the godfathers of behavioral finance, is interviewed by Guy Rolnik of Haaretz on the fallibility of models, intuition and experts in the face of our own psychology:

"Psychology today differentiates between two methods of thinking: There is the intuitive method, and there is the rational one. The intuitive method is characterized by rapid learning, and it concludes very quickly that what has happened the last three times will happen forever, again and again."

Why is it that we believe that if it has happened three times, it will happen again?

"I once told a story about this: We once traveled from New York to Boston on a Sunday night, and we saw a car on fire on the side of the road. A week later, again on a Sunday night, we were traveling and again saw a car on fire in the same place. The fact is, we were less surprised the second time than the first because we had learned a rule: Cars burn at this spot.

"We find this everywhere - the speed at which people create rules, norms and expectations, even when they know it's ridiculous. This is the intuitive method at work. It remains true that whenever I travel, I always look for burning cars at that spot."

Over the last 40 years you have demonstrated that we never employ the statistical method of thinking, just the heuristic one - rules of thumb. Some economists today say the models were indeed based on statistics, but the problem is that they were based on statistics according to which the market goes up, rather than on long-term statistics.

"When it comes to finance, people link risk to volatility, but in reality, there is no connection between the two at all. There is a connection, but not when we're talking about huge risks. Greenspan and others believed that the global system - by virtue of its being global - was ipso facto more stable. Then it turned out that while it might have been more stable, it was also more extreme.

"In the last half year, the models simply didn't work. So the question arises: Why do people use models? I liken what is happening now to a system that forecasts the weather, and does so very well. People know when to take an umbrella when they leave the house, or when it will snow. Except what? The system can't predict hurricanes. Do we use the system anyway, or throw it out? It turns out they'll use it."

Okay, so they use it. But why don't they buy hurricane insurance?

"The question is, how much will the hurricane insurance cost? Since you can't predict these events, you would have to take out insurance against many things. If they had listened to all the warnings and tried to prevent these things, the economy would look a lot different than it does now. So an interesting question arises: After this crisis, will we arrive at something like that? It's hard for me to believe."

The financial world's models are built on the assumption that investors are rational. You have shown that not only are they not rational, they even deviate from what is rational or statistical, in predictable, systematic ways. Can we say that whoever recognized and accepted these deviations could have seen this crisis coming?

"It was possible to foresee, and some people did. There were quite a few smart people with a lot of experience who said bubbles are being created and they have to be allowed to burst by themselves. But it turns out that this bubble did not have to be allowed to burst by itself. I have a colleague at Princeton who says there were exactly five people who foresaw this crisis, and this does not include [Fed Chairman] Ben Bernanke. One of them is Prof. Robert Shiller, who also predicted the previous bubble. The problem is there were other economists who predicted this crisis, like Nouriel Roubini, but he also predicted some crises that never came to be."

He was one of those who predicted 10 crises out of three.

"Ten out of three is a pretty good record, relatively. But I conclude from the fact that only five people predicted the current crisis that it was impossible to predict it. In hindsight, it all seems obvious: Everyone seemed to be blind, only these five appeared to be smart. But there were a lot of smart people who looked at the situation and knew all the facts, and they did not predict the crisis."

(via Mark Thoma)

Tales from the Meltdown: Paul Krugman on the Geithner Plan

part 1


part 2

Tales from the Meltdown: AIG as Shadow Banking Reinsurance

Gillian Tett, Brad Setser and Mark Thoma note the following in a nested set of articles: “Concretations of risk, plagued with deadly correlations”

One of the selling points of financial innovation was that it would distribute risk widely thereby insulating the the financial sector from large shocks. Everyone would take a small loss, but no loss would be large enough to cause any real difficulties. That turned out to be a false promise in the face of a large, systemic shock. As problems began developing in these markets, it became evident that risk was far more concentrated than the promoters of new financial products had claimed.

Tales from the Meltdown: Geithner - Gone by June

Here, in two minutes, Chris Whalen of Institutional Risk Analytics lays out the plan that the Administration has been unable to articulate in six weeks.

Tales from the Downturn: the New Urban Landscape

Richard Florida, of The Rise of the Creative Class fame, has an extensive article on the sociological impact of the current crisis in the new Atlantic. He discusses the increasing disparity between hot urban cores and lagging "shallow roots" regions, as proxied by IP production and educational attainment:

Thirty years ago, educational attainment was spread relatively uniformly throughout the country, but that’s no longer the case. Cities like Seattle, San Francisco, Austin, Raleigh, and Boston now have two or three times the concentration of college graduates of Akron or Buffalo. Among people with postgraduate degrees, the disparities are wider still. The geographic sorting of people by ability and educational attainment, on this scale, is unprecedented.

The University of Chicago economist and Nobel laureate Robert Lucas declared that the spillovers in knowledge that result from talent-clustering are the main cause of economic growth. Well-educated professionals and creative workers who live together in dense ecosystems, interacting directly, generate ideas and turn them into products and services faster than talented people in other places can. There is no evidence that globalization or the Internet has changed that. Indeed, as globalization has increased the financial return on innovation by widening the consumer market, the pull of innovative places, already dense with highly talented workers, has only grown stronger, creating a snowball effect. Talent-rich ecosystems are not easy to replicate, and to realize their full economic value, talented and ambitious people increasingly need to live within them.

Big, talent-attracting places benefit from accelerated rates of “urban metabolism,” according to a pioneering theory of urban evolution developed by a multidisciplinary team of researchers affiliated with the SantaFe Institute. The rate at which living things convert food into energy—their metabolic rate—tends to slow as organisms increase in size. But when the Santa Fe team examined trends in innovation, patent activity, wages, and GDP, they found that successful cities, unlike biological organisms, actually get faster as they grow. In order to grow bigger and overcome diseconomies of scale like congestion and rising housing and business costs, cities must become more efficient, innovative, and productive. The researchers dubbed the extraordinarily rapid metabolic rate that successful cities are able to achieve “super-linear” scaling. “By almost any measure,” they wrote, “the larger a city’s population, the greater the innovation and wealth creation per person.” Places like New York with finance and media, Los Angeles with film and music, and Silicon Valley with hightech are all examples of high-metabolism places.