Sunday, October 04, 2015

Let the people bet

In casual conversations, some people will say, "I bet ....." usually revealing they have no clue. But betting is serious stuff. Forecasts with and without something on the line make all the difference in the world.

All assets held, bought or sold reveal serious forecasting because the individuals involved have a serious stake running on the outcome. This is why expanding the ambit of betting markets is a good idea. Alex Tabarrok at MR updates this thought in a recent post ("Corporate Prediction Markets Work Well"). It is the best way to get those with "inside information" (or insight) share their wisdom with the rest of us.

Philip Tetlock and Peter Scoblic write about this in today's NY Times ("The Power of Precise Predictions ... Making specific forecasts is the key to improving our nation's policies.")  Prohibitions against private betting are precisely the wrong policy.

The betting idea only applies to situations where outcomes within a specific time horizon can be clearly specified. Tetlock and Scoblic mention that they are currently sponsoring a betting tournament on the Iran deal. I am not sure what people are betting on in this case? A nuclear strike by Israel on Iran's nuclear plants in the next five years? Listen to this speech by Israel's Netanyau before you bet. Recall that the deal was sold with "peace in our time" gusto.

Thursday, October 01, 2015

Another "sun tax"

Voting with feet is a core benefit of federal systems. People can choose exit over voice; the power of politicians to do nutty things is thereby checked.

But there is also the "sun tax".  This means that natural (and other) amenities draw labor and capital -- and weigh on the exit option; bad policies can not simply survive but also multiply.

A quick Google Scholar search turns up only a handful of relevant scholarly studies. But the idea is simple enough. West coast and New York City taxes and regulations are known to be in a league of their own -- and very unlikely in lower amenities places.

Today's WSJ includesSarah Ketterer's "The 'Wage Gap' Myth That Won't Die. ... You have to ignore many variables to think women are paid less than men. California is happy to try"  The op-ed cites various studies that test the obvious statistical controls that narrow the observable gap (career choices, college major choices, different hours, etc.). But here is the author's key point:
The Fair Pay Act will prohibit employers from paying men and women different wages for “substantially similar work.” ... The Bureau of Labor Statistics (BLS) notes that its analysis of wages by gender does “not control for many factors that can be significant in explaining earnings differences.” 
What factors? Start with hours worked. Full-time employment is technically defined as more than 35 hours. This raises an obvious problem: A simple side-by-side comparison of all men and all women includes people who work 35 hours a week, and others who work 45. Men are significantly more likely than women to work longer hours, according to the BLS. And if we compare only people who work 40 hours a week, BLS data show that women then earn on average 90 cents for every dollar earned by men.
So 35 hours worked vs. 45 hours worked are "substantially similar"? Sound like lawsuit heaven. This means litigation costs and diminished economic growth and opportunity.

But there is that California sun. Lawmakers get to take bows for being on the side of the angels. They can roll the dice with better odds that the California economy will somehow survive. 

Saturday, September 26, 2015

No clue

I have not yet read Philip Tetlock's Superforecasting: The Art and Science of Prediction but the buzz suggests a great read so I have pre-ordered from Amazon. In today's WSJ, Jason Zweig offers amazing praise:
Three-quarters of all U.S. stock mutual funds have failed to beat the market over the past decade. Last year, 98% of economists expected interest rates to rise; they fell instead. Most energy analysts didn’t foresee oil’s collapse from $145 a barrel in 2008 to $38 this summer — or its 15% rebound since.

A new book suggests that amateurs might well be less-hapless forecasters than the experts — so long as they go about it the right way.

I think Philip Tetlock’s “Superforecasting: The Art and Science of Prediction,” co-written with the journalist Dan Gardner, is the most important book on decision making since Daniel Kahneman’s “Thinking, Fast and Slow.”
Humans are understandably eager to identify narratives (in their own lives, in market swings, in the universe, to name a few).  To be sure, most people cheer whenever there is progress by scientists working the "Standard Model" of physics.

It's a little strange. Some forecasting ability is indispensable (it is generally safe to cross the street on a green light) but skepticism is also essential.  Witness Zweig and Tetlock. Hard-to-find wisdom and perspective are essential. What else? Let us not-so-fast "go boldly where no man has gone before." Tetlock and Zweig seemingly say that we usually have no clue where it is that we are going.

Tuesday, September 22, 2015

Three poles, not two

We owe our prosperity to non-zero sum behavior and the institutions and cultures that encourage it. We get NZSB in markets functioning under the rule of law. (Don Boudreaux points us to James Pethokoukis who points us to Deirdre McCloskey for some explanations.) With Pope Francis here for a few days and political campaigns everywhere heating up, this is all worth recalling.

Binary distinctions get us into trouble. Many critics seemingly (unwittingly?) equate markets with crony capitalism. But try a three-way distinction: markets under the rule of law vs crony capitalism vs collectivism. The third has at long last been discredited but the critics are not able to distinguish between the first two. They see just one type of capitalism and many don't like what they see. That's a serious error.

Is it a tax? Is it a mandate? The Supreme Court says it's whatever the ruling party wants it to be. Not exactly the rule of law.

I am reminded of all this in reading Yuval Noah Harari's excellent Sapiens, A Brief History of Humankind. The author is very smart and an engagingly clear writer. He covers a lot, including history, biology, anthropology and economics -- and much more. He excels at discussions of how we have learned to tell ourselves stories, e.g. "imagined orders" -- all the isms -- to create the grounds for large-group cooperation.

Some of Harari's best chapters link credit, trust and economic growth. He gets it about economic freedom and prosperity. Strangely the book is also riddled with shots at markets. Harari sees ill-gotten gains all around. It's as though crony capitalism were the only kind. And he wants more supervision to fix things.  But supervision by which clan of wise men and wise women? Would not that mean more crony capitalism and a move in the wrong direction?

In one paragraph (page 328), he writes, "But in its extreme form, the belief in the free market is as naive as belief in Santa Claus. There simply is no such thing  as a market free of political bias." And "When kings fail to do their jobs and regulate markets properly, it leads to loss of trust, dwindling credit and economic depression."  I have no idea how he squares that circle. Nevertheless, it's a great book

Wednesday, September 16, 2015

Imagination needed

Milton Friedman famously argued for immigration -- on economic as well as liberty grounds. "Humanitarian" sounds good too but the essence involves giving people economic opportunity as well as greater political freedom. Friedman did warn, however, that his suggestion is complicated by welfare state policies that can add to the attraction of the destination countries. Receiving country backlash would increase,

But it is also true that large-scale immigration and the welfare state are both here to stay. What can be done? Massive vetting efforts are required.  Marginal Revolution cites a "markets in everything" private vetting service solution.

Expensive? Yes, but so are the alternatives. "Trillions" could be left on the sidewalk. Terror attacks are also expensive and so is homeland security. This may be one of the most important conversations of our day. I would put it ahead of climate change because what we see on Europe's borders right now is, I believe, just the start. Holman Jenkins sees the European status quo as just another Greek-debt approach, e.g.,  "Extend and Pretend."

It's not pretty that the shrillest (and least imaginative) view from the U.S. (somehow build a wall and have Mexico pay for it) is the one getting the most attention.

Sunday, September 13, 2015

Big history and big fears

I once (very briefly) thought that the likes of Julian Simon, Bjorn Lomborg and Matt Ridley had delivered knock-out blows to the neo-Malthusians. But that could never be.

Nevertheless, I greatly enjoyed Ronald Bailey's The End of Doom. It is well researched and nicely written. Baily, for example, gives no quarter to the anti-GMOers in his Chapter 5 "The Attack of the Killer Tomatoes."

On climate change, Bailey writes that he had changed his mind and that the balance of research he has seen persuades him that man-made global warming poses a significant problem. The chapter is wide-ranging and (as far as I can tell) well balanced. Long-run forecasts that involve climate as well as economics bring on a range of intellectual challenges that the author manages to introduce us to in just 68 pages. Is there a warming hiatus? How do we (will we) know? What are the costs and benefits of "doing something"? Is there a related severe weather uptick?  How can governments that subsidize waste in farming and water use be expected to make wise climate change policies? Solar energy? Nuclear?

Bailey seems to like the view of the Information Technology Innovation Fund view which he cites on page 234, "The paramount goal of climate change policy should be to make the unsubsidized cost of clean energy cheaper than fossil fuels ..." But I am not sure how policies in this field can remain entirely unsubsidized. At least the research could be subsidized. But will that be sealed off from politics? How?

I bring all this up because today's NY Times includes an essay by Timothy Snyder "The Next Genocide" which is apparently from his new book Black Earth: The Holocaust as History and Warning (which I have not yet read). First, let me say that Snyder's Bloodlands: Europe Between Hitler and Stalin is invaluable as we continue to try and make sense of 20th-century European history. But in today's essay Snyder recounts how an unhinged Adolf Hitler managed to link German nationalism and memories of food shortages to extreme neo-Malthusianism to crackpot euthenasia -- to bring on a world war and a holocaust. The author fears that the "Ecological panic, central to Hitler, could happen again."

Yes, the worst can always happen. But we are in the era of Deirdre McCloskey's Great Fact, the post-Enlightenment-post-1700 unheard of rise in human well-being. Unlike post-WW I Germans, many fewer people now alive harbor memories or fears of hunger or famine. Bailey reminds us that we are in the age of Norman Borlaug and that we can feed the peak population that is not far off. 

Thursday, September 10, 2015

Party like it's 1976

It's perhaps pointless to comment on Los Angeles' transportation planning policies. For the last 50 years, they have been "anti-car" and otherwise mostly brain dead.  Even the NY Times' breathless coverage ("A Los Angeles Plan to Reshape the Streetscape Sets Off Fears of Gridlock") includes some head-scratching over the latest plan to divert auto-lanes to bicycle-lanes. Going all out for transit in the hope that diminished (potholed) roads would shift auto users to transit has been a nothing but an expensive failure. So double-down.

LA is not Amsterdam. We are less flat, much bigger, often much hotter and we own many more autos. Trading an auto commute for a bike ride will be on the smallest of scales.

In 1976 (!), then-Governor Jerry Brown (the more things change ....) and his Secretary of Transportation had a similar brainstorm and took a lane from the Santa Monica Freeway for exclusive carpool use. The increased gridlock and outrage were hard and fast. The blunder was quickly apparent and the project was reversed in days. Since then, carpool lanes have been added (at great cost) rather than subtracted from existing lanes. But LA Mayor Garcetti the Council are now groping their way back to 1976.

Tuesday, September 08, 2015

Light touch

If government is a necessary evil, then let's have small government. By all means. But what about foreign policy? George W. Bush's Big Stick and Barack Obama's efforts to actually earn his Nobel Peace Prize have each foundered. The refugee problem now being experienced in Europe is easily traced to the chaos in the middle east and North Africa. There has not been a big picture (a la George Kennan) assessment of what can be done.

But an intriguing option is discussed by Professor Henry Nau who writes about "How Restraint "Leads to War" in the current Commentary. This is how he concludes (but read the whole thing):
In summary, pursue democracy, but primarily where it counts the most: on the borders of existing free countries. Be willing to use force to make sure the adversary takes negotiations seriously, but also be willing to compromise, because military power is a means and not an end. And advocate democracy, but a democracy of choice and varying traditions that preserves national sovereignty and nurtures global civil society, not centralized international bureaucracies. Above all, recognize that wars result when America is too ambitious and when America is too restrained.
Are the people we elect even capable of exercising a light touch? I do not know. But I wish they would think carefully about Henry Nau's argument. We have seen that large numbers of people die when we err on either side.

Monday, September 07, 2015

Shout it from the rooftops

I am late to the party and had not read William MacAskill's Doing Good Better.  But having just heard him on this week's Econtalk, I am convinced that his message is important. If you enjoy it as much as I did, you may want to Facebook, Twitter, etc. about it.

Friday, September 04, 2015

Mood swings

Referring the recent stock market volatility, the New Yorker's James Surowiecki writes that, "The stock market is not the economy ..." but that "doesn't mean that stock-market crises can't become contagious ..."

There are, of course, many moving parts. These include the expectations of large numbers of investors (in stock markets and beyond in the "real" economy); expectations can turn on a dime and we have no models that helps us with this.

Market data come at us all the time from many sources. We can all observe pretty much the same things but processing and interpretations are all over the place and personal.

When the Great Recession hit it was fashionable to scoff at the idea that markets get prices right. But that's a straw man. The efficient markets idea is actually that prices are always wrong but are always being corrected; they simply reflect the latest available information -- but "latest" changes by the nanosecond. Look at asset price fluctuations. Latest information includes the latest investor mood swings. The notion of mood swings tells us much more than "animal spirits". 

It is not ironic to say that the efficient markets theory has passed the market test; consider the popularity of index funds.

Sunday, August 30, 2015


The Economist (Aug 29; "Infrastructure in the rich world ...") takes us once more through the sad lament that "infrastructure" is being short-changed.  But the catch-all aggregation "infrastructure" obscures that fact that we can over-invest and under-invest at the same time.  In California we will have miserably potholed streets (for the many) as well as high-speed trains (for the few). This is the politics we have. The cited article suggests that it is not simply a U.S. problem. Bent Flyvbjerg has been making these points for many years.

Suggested reforms are hard to take seriously because when there are mega-projects, there will be mega- dollars and mega-politics. But for starters, let's stop talking about "infrastructure" as if it were all interchangeable and malleable capital to be funded with fungible dollars. Never talk about the proposed new projects in the same reports as upkeep and maintenance of old projects. The former always nose out the latter.

There are now cities that can say "no" to hosting Olympic games because of well earned reputations for budget disasters. Perhaps there could also be progress in the "infrastructure" discussion if we clarify -- and then try to prioritize.


From the Sep 2 WSJ:  "The U.S. Olympic Committee and city of Los Angeles officially launched their bid for the 2024 Olympics on Tuesday after the City Council voted unanimously to approve an agreement that will pave the way for the city to become America’s replacement candidate for the Games."  Some cities have learned to say "no." For LA, it will be potholes all the way down.

Monday, August 24, 2015

Complementary ideas

I liked Cesar Hidalgo's Why Information Grows (but here is a dissenting view).

Information exchange is, of course, essential to any understanding of economics and cities. Cities offer transactions cost economies that facilitate networking, exchange, and growth. Hidalgo likes discussing networks. I often cite supply chains for goods and supply chains for ideas. Cities and their urban structures are collections (patterns) of supply chains.

The recognition of supply chains encompasses specialization, exchange, economizing on transactions costs, and the structure of cities. Supply chain parts are within any city, but parts may be beyond the city, in other places. All of this involves location choice. People in cities (in their roles as producers or consumers) want two things:  accessibility and space. Many complex trade-offs are in play. Cities produce floor space. If all goes well, they do so in places and configurations and at prices that make it possible for large numbers of private activities to succeed. Cities are also seen as places where we can find transaction cost economies. These facilitate the formation of any supply chain. They also influence the nature of any chain; some supply chains (or their parts) are within firms and some are beyond the firm; likewise some are nearby and some are not, all reflecting the “make or buy” challenges faced by managers and owners of firms. These choices are informed by interaction costs as well as location choice costs.

Knowledge and information are each essential. How do you get one from the other? The right networks have to emerge. Out-of-equilibrium systems are jostled. These are interacting supply chains for things and supply chains for ideas. Jane Jacobs covered all this. I do not recall that Hidalgo cited her. He does link to Granovetter, Putnam, Fukuyama and Hayek.  All of these thinkers contribute complementary ideas that add our understanding of cities. 

Thursday, August 20, 2015


Eugene Volokh asks "How many people ... would want to come to America if we had open immigration ...?
"... Say that we consider largely removing limits on immigration, as was indeed the law throughout much of the nation’s history. (Let’s set aside narrow limits, such as on people with criminal records, terrorist connections, or easily communicable diseases.) Say also that we will offer these now largely legal immigrants those social welfare benefits that are in fact politically likely — not the bare minimum that some libertarians might like, nor the vast amount that some welfare-state proponents might suggest, but those benefits that are likely: Public education for their children, some level of health care, and the like."
It's a great question. The economics are win-win. The morality is inescapable.

There has always been human misery but it is now more visible than ever. Many desperate people take huge risks and many suffer unimaginably to leave the hell-holes where the accident of birth has placed them. They want to take their chances not only by signing up for a perilous journey but also for all of the uncertainties of entering a place they know very little about. If they have contacts such as friends and family that preceded them, so much the better.

But Volokh's  "how many people" question is impossible to answer. How would a long run equilibrium look? Would increased immigration flows prompt ever greater demand for entry? Or would it be the opposite; after the most desperate have left would those who stayed behind be more reluctant to uproot?

Our political season is now revealing the extent of nativist sentiment in America: even the crazy idea of deporting millions gets traction.  Tyler Cowen reports on similar backlash in Europe.

What to do? Part of the public's antipathy is directed to the awfulness of the status quo. We often proclaim "zero tolerance" only to be overwhelmed by the impossibility of implementing it. Not having a working guest worker program inevitably gives rise to fence-jumping. The latter hardens attitudes all-around and gives us the sorry debate we are now having. How to get to Volokh's "narrow limits"?  Look for the most moderate reform. Start with a guest-worker program and build trust. Go incrementally. Forget the "comprehensive" immigration reform packages. Start small.

Sunday, August 16, 2015

Starbucks, prices, politics, life extension

People who get markets understand where prices come from and why they are essential. Many others who do not get markets are sure that prices are somehow "wrong" -- and that they know what they should be (some kind of cost mark-up) -- and who should fix them. Guess who. Much of the politics (and "policy discussion") we have is because of the latter.

Today's NY Times includes "Cheap Coffee and the Starbucks Premium ... Why Starbucks raised price on some brewed coffee even as the price of beans fell globally." That does sum it up. They raise prices because they can: the "premium". Those crazy consumers. But who better? (Figuring out when and how they can is not so simple; price adjustments happen often; they are called "sale", "clearance", etc.)

To be sure, the Times piece mentions that Starbucks announced on July 6 that its costs were rising.  Announcements like these accompany all price hikes because sellers understand the public's grasp of pricing.

We hear all the time that more and more people have gone to college -- and more have been through econ 101. But if the simplest of lessons about prices were to be taught and learned, just imagine how much of the rhetoric and how much of the politics would disappear.  Imagine how much time would be made available. It would be like life extension. Imagine.