Sunday, January 25, 2015

Complexity models and policies


Here is a famous headline from The Telegraph, 5 Nov, 2008: “The Queen asks why no one saw the credit crunch coming … During a briefing by academics at the London School of Economics on the turmoil on the international markets the Queen asked: ‘Why did nobody notice it?’” 
Since then, many others have asked the same question. There are now an uncountable (and counting) number of books and papers that explain it all -- after the fact. This will go on.
David Colander and Rolan Kupers (Complexity and the Art of Public Economy: Solving Society's Problems from the Bottom Up) provide a recent addition.  One Amazon reviewer calls it the "best economics book of 2014." Economists, CK write, are wedded to wrong and inadeuqte models.
They start off on a bad foot, attacking the straw man notion that most people are wedded to either a "market-can-fix-everything" or a "government-can-fix-everything" view. I dislike binary choices. And clearly, institutions and culture matter. In my view Deirdre McCloskey (Bourgeois Dignity: Why Economics Can't Explain the Modern World) tells that story best. Evolving norms matter a great deal and the phenomenon is absent from formal economic models.
Even those who will not go as far as Pres Obama's "you didn't build that" view understand that markets function best in the context of a credible legal infrastructure and a government that takes care of significant physical infrastructure.  Our challenge is to somehow invent a politics and a government that stops about there.

Colander and Kupers take conventional economics to task for trying to mimic the approach of physics; biology, they say, offers the better model.  Could be.  Their argument is that "complexity economics" is where the hope lies.  They mean that economics has to recognize the possibility of increasing returns, multiple equilibria, endogenous tastes, nonlinear dynamics and positive feedbacks.  CK want the possibility of "lock-in" to be recognized.  But how many of the original 1955 Fortune 500 are still on that list?  Very few.  CK claim that as we recognize the various realities that belong to complexity, we will come up with better policies, e.g. "complexity policies."  Will such policies meet the challenge I mention in the previous paragraph?  I liked the book but I am not convinced that the answer is "yes."

CK write about all the things that "government" "should" or "could" be doing.  They might delete "government" and insert the synonym "politicians" -- the ones we have, the ones I see on the nightly news.

Wednesday, January 21, 2015

State of the economy

Twenty-five years ago, Milton Friedman suggested that the U.S.was 45% socialist.  I prefer the label "crony capitalist" and the percentage may be higher than 45. Both of the major political parties are redistributionist; both want to redistribute in the direction of their political base. As office-seekers, and presiding over very large budgets, can they be anything else?  Perhaps we should not be surprised that the U.S. ranks 12th in the 2014 Heritage Index of Economic Freedom. Free the World also puts us at 12th. It would be nice for the U.S. to move up in both rankings.

Economically, we look much better.  According to comparisons shown in the 10th Annual Demographia International Housing Affordability Survey, as a nation, we are the best. The UBS Prices and Earnings report is my favorite. Their "Working time required to buy" table compares 72 of the world's major cities in terms of how many minutes or hours the average worker must work to purchase one Big Mac, one kg of bread, one kg of rice, or one iPhone 4S with 16GB.

Four U.S. cities are included, some of our most expensive places, Chicago, Los Angeles, Miami and New York.  But in the Bic Mac column, the U.S. cities are among the best, with the sole exceptions of Tokyo and Hong Kong. A Big Mac costs the average L.A. worker 11 minutes of work but it is just 9 minutes in Tokyo and 10 minutes in Hong Kong. The international range goes all over the place, mostly much higher.

We do pretty well in the bread and rice columns, but the U.S. and most of the other places listed have awful farm support policies.  We do very well in the time required to buy the iPhone; the U.S. four-city average is 31.25 minutes; only Geneva is better, at 23.5 minutes. Go figure.

All these comparisons and rankings are tricky and one has to be very careful.  But I caught parts of the State of the Union speech (and its reception) on TV last night. (John Stossel dreams of the speech he would have preferred.)  I did see the President take credit for the low price of gasoline.  No one laughed.

Considering our politics, the state of our economy is pretty good. 

Tuesday, January 20, 2015

Worth listening to

I had previously cited the work of David Theroux.  Here, David links the thought of C.S. Lewis to modern conceptions of liberty and the integrity of the individual.

Monday, January 19, 2015

Horse sense

Tyler Cowen cites The Horse in the City which I reviewed a while back.  This history is interesting for many reasons.

1. Most people fear the environmental effects of cars but have little knowledge of how much more polluted the cities were when we relied on horses.
 
2. Many routinely extrapolate negative trends to the point of inevitable catastrophe but fail to note how horse-manure doomsday never came; entrepreneurs, not an army of regulators, came to the rescue.

3. Those who rue the passing of a golden-age past are usually ignorant of the realities; it is usually these same folks who fear the future -- and who somehow know how to manage it.

4. Washington politicians recently saw the possible decline of the Detroit auto industry as ominous but the decline of the auto's predecessor, the horse, was not a calamity.

One can never know enough history. Read the book.

Thursday, January 15, 2015

Better than "smart"

Robin Hanson asks "Why not sell cities?"  You buy and own the city; you become the residual claimant (landlord) and can internalize all sorts of externalities. It could be a good deal.

I have often cited the shopping mall as an example of a single owner as the best possible land use planner (for that mall) because of the ability to internalize externalities.

The question always comes up about how scalable the mall example is.  Hanson alludes to some of the difficulties, especially with respect to governance and politics. Spencer MacCallum has famously suggested the hotel as a model for governance and public facilities and space use via contract. (The thing you sign when you check in or make the reservation.) Contracts respond to market forces and management has to choose, for example, who gets "free" wi-fi, gym access, bottled water, etc.


Bob Nelson has been writing about private communities -- and privatizing more of them -- for some years.  The privatizing part is not simple.

All three of the cited works deserve a hearing. Conventional city planning is stuck in a "smart" growth rut whereby growth controls and a bizarre approvals process have resulted in high costs and housing "affordability" problems. Connected crony developers get rich, as do lawyers and handlers who make a good living off the sorry mess.

At the same time, suburbanization trends continue. The promised "smart" benefits have not been realized but the costs have.

ADDED

Arnold Kling on the same topics.





Monday, January 12, 2015

New economy

What do we know? Our economic data are not very good -- and probably getting worse as more of the economy creates hard-to-measure consumer surplus.  What do we pay for all the cool stuff we get for free on the Web?  Next to nothing.  How will we measure GDP and other stand-byes. Measurement challenges will hamper our understanding -- and forget about macro-economic forecasts.

This is why I do not understand the declinists and stagnationsts. New-economy industries (e.g. Silicon Valley) employ fewer people than in-its-heydey old-economy (e.g. Detroit). But this is just the start.

Many people have used Uber-type taxi services and understand its vast advantages. Networking and apps have been fashioned to reduce transactions and vetting costs to the extent that an army of new drivers (and autos) can step forward to serve another army of new customers.  Note that the app technology involved is stuff that is here now.  (Transportation economists used to worry about all the empty seats in all the cars out there. What to do?)

The Economist looks at the emerging phenomena in "There's an app for that."  Some call it the "sharing economy."  But we ain't seen nothin' yet -- and it's way beyond taxis. As new apps connect buyers and sellers in  a variety of fields, applications that we have not yet imagined will emerge.

More unemployed (and under-employed) labor will find things to do. More unemployed (and under-employed) capital, such as cars parked in garages, will find new work.

No surprise that start-up funding is growing.

ADDED

I cannot decide whether peer-to-peer professional cuddling is part of the new economy.

Friday, January 09, 2015

World peace

Bloodthirsty primitives around the world have a way of hogging the news. But many of you have seen this YouTube and it does help. Watch it often.

I read Joshua Greene's Moral Tribes last year and will do so again after hearing him discuss his work with Russ Roberts.  Greene ends the conversation on an optimistic note.  Agreeing with Steven Pinker, that humans are becoming better and less violent and less nasty towards "the other", he concludes that humanity is slowly cobbling a meta-morality whereby we extend civility to an ever wider circle -- beyond the family, clan, tribe, etc. I think the data are on his side. As usual, there are very many ruts along the way.

Peace is a "cooperation problem," Greene writes. We have evolved moralities to gain the benefits of being peaceable. A meta-morality (world peace) would be even better.


Thursday, January 08, 2015

Real politics

The Affordable Care Act (ACA,"Obamacare") is apparently not popular with many Americans. But stay tuned; not all of the law has kicked in yet. To quote a prominent House leader, "we have to pass the bill to find out what's in it."  That is one way to digest 2000+ pages of law. Why so much heft? There were apparently many Bootleggers and Baptists to bring on board.

Finding out what is in this monstrosity is now slowly happening and some likely erstwhile supporters are not happy. Harvard faculty have recently been vocal about the fact that their ox is being gored. This post at The Incidental Economist includes a chart that makes the point.  Harvard faculty enjoyed a generous plan that is subject to an Obamacare "Cadillac" (high-end plan) tax. To avoid it, Harvard is making some changes that reduce coverage --slightly. Read the whole post.

It is interesting that ACA defenders talk as though the choices are the pre-ACA status quo or ACA. Another path would be to de-regulate insurance and medicine to the point where something close to a market emerges. Let people shop and make choices with respect to insurance coverage and care; give them the incentives to take lifestyle choices (diet, exercise, etc.) seriously. Provide vouchers to those below the poverty line.

But a simpler and common sense approach would leave Bootleggers and Baptists in the cold. It is amazing that the textbooks still teach a "median voter model" -- whereby policies and programs preferred by a mythical median voter are enacted.

ADDED

Health Care Policy 101 (by Arnold Kling) 


Monday, January 05, 2015

Red States, Blue States

Richard Florida wrote about income inequality, comparing the various states in yesterday's NY Times. There is apparently quite a lot of it in the "Blue" states.  Are they "blue" because of greater inequality or do we get inequality from progressive policies and leadership?

Unfortunately, it is not simple. In a Bootleggers and Baptists world, it is hard to settle on the role of the state in the U.S. (all levels of government, all taxes as well as expenditures) as a force for greater or less inequality. Crony capitalism rewards cronies and the cronies are everywhere: left, right and center.

This morning's LA Times reports "After two-year delay, construction on California's bullet train is set to start".  This is the kind of blue-state stuff that will do nothing for the state's poor people.

In fact, the latest wrinkle in the California HSR story is that dedicated revenues will be made available from the State's cap-and-trade program. Leave aside the merits of the program, will higher prices for fuel have a progressive effect on the state's Gini coefficient?  Gasoline taxes, for example, are keyed to purchases and not the income of the purchaser. California is the 6th most unequal state in Florida's ranking. But give them time.

ADDED

Brad DeLong comments on the Florida article.  One of his take-aways is that Blue states must invest more in infrastructure.  California is hell-bent on doing so in a big way.  Does the HSR nuttiness mean we will have less to invent in the mythical "infrastructure" that everyone seemingly prays for?

In a better world, every time that some well-meaning person prescribes "infrastructure", this book falls out of the sky -- and, we hope, does not hit him or her on the head.

 

Wednesday, December 31, 2014

Forecasting

Two things usually occur in late December. Economists make economic forecasts for the coming year -- and others remind them how terrible their forecasts of the previous December have turned out. How about those oil prices?  Here are more from a year ago.

The economics we know helps us to grasp (perhaps forecast) broad patterns but it is not a good guide to the sorts of point forecasts that so many love to make. We are comfortable saying that if a Cuban entrepreneurial class is allowed to emerge and be free, the island will flourish.  Here are others of that nature.

But most of us have no clue what the price of gold or real estate or whatever, even the SP 500, will be at the end of next December. In their private lives, even economists buy index funds.

The WSJ's Jason Zweig discusses all this in his column today. He describes Ken Arrow's stint as weather forecaster during WWII.  Arrow saw that the models used for one-month weather forecasts were awful but was told by superiors, "The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes." This all happened before Catch-22 was written.

Zweig also points us to a study that demonstrates the superiority of simple over fancy models. He also cites an on-going evaluation of forecasts, maintained by Phillip Tetlock and his associates.


In a WSJ op-ed of May 4, 1998 (I held on to it for great classroom discussions), Edward Yardeni wrote about Y2K, "We must prepare for the possible collapse of essential government services, including tax collection, welfare payments, national defense and air traffic control."  One can say that the alarmists perhaps helped us prepare -- and we did avoid the calamity.

Happy New Year.

ADDED

If you want to play, this is via Bill McBride.

Tuesday, December 30, 2014

The moral case

Doomsday forecasts fail because they fail to consider that (non-scarce) human ingenuity, incited by credible property rights, will doom the forecasts -- and the policies they spawn. The Ehrlich-Simon bet is a perfect example. Simon clearly got it and Ehrlich was clueless. But religious-left alarmists are not exactly open to evidence that undermines the faith.  Have any of them noticed that peak-oil never happened -- and is receding as we speak?  Have any of them noticed that spending mega-bucks on high-speed rail and subsidized electric cars is beyond silly?

Much of the story is well documented by Alex Epstein in his The Moral Case for Fossil Fuels.  He updates themes developed by Julian Simon, Indur Goklany, Matt Ridley, Bjorn Lomborg, to name just a few. Beyond that, Epstein properly emphasizes the moral case. With fossil fuels, we get human flourishing; without them, the opposite.He does not dismiss the climate story but carefully demonstrates that "the science" is not "settled."  In fact, the greater peril is from making huge economic sacrifices with little serious prospect of gain. The Germans may decide to follow stupid policies; perhaps they will wise up. But why is John Kerry of all people lecturing the Indonesians and others that it is their obligation to remain poor.

Epstein is quotable throughout the book.  Here is one of many:
Nineteenth-century coal technology is justifiably illegal today. The hazardous smoke that would be generated is now preventable by far more advanced, cleaner coal-burning technologies. But in the 1880s, it was and should have been perfectly legal to burn coal this way -- because the alternative was death by cold or starvation or wretched poverty. (p. 43)
Why are so many (seemingly) educated people who will live longer and better than their ancestors behaving like gullible and hysterical Luddites? Why in a sea of good tidings are so many (including "thought leaders" in Epstein's phrasing) eager to seek and focus on bad news?  I have no idea.  Here is one attempt to explain the puzzle.

Monday, December 29, 2014

Checks, balances, bells

Most American school kids learn about the system of checks and balances written into the U.S. Constitution. At that level, it is very attractive and (seemingly) limits the damage that any one group can do to the rest of us. The whole arrangement was (seemingly) settled by the 1803 Madison v. Marbury ruling.

But the reality is much more complex and much more interesting. Public choice economics reminds us that all of the players are people who consider incentives and constraints -- and who also have their biases. Judges cannot be expected to be a race apart. They cannot be expected to operate outside any political context. This is one reason one can lose money betting on judicial rulings and, especially, Supreme Court decisions.

All of this and more is nicely rendered by Damon Root in his Overruled: The Long War for Control of the Supreme Court. Spoiler alert: the book's last chapter is titled "No Peace."  Nothing is settled. The idea of judicial deference to legislation (by the states or by Congress) has been embraced by the likes of Oliver Wendell Holmes, Jr., Robert Bork and John Roberts -- and many others. The Fourteenth Amendment to the U.S. Constitution and its various clauses are also embraced and ignored in zig-zag fashion.

Read the book. Do not bet on how Obamacre will fare in the upcoming King vs Burwell decision this Spring. Do not expect that the public comments of Prof. Jonathan Gruber will not be a factor. Rung bells are never un-rung.

ADDED

Here is a review of the book by a legal scholar.

Monday, December 22, 2014

Externalities and all that



“When all voluntary transactions have been entered into by market transactors, there still remain some interactions that ought to be internalized but which the market forces left to themselves cannot cope with” (Carl Dahlman, JLE, Apr 1979).  There is apparently no residual claimant. Add one and you get the following:

“In many economics textbooks, the presence of externalities is invoked as a justification for government intervention in the marketplace. Yet the private sector often finds its own solutions to externality problems. This is the secret of the shopping mall’s success. Because a property developer owns the entire shopping complex, its profits depend on the entire mall, not on any particular shop. By choosing the right mix of tenants and charging rents that reflect each store’s contribution to the mall’s overall revenues – including the business it brings to other stores – the developer can ‘internalize’ the externality and maximize its profits” (The Economist March 1, 1997).

I am prompted by a recent piece by Jason Potts, “Innovationis a Spontaneous Order” in Cosmos and Taxis (full disclosure, I am a consulting editor).  Potts discusses five spontaneous orders: science, business models, co-operation, clusters and copying.  It is, however, useful to differentiate cities from clusters; Potts seems to use them interchangeably.

The shopping mall described above is a cluster, not a city. Cities could be a collection of such clusters and one has to wonder if there are interactions between the clusters that remain to be internalized.  If so, by who?

Potts elaborates, “The basic units of a cluster are nevertheless knowledge-using and knowledge-generating firms.  Such firms will tend to co-locate to the extent that knowledge externalities can be created and exploited.  This is a property of the ‘absorptive capacity’ of the firms themselves, not of the environment.  (The ‘Coase theorem’ suggests that we would expect firms to bargain and contract their way toward internalizing the externality.)  Innovation networks and clusters simultaneously emerge as the network and special dimensions of this growth-of-knowledge process.  They are the emergent consequence of firms discovering and exploiting knowledge complementarities.  Clusters and innovation are part of a mutually constituting spontaneous order.”

I like the fact that Potts cites the exchange of knowledge. He also cites possible Coasian bargaining toward internalizing. The rest of the paragraph calls attention to my favorite theme: we get innovation networks, spatial clusters and the development of ideas as part of the same process. The right spatial arrangements are the key to growth. What can planners do? Recognize that they are an unlikely residual claimant and let the bargaining and contracting proceed.

Sunday, December 21, 2014

Our harsh culture

Today's NY Times includes "Dude, Close Your Legs: MTA Fights a Spreading Scourge." Perhaps we should face up to the fact that there are some rough edges in American culture, including how many Americans behave in public spaces and places, including public transit.

(Also in some private places.  I witnessed an episode this morning where police were called because an irate customer lost her composure -- to put it mildly.)

And no one has any good ideas on what can or should be done. In our recent history, there has been more exit than voice as many Americans have de-camped to suburban areas in the hope of encountering less harshness. There is also the choice of private spaces (including shopping malls and Disney-type parks) over conventional public spaces.  Not to be overlooked is the fact that many Americans have a pretty good green space in their back yard.

Many Americans flock to European cities to enjoy the public spaces and parks as well as street life -- and public transit. Quite a few return and ask how we can mimic all of these things at home.  Then it's usually off the to races, including the inevitable tut-tutting about the "need" for more investments in public infrastructure. As though it is simply about more money.  The money part, of course, has the support of all the usual suspects.  Aaron Renn nails that one in a recent post.  I also cited some Los Angeles  infrastructure spending gone awry, in a recent post.

We do not know what to do about homeless street people.  We do not know what to do about an increasingly harsh culture.  In fact the latter greatly amuses audiences of many current movies. The evolution of American public behavior is easily seen by viewing the popular films of today vs those of fifty+ years ago.

What is to be done? This is complex but step #1 has to be an end to denial. We have a problem and it's not just about "starving" infrastructure.

I wish the NY MTA luck with their campaign. Once the middle class abandons public transit, it's all over for that mode. In many other large U.S. cities, that ship sailed some years ago.