Thursday, March 31, 2005

On "horologic schizophrenia"

Those who, like anyone sensible, hate re-setting clocks twice a year (sooner than you think). This very enjoyable review of what appears to be a fun book may ease the pain. From today's WSJ "Bookshelf":

Does Anyone Really Know What Time It Is?
By BILL KAUFFMAN March 31, 2005; Page D8

Spring ahead, fall back.

Oh, must we?

This weekend brings Daylight Saving Time, that puzzling ritual of mass clock-winding ill befitting freeborn Americans. And now, just in the nick of time -- OK, 86 years too late, but time is malleable -- comes novelist Michael Downing with "Spring Forward" (Shoemaker & Hoard, 202 pages, $23), a lively history aimed at debunking the "uncanny idea of falsifying clocks to delay the apparent time of sunset."

Ben Franklin proposed the conservation of daylight in a whimsical 1784 essay, but the real father of Daylight Saving Time was British architect and -- crucially -- golfer William Willett, who deplored "the waste of daylight" in a 1907 pamphlet. The British royal astronomer ridiculed Willett's plan, suggesting instead "that between the months of October and March the thermometer should be put up ten degrees."
The strange history -- and disturbing implications -- of Daylight Saving Time.

It took the exigencies of World War I to convince governments to adopt Daylight Saving Time. (The claim was that it would cut back on energy use, though evidence was scant.) The success of DST in Europe was not lost on the scheme's U.S. advocates. They "had long been dismissed as caddies for the interests of the leisure class," writes Mr. Downing, but now they "shifted the battle from the golf links to the trenches." Setting clocks ahead, they promised, would permit scarce resources to be shifted to munitions. "Daylight's proponents wrapped themselves in the flag, appropriated the war effort" and won. They painted their foes -- a "coalition of miners and farmers, Populists and Republicans, ministers and movie moguls" -- as, literally, the forces of darkness.

"From the first," notes Mr. Downing, "farmers opposed Daylight Saving, which was an urban idea of a good idea, hatched in London and cultivated in the cities of Europe and the northern United States." New York City-based merchants subsidized the DST campaign, though Broadway suffered when darkness -- and curtain rise -- was delayed.

Indifferent to the arguments of the daylight-mad Chambers of Commerce, cows proved unwilling to adjust their milking habits to the new time. Nevertheless, President Wilson smugly lectured husbandmen that the farmer's "life and methods are more easily adjusted, I venture to think, than are those of the manufacturer and the merchant."
Illinois Rep. Edward King charged that DST benefited "the pleasure-seekers, the swivel-chair ornaments, and the golf players" by giving them an extra hour of daylight for their decadent recreations. Critics referred to DST as "golf time." And indeed, Daylight Saving was a tremendous boon to golf, as duffers might stride the links till 9:30 of a summer night. President Wilson was "a genuinely fanatic golfer," but he hid the niblick under his hairshirt, emphasizing sacrifice rather than pleasure.
Farmers demanded, and got, DST repealed after the war. The battle over time shifted to the states and cities, with the populated East the stronghold of the time-shifters. In one act of chrono-tyranny, Connecticut made it illegal to display the wrong time on a wristwatch.

Yet as the perceptive Mr. Downing observes, the claim by DST foes that they were defending "God's time" was specious. God's time had been junked in 1883, when the railroad industry, frustrated by localized timekeeping, adopted Standard Time. Within minutes -- or months -- governments across the country reset their clocks accordingly. In the old laissez-faire America, cities kept their own time. If it was 11:32 in Buffalo it might be 11:41 in Albany, and so what? Is not variety the spice of life?

Not to the iron horse. Heaven forefend that states and cities might set their own times, wake to their own sunrises. Efficiency eclipsed the sun as the American timekeeper. The U.S. was divided into four standard time zones. Thus noon comes simultaneously to Detroit and Bangor, sun be damned.

Those who love daylight but dislike compulsion -- President Harding among them -- supported "voluntary" DST. That is: Wake up earlier! Make the day's events conform to the sun's time; in spring and summer, begin work, school and baseball games an hour earlier. Alas, noncompliance doomed this sunny compromise.

In 1942, FDR reimposed DST as a year-round measure. He called it "war time." Once again, peace brought repeal, and the states of the union tick-tocked, as Mr. Downing puts it, in "horologic schizophrenia," which also goes by the name of federalism. By 1965, 18 states observed DST, 12 did not, 18 more "halfheartedly participated," and contrarian North Dakota and Texas observed "daylight in reverse," winding their clocks back one hour. Calculating interstate airline and bus schedules was a job for savants.

But then uniformity rode in on her pale gray horse. Since 1966 we've sprung ahead when Washington says to, though Arizona, Hawaii and eastern Indiana stubbornly refuse to adopt Daylight Saving Time. For the rest of us, DST now runs from the first Sunday of April to the last Sunday of October, or seven months a year, "which means that Daylight Saving Time has become our Standard Time."

Stripped of its bogus efficiency arguments, Daylight Saving Time amounts to an extra hour for shopping and golf. Middle-class consumers are pitted against farmers -- and we know who has the numbers. By 2000, writes Mr. Downing, "the number of Americans living on farms was approximately equal to the number of Americans who were permanent residents of golf-course communities."

The bogeymen have trounced the dairymen. Spring ahead, and fore!

Mr. Kauffman's most recent book is "Dispatches From the Muckdog Gazette" (Henry Holt/Picador).

Wednesday, March 30, 2005

Intellectual gridlock

After complaining about the state of local roads and highways, LA Times correspondent Ralph Vartabedian manages the following: "Toll roads reduce congestion, not only by increasing road capacity but by reducing demand. If we want to do that, then why not slap tolls on every congested interstate with electronic meters? To me, that seems like bad capitalism. Roads are public goods and efficient open transportation has served our economy well for over 100 years."

And the U.S. Census' American Community Survey has just been released. The Census Bureau reports that, "For the nation as a whole, the average daily commute to work lasted about 24.3 minutes in 2003." The nation's worst commute is in NYC (38.3 minutes) because of heavy transit use.

What can one say? 1) In spite of the absence of efficient pricing, we do pretty well (while people spend as much time complaining as they do commuting [to paraphrase a wise colleague]); and 2) We dismiss pricing and, instead, go for awful second-best policies, contriving and relying on strange logic streams, as the one cited above.

Tuesday, March 29, 2005

Soft landings

"For the third time in five weeks, bond markets have weakened to face the bad, if not terrible news. They are cooling down, not melting down." This from "American bond markets: A sated appetite" in The Economist, March 26.

Prices are supposed to move to clear markets and usually do. That's the good news. When prices move precipitously, for whatever reason, things can go bad. Soft landings vs hard landings -- and all the talk of "bubbles" that might "pop".

Comparative static analysis, by definition, has almost nothing to contribute. Whether dynamic analysis can be helpful is still unknown.

What is known is that in the world beyond economic theory, modern capital markets and modern information markets work to limit the frequency and the impacts of surpises. Once again, the real news is that spontaneous innovation and ingenuity are everyone's best bet.

Sunday, March 27, 2005

The U.S. image abroad

For all we know, historians will debate Ronald Reagan's role in the USSR's collapse for many years. Likewise, George W. Bush and the spread of democracy (and market-friendly governance) will be a topic of debate for some years. Either way, these two men are likely to have a place in history way beyond the fact that they were White House occupants.

Bush has his critics and among his dumbest foreign policy initiatives, in my view, is putting Karen Hughes (or anyone) in charge of a campaign to burnish America's image overseas. International elites will always object to what we stand for. So what?

An LA Times (3/27/05) op-ed re modern Isreal notes: "It is fast-paced, cutting edge, daring and more than occasionally hedonistic. It is a cosmopolitan embrace of a modern state whose citizens yearn for worldliness, travel and openness."

Similar aspirations and yearnings can be found through of much of the of the world. What most young people want is clear. It is a modern Western lifestyle (warts and all, as they say). That's the way it is and that is why the West will keep on winning.

Having Karen Hughes or Margaret Tutweiler or anyone run a White House-based PR campaign has nothing to do with any of this. Rather, it misses the main point -- and risks doing much more harm than good.

Friday, March 25, 2005

Institutional entrepreneurs

Google Scholar cites 1,730 links to "Coase Theorem" but only 37 to "Institutional Entrepreneur", an economic agent celebrated in Anderson and Hill's The Not So Wild, Wild West, which I have cited admiringly before.

Much has been written on what we should really get from the Coase Theoreom (or from the Prisoners' Dilemma, or from the Tragedy of the Commons, etc.). The most important take-away has to be about the remedial actions that are prompted, ones that expand property rights and exchange, usually by finding ways to lower transactions costs. These typically have profound welfare implications.

I enjoy growth theories that endogenize technological change. Again, we will long wonder what took so long? But even better is history through the prism of entrepreneurial actions with profound welfare consequences. Entrepreneurs that bring iPods and Blackberrys to market are to be admired but those that conceive and develop new property arrangements to overcome Prisoners Dilemma problems are even more attractive.

A similar class of heroes are those that develop technologies that overcome state-sanctioned monopolies. Satellite dishes sprouting in Third World backwaters give people new information options. Closer to home, I will soon replace cable with a satellite dish, overcoming the cozy arrangement hatched between local cable operators and the local city council.

Thursday, March 24, 2005

Vibrant places

Whether it is Richard Florida's "Creative Class" or Joel Kotkin's "Nerdistans" or David Brooks' "Patio Man", there is no question that evolving lifestyles beget new neighborhood types. As with all else new, these can be mixed blessings.

Tom Kirkendall sent the pointer that the NY Times has discovered "Vibrant Cities Find One Thing Missing: Children". A prominent former President might even point out that it depends on the meaning of "vibrant."

"Portland is a great city that attracts a lot of educated people," the article quotes one resident. "But the real estate is becoming outrageously expensive. And then you get wealthy singles and wealthy retirees. What's missing are kids. And that feels really sterile to me."

"Sex and the City" is also vibrant. Fun for a short visit but few would want to live (it) there for any length of time. The Times piece focuses on the Pearl District of Portland. Portland boosters have taken to calling their city "The Intentional City". The Law of Unintended Consequences, however, remains in play.

Tuesday, March 22, 2005

Old and New Europe

When capital and labor are mobile, governments are prompted to compete -- even lowering tax rates. Today's WSJ lead editorial ("Germany's Epiphany"; link only works for subscribers) provides some data to corroborate the point. An accompanying table shows national and local tax rates for 12 OECD countries for 2000 and 2005; ten of twelve (excluding UK and Japan) had lowered tax rates -- even though politicians and their programs everywhere surely "needed" the money.

"When eight formerly communist countries in Central Europe joined the EU last May, German Chancellor Gerhard Schroder was among the earliest and loudest critics of their tax-cutting ways. Low tax rates 'are not the way forward' for Germany's new eastern neighbord in the EU, he warned on the eve of the Union's enlargement.

"Well, what a difference a year makes. Last week Mr. Schroder announced plans to cut the federal corporate tax to 19% from 25% -- which just happens to be the corporate tax rate of Poland, one of the new EU members Mr. Schroder was so critical of last spring."

"Old" Europe learning from "new" Europe.

Friday, March 18, 2005

Defying gravity

Forbes' Rich Karlgaard writes about Ken Kam's fund: "He's created a fund, MOFQX, that has a low-risk beta score of only 0.48, yet has more than doubled the returns of the S&P since it was founded in November 2001. MOFQX's return is calculated after Ken skims off a hedge-fund-like 1.95% management fee. But who's complaining?"

How does Kam do it? is his "virtual stock market" that anyone can play for free. Karlgaard likens it to fantasy baseball and notes that there are 70,000 player/fans. The cool part is that Kam tracks players' success and identifies the current best 100 (players know about this) on a month-to-month and two-years rolling basis. There are 1,400 "superstar" investors and Kam picks the 100 best of the best each month to manage the MOFQX portfolio.

Kam sounds like an innovator who understands that the web signals new markets and new information conduits. Call it open-source fund management and note that it defies gravity, being off the risk-return trade-off schedule that we take for granted.

Wednesday, March 16, 2005

Full circle

Rummaging, I found Michael F. Bryan's October 15, 1997 "On the Origin and Evolution of the Word Inflation" Luckily, the Cleveland FRB's "Economic Commentary" series is maintained online.

Why can't textbooks be this clear? Bryan's piece includes a fascinating series of definitions of inflation offered by economists and others over many years.

His conclusions are worth repeating. "Without being tied to the money supply, any price increase seems to have an equal claim on the word inflation. Indeed, today we regularly read reports of a seemingly endless variety of 'inflations.' When the word is used as a description of the price level, an anti-inflation policy can easily be characterized as being against any price increase, including higher wages! This is simply not the case. An anti-inflation strategy is concerned with a particular type of price increase -- a rise in the general price level stemming from excessive money creation. When viewed in this light -- the light provided by the word's original meaning -- a zero-inflation objective for the central bank becomes a much more sensible goal."

Reading the full article shows that, having come full circle, we have covered a lot of ground.

Tuesday, March 15, 2005

Not locked in

Path-dependence and the lock-in of inefficiencies and errors suggest beguiling alternatives to market-based explanations. Trouble is that the evidence presented for lock-in is weak (Liebowitz and Margolis).

The simplest example must be U.S. settlement change. The Europeans made a mistake and originally landed on the wrong North American coast. That error has been relentlessly corrected over the years. The Census Bureau's mean and median centers of population have been steadily moving southwest for years; the sunbelt-frostbelt migrations are well known; empirical models of migration consistently show that climate matters.

Do people move to places with warm summers, warm winters, or moderate variance between the two? Looking at 1990-2000 city growth, hot summers explain best. These places may also be attractive because they were also cheap. Perhaps because they had been hot and undesirable before cheap air conditioning and affordable swimming pools.

Be that as it may, people are very busy correcting the error that the Pilgrims and many others made, starting in the early 17th century, landing on the wrong coast -- and very far away from the left coast.

Monday, March 14, 2005

Memes, genes and progress

All flora and fauna represent genetic lines that have survived. We have a clear enough understanding of natural selection to appreciate this.

In recent years (at least since Richard Dawkins' The Selfish Gene appeared in 1976) we have also considered memes (ideas that are self-propogating and transmitted) and have wondered about what selection process governs the ideas that have (and will) survive. In the age of the internet (and blogging), this is ever more interesting.

Heath, Bell and Sternberg have reported on experiments that test the emotional selection of ideas vs. the informational selection of ideas. The latter seems practical and is traced to Oliver Wendell Holmes' evokation of the "marketplace of ideas" (in 1919). Alas, the authors present experimental evidence for the importance of emotional selection.

There are no straight evolutionary lines when it comes to genes or memes. In the latter case, the evolutionary dead ends are the ones associated with rumors, urban legends, conspiracies and the like.

Will new technologies (themselves based on good ideas that have survived) such as modern communications cause informational selection to gain a new edge over emotional selection? No one knows. But I do not know how it could be any other way.

Friday, March 11, 2005

Political gridlock

Today's lead editorial in the WSJ ("The Gerrymander Gauntlet" -- link only works for subscribers) lauds Gov. Schwarzenegger's effort to get Californians to stand up to the political class. "California lawmakers are so adept at designing their own districts that of the 153 seats -- 80 Assembly, 20 state Senate, 53 Congressional -- theoretically up for grabs last November, not a single one switched parties."

The article includes a map that shows Rep. Lois Capps' district which hugs the California coastline, from Oxnard in the south to Monterey county in the north, 200 miles long. One presumes that Capps and her staffers reach out and touch her constituents but relying on hybrid vehicle technology only.

Both parties are complicit, as are their enablers, who like nothing better than an entrenched political class that takes care of business and overcomes "political gridlock".

Wednesday, March 09, 2005


When TIPS (Treasury Inflation-Protected Securities) were introduced in 1997, investors were offered a new option, whereby they could hedge inflation risk. Analysts were, at the same time, provided with a simple way to measure anticipated inflation: simply compare yields on equal-maturity Treasuries, TIPS vs conventional, and observe the extra compensation that investors want in order to to forego the hedge.

Yet, it is never that simple. The FRB of Cleveland's Nov 2004 Economic Commentary features "Expected Inflation and TIPS" by Charles T. Carlstrom and Timothy S. Fuerst. The essay includes evidence of that inflationary expectations (as measured by University of Michigan and FRB of Philadelphia surveys) and the gap between equal-maturity yields have not matched. It also cites plausible theoretical explanations. TIPS buyers not only are insured against whatever inflation actually comes to pass but they are also immune from the risk of making bad guesses. Hence, the yield gap overstates expected inflation. Another reason to be wary of the yield gaps is that, to date, TIPS are somewhat less liquid than conventional Treasuries.

TIPS are a fine innovation but the investor's life is complex. Something new and something old.

Tuesday, March 08, 2005

Ponzi again

Pay-as-you-go social security is a Ponzi scheme backed by the power to tax. This makes it acceptable (even attractive) to some. The LA Times' Robert Scheer (March 8) writes that, "The problem with Social Security is that it isn't broken, which is precisely why the president is so eager to destroy it." Later in the column, Scheer embraces the idea of lifting the $90,000 payroll tax cap.

In 1947, the Bureau of the Census' P.K. Whelpton published Forecasts of the Population of the U.S., 1945-1975. He wrote, "With regard to the fiscal problems of social security, it should be realized more generally that if the 'old age and survivor insurance' program is to continue to be supported by pay-roll deductions and employers' contributions, the rising ratio of elders and producers will necessitate the accumulation of large reserves, or an increase in the withholding rate. The former means force savings by 'covered' workers and employers, deposited in the U.S. Treasury."

Whether 2005 or 1947, demography and the the Ponzi logic are iron-clad. Taxing more (and more) is the only way out. Those who, like Scheer, welcome this ask: "What's the problem"?

Monday, March 07, 2005

History that counts

Scholarly interest in property rights was eclipsed during what Brink Lindsey aptly referred to as the Industrial Counterrevolution. Yet, it has been making a comeback in recent years. Among the most enjoyable of recent scholarly works has been Terry L. Anderson and Peter J. Hill's The Not So Wild, Wild West: Property Rights on the Frontier.

"The 'wild, wild West' image suggests that rents were dissipated through racing and fighting. In contrast, the 'not so wild, wild West' image suggests that rents were captured and nurtured as individuals and groups peacefully defined and enforced property rights and engaged in market transactions in which those rights were exchanged" (p. 14).

Both images, the authors suggest, have some usefulness. Perhaps after enough work by scholars such as Anderson and Hill (and many others), more people will come to realize that there is more to history than just the one image. Indeed, we owe much of our well-being to the power denoted by the latter image.

Saturday, March 05, 2005

Credible money

Econ principles students are taught that markets are a wonderful data source; opportunity cost signals are always being generated and updated. Freely varying prices are a good thing. A changing "price level" is not such a good thing and comes from mismanaged money supplies.

Some students are even taught that defining the price level is hell. "Steering by a faulty compass" in the Feb 26 Economist takes up the question and cites arguements for including asset prices (including house prices) in the proper price index.

There are seemingly good arguments for almost any index. That's the problem. "Given the elusiveness of a perfect price index, central banks should keep using conventional, narrow inflation targets, but be prepared to undershoot them temporarily if house or share prices soar ... and although the calculation would be tricky, central banks migth usefully publish broad price indices ..."

It appears that the only way out of the morass is clarity, credibility and transparency. Adopt an index, publish it and stick to it. Read their lips: no new indices.

Wednesday, March 02, 2005


Inanimate objects facilitate bad behavior. Guns, lotteries, McDonald's, the stock market, etc.

I cannot figure out what John Allen Paulos is up to. Like any author, he may simply be keen to sell books. By way of background, Paulos had been writing books that are great fun for those who enjoy math and statistical puzzles. Yet, his latest, A Mathematician Plays the Stock Market (summarized in his op-ed in Monday's WSJ and also in other venues), re-tells his tale of woe re his WorldCom holdings. Smart man falls in love with his stock picks and holds on much longer than he should; smart man looses lots of money; smart man writes (and writes) about all this and may become a poster-child for behavioral economics or anti-social security reform or whatever.

Given all of this, the nanny state has to keep and protect us -- via a Ponzi scheme that is trillions of dollars in the red. One which seemingly smart people point to as a source of security that must be "saved".

Ponzi-schemes backed by the power to tax can last forever. What is wrong with this picture?

Tuesday, March 01, 2005

Invisible hand trumps dead hand

Low transactions costs and clear and credible property rights give us exchange, efficiency and the prospect of prosperity. Yet, we live in a world where transactions are often costly and property rights limited. In an open system, however, these problems are also opportunities. A dynamic analysis would highlight the fact that entrepreneurial activity, if given the chance, could develop remedies -- ways to lower transactions costs and/or make property rights enforcement feasible. This is how the ambit of the exchange economy expands.

The problem is that regulators and politicians, responding to "market failure" often rush in and preclude inventiveness. Eric Brousseau cites the internet as an example of success because technology moved too fast for the regulators.

The web, then, is rife with illustrations of how rights and costs were successfully managed bottom-up, creating exchange and welfare-enhancing possibilities. Ebay is just one of many examples.