Thursday, December 29, 2005

More on the failure of market failure

Fred Foldvary and Dan Klein recently published The Half-Life of Policy Rationales: How New Technology Affects Old Policy Issues, which shows how new technologies continue to undermine the standard market failure chestnuts.

Foldvary-Klein are right and it's an important argument. Connecting auto drivers to GPS-data not only helps them navigate but also reduces transactions costs to the point where proper pricing is easily done.

In "Navigating future road charges", BBC reports:

"Motorists are already beginning to embrace the idea of satellite-navigation units in their cars.

"This week the first test satellite in Europe's 3.4bn-euro ... Galileo satellite navigation system blasted off in a Soyuz rocket from Baikonur Cosmodrome in Kazakhstan.

"The final global network of 30 Galileo satellites is crucial to prviding high volumes of time- and location-based data needed for new services such as advanced sat-nav, mobile location data, natural disaster surveillance and air traffic control.

"Powerful applications are expected on the roads; the Galileo network would allow a vehicle's exact movements to be tracked, presenting new possibilities fo road-user charging and tolling ... The time signal produced by Galileo would also allow different chanrges for driving at different times of day."

Not only will economists have to stop including highways as inevitable market failures but politicians may actually have to confront the idea that there is one less excuse for them not managing the road system -- as well as one less rationale for building useless rail transit systems or expensive "Big Digs".

What's not to like?

From "Bye-Bye, Kyoto" (Forbes, January 9, 2006):

"... The Kyoto rules say that western Europe must get their emissions to a level 8% below those prevailing in 1990. But virtually all those countries -- the only significant exception is Germany -- are going in the wrong direction. The latest available data, covering emissions through 2003, tell us that in the years since the treaty was negotiated, carbon dioxide levels have increased by 7% in France, 11% in Italy and 29% in Spain. The increase for western Europe as a whole was 5.4%.

"After many years of European chatter about the monstrous evil perpetrated by George W. Bush in rejecting Kyoto, it is of possible interest that the increase in carbon emissions in the U.S. during those years was slightly lower (4.7%)."

I know very little of the science involved but have read enough to know that climate change is complex and that there are competing views. But I do know that all the doomsday forecasts ever made have been wrong.

And I know am wary of social engineering. And double that if it comes to us via the "international community".

Add insufferable green/left/European preening and fretting and what's not to like about the quote?

Wednesday, December 28, 2005

Lethal economic ignorance.

The (too) common notion that there are savings to be had from "cutting out the middleman" is grist for any principles of economics class. We highlight the pervasiveness of transactions costs and the value added from reducing them.

Yet, many cannot conceive of value added without a tangible visible product. It is also true that ignorance of economic principles can be lethal.

Thomas Sowell masterfully addresses both problems in his essay, "Are Jews Generic?" to be found in his recently published Black Rednecks and White Liberals.

Sowell is typically scholarly yet clear.

"In any given country, a particular minority may be hated for any number of reasons peculiar to that country or that group. However, in a worldwide perspective, the most hated kinds of minorities are often defined not by race, color, religion, or national origin. Often they are generically 'middleman minorities,' who can be of any racial of ethnic background, and in fact are of many. Many of the historic outbreaks of inter-ethnic mob violence on a massive scale have been against the Jews of Europe, the Chinese minorities in various Southeastern Asian countries, against the Armenians in the Ottoman Empire, the Ibos in Nigeria, and against other middleman minorities in other times and places."

Interestingly, he adds that the Nazis were typical but simply more technologically advanced than the others who went about victimizing middlemen. Sowell also re-tells Eric Hoffer's re-telling of E.A. Voigt's recounting of the Japanese mission that tried to study the Nazi movement in the early 1930s. A member of the mission is quoted saying: "It is magnificent. I wish we could have something like it in Japan, only we can't, because we haven't got any Jews."

Monday, December 26, 2005

The law of many prices

David Brooks writes that we are Bobos in Paradise, no longer satisfied with a "cuppa joe" but at home with the complex Starbucks menu.

David Harford, The Undercover Economist, notes that "Starbucks doesn't have a way to identfy lavish customers perfectly, so it invites them to hang themselves with a choice of luxurious ropes." In other words, it's all about price discrimination. (Harford is most entertaining when he calls attention to all the ways that sellers pull it off.)

Which author is correct? Both, of course. Brooks emphasizes demand and Harford addresses supply. Leave the land of the Law of One Price behind and discover the really interesting stuff about how a complex economy allocates (and continuously reallocates) resources that facilitate evolving lifestyle choices.

Sunday, December 25, 2005

"The Peacock Mind"

A holiday present to its readers from The Economist is "The proper study of mankind: A survey of human evolution" (Dec 24, 2005).

The survey covers many of the evolving ideas in anthropology, biology and evolutionary psychology.

I particularly liked this "... the human mind is like a peacock's tail, a luxuriant demonstration of its owner's geneitc fitness." And "[p]erhaps the founding father of economics is not really Adam Smith, who merely explained how to get rich, but Charles Darwin, who helped explain why."

Women are drawn to high-status successful males. These males (may)know that money will not make them happy but it does help them to procreate. Male striving, in turn, animates comparative advantage and economic growth.

The money buys (or does not buy) happiness discussion may be interesting but also beside the point when put alongside such heavy weights as sex and evolution.

Thursday, December 22, 2005

Spilling ink

At the end of each year, we get the inevitable lists of top-this-and-that (including Time magazine's weirder and weirder person-of-the year and people-who-mattered) and resolutions and forecasts, etc.

David Wessel in today's WSJ forecasts the following:

"Ben Bernanke's first interest-rate move as U.S. Federal Reserve chairman will be to cut rates ... A big bankruptcy will rattle the U.S. and shake political support for unfettered global trade ... Health care will emerge as a big issue in the 2006 congressional elections, forcing 2008 presidential candidates to promise action ... The gap between winners and losers in the U.S. will keep widening."

Here is what he says about the latter:

"The gap between winners and losers in the U.S. will keep widening.
In a 1998 book, a colleague and I predicted technology would propel faster economic growth and a growing supply of educated workers would narrow the gap between high- and low-paid workers over the ensuing 20 years. We were right on the first, and only temporarily (in the late 1990s) right on the second. Next year won't help our case.

"By nearly every measure -- the ratio of CEO wages to those of ordinary workers, the share of income going to the top fifth, differences between health and retirement benefits at the top and bottom -- inequality is growing. Why? Technology, globalization, the premium employers pay to hire the educated and workplaces where old-style loyalty is replaced by rewards for solo performance.

"The politicians in charge believe resisting these forces is counterproductive or wrong. But even Mr. Greenspan, a card-carrying conservative, sees a need to do more than we are. 'Equal opportunity requires equal access to knowledge,' he has said. 'We cannot expect everyone to be equally skilled. But we need to pursue equality of opportunity to ensure that our economic system works at maximum efficiency and is perceived as just.'

I hope we make it through the year. I also hope that all "gap-between- winners-and-losers" discussions take note of the following:

Labor migrations between adjacent rich and poor countries with long borders are very hard to limit. Data about wages at the low end for the U.S. are tricky because they include many immigrants who have improved their lot. Also, wages at the low and are depressed because of immigration, which is mostly by the unskilled.

If we are to discuss changes in the U.S. income distribution, then it is only reasonable to control for the latter effects. Otherwise we are just spilling ink.

Wednesday, December 21, 2005

The beat goes on

Lopsided left representation among U.S. college faculties is well known. Dan Klein and Charlotta Stern sum it up in "Narrow-Tent Democrats and Fringe Others: The Policy Views of Social Science Professors."

Their survey finds that academic economists are 3:1 left, political scientists almost 6:1, historians 8.5:1, political and legal philosphers 9:1 and anthropologists and sociologists 21:1.

They also find that both groups lean to statist views.

Paul Krugman had once explained this state of affairs with the suggestion that conservatives are too dumb to serve on decent faculties.

Many have commented on the subtle and the not-so-subtle screenings that are at play in many academic units. A variety of research specialities and topics are code for politically correct and this often gives applicants a leg up.

But what animates the process? Many people are happier to be surrounded by like-minded colleagues that reinforce their world view -- in spite of the diversity mantra. And many others, to their great discredit, probably believe that Krugman is right.

Sunday, December 18, 2005

Clarity on Kelo

I have long been a fan of The Freeman: Ideas on Liberty but the November 2005 issue is a keeper. Mostly devoted to the problems highlighted by the U.S. Supreme Court's Kelo decision, it brings together wonderful analyses by Richard A. Epstein, Donald J. Boudreaux, Andrew P. Morriss and others.

These writers remind us that even if eminent domain (and eminent domain abuse) is Constitutional, it is unnecessary as well as bad policy. Developers assemble parcels all the time without resorting to eminent domain, real urban redevelopment is more likely with property rights intact than not, and takings are generally distasteful if we care about liberty.

How refreshing.

Saturday, December 17, 2005

Devolution, property and development

Robert H. Nelson has long written about the benefits of private neighborhood associations and has espoused that state laws be changed so that inner city property owners can also gain the benefits that suburban owners of their neighborhoods enjoy. He elaborates all of this in his recent Private Neighborhoods and the Transformation of Local Government.

Writing in the December 12, 2005, Forbes, ("Privatizing the Inner City: Forget condemnation. Here's how to bring housing, Costco and Ikea to urban areas"). He shows that this is the best alternative to the awful prospects made possible by Kelo vs New London, Connecticut.

"... allow homeowners to privatize their neighborhoods and sell en masse directly to developers."

Trouble is that most advocates of the inner city have such a low opinion of its residents that they would work hard to block this devolution of power (and wealth) -- away from themselves.

There is also the small problem that none of the traditional approaches to inner city revitalization have had much effect.

Oh yes, that is because they have been "underfunded". Or perhaps they have been overfunded.

Friday, December 16, 2005

Pesky facts

It's official. The census reports that Americans at all levels became materially better off in the years 1981-2002. So says "Supplemental Measures of Material Well-Being: Basic Needs, Consumer Durables, Energy and Poverty, 1981-2002" (link at This will astound (and depress?) class warriors. But that will be momentary because they cannot debase their intellectual capital.

The report's Table 4, "Percent of Consumer Units Reporting Ownership of Selected Appliances and Vehicles by Expenditure Decile, 1992-2002" documents across-the-board improvements. The report also acknowledges that the numbers understate the improvements because they cannot capture signficant quality improvements.

But are they happy?

Wednesday, December 14, 2005

"Sound financial footing" ... my foot

The recently released Milken Institute report on the L.A. economy finds that the county's biggest employer is local government (462,960) which also tied for first place in job creation in the years 1980-2003, adding over 111,000 jobs

Local government employment, however, is surpassed by the county's informal sector which Milken researchers estimate now employs 679,000.

The L.A. Times' lead editorial re the Milken report fails to connect these dots.

High taxes and onerous regulations explain and support government employment and they drive businesses underground.

Times editorial writers rue instead the fact that off-the-books companies do not pay sales taxes.

But "[b]usinesses can be offered amnesty for past transgressions. Business education programs could offer both strategic advice and help in obtaining capital for those willing to comply. If such efforts were even half successful, public attitudes about the underground economy could shift, the city and the county would be on a sounder financial footing and Los Angeles would be a better city, even if lunch might be a dollar more."

A "sounder financial footing" and more taxes collected, perhaps to support even more government jobs. All that is missing from the reverie is an end to declining newspaper readership.

Monday, December 12, 2005

Trust busting is hard work

The Economists's Economic Focus column ("Matchmakers and trustbusters") comments on two recent articles (by Jean-Charles Rochet and Jean Tirole and by David Evans) that analyze two-sided markets. Many businesses depend on concurrent success in two markets. The article cites credit card companies (enough vendors and enough customers must use them) operating systems producers (users and software writers must both flock to them) singles bars (males and females must both show up). To make it all click, suppliers are prompted to discover pricing schemes that do the job. Fine as far as that goes.

But what will the trust-busters and other regulators say (and do)? Free drinks to the ladies? Looks like pricing below cost and grounds for prosecution.

It is again clear that trust-busting is a fool's errand. Absent legalized market closure, there will be competition and innovation and discovery, etc.

BTW, the same issue of The Economist includes "Bats and balls" re scientific work on the (lower) mammals that finds that the sizes or brains and testes are inversely related. Why do we care? Because the research was conducted by males -- and should be cited when we hear that science is just another arena in which males oppress females.

Friday, December 09, 2005

More on more money buys more happiness

There is more wonderful material on money and happiness in Dwight R. Lee's refreshing "Who Says Money Can't Buy Happiness?" in the Winter, 2006, Independent Review.

First, Lee reminds us that Adam Smith reminded us that ambitition moves us out of a zero-sum prisoners dilemma to animate comparative advantage and wealth and welfare. These, by the way, tend to make us less miserable.

Second, Lee reminds us that Voltaire reminded us that when we strive to accumulate via trade, we do much less pillaging.

He could have included WW II Germany and Japan, each of which made no bones of the fact that they were after resources -- and both of which belatedly discovered the path to wealth via trade. That lesson learned came at devastating cost them and many more of their victims.

Most people, it turns out, are not self-inflicting wounds by striving. And, Lee concludes, "[h]appiness can also be heightened and extended by taking a little time out from our struggles each day to appreciate how much we have achieved already and how blessed we are in comparison to most people who are alive today and almost all who came before us. Consider how much the pursuit of wealth has added to the length, comfort, health, beauty, and meaning of our lives and the lives of our loved ones. If that competition does not increase your happiness, then do not expect that higher taxes and more government spending on mass transit and recycling programs will do so."

Thursday, December 08, 2005

Money buys happiness

Causation is tricky but we love it. It is no surprise that the ancient money-makes-you- (or does not make you) happy discussion is now taken up by economists and other social scientists. In fact, my colleague Dick Easterlin has done some of the most careful work in this area.

This morning's WSJ includes "Money Buys Happiness" by Arthur C. Brooks. He reports evidence that the richer are happier to the extent that they donate more (money and /or time) to good causes.

To be sure, paying more in taxes does not make them happier. Apparently they exclude this from the good causes category -- and it leaves them less to donate.

"Money Buys Happiness"
WSJ, December 8, 2005; Page A16

"During the holidays, we will give thanks for the important things in our lives. For most people, money is not one of these things -- at least this is what we would like others to think. We are after all constantly reminding each other that 'money doesn't buy happiness.'

"Economists aren't so sure. They note that people with a lot of money tend to express a higher subjective happiness than people with very little. According data from surveys by the National Opinion Research Center, for example, people in the top fifth of income earners are about 50% more likely to say they are 'very happy' than people in the bottom fifth, and only about half as likely to say they are 'not too happy.'

"There is, however, generally very little change in the average level of happiness in populations getting richer over the years. For instance, the percentage of the U.S. population saying it was 'very happy' in 1972 was exactly the same as it was in 2002: 30.3%. Social critics of 'consumerism' explain this by claiming that what makes rich people happy is not money per se, but rather the fact that they have more of it than others -- so if everybody gets richer, happiness remains unchanged. The critics go on to say that income differences lead to unwholesome feelings of superiority, so taxes can improve our moral fiber simply by bringing us closer to the same income level.

"Perhaps you're unconvinced. In fact there is another explanation for unchanging happiness levels over time which is rather less supportive of income redistribution. As incomes rise, so generally do levels of government revenues and spending, and there is evidence that these forces work against personal income on the overall level of happiness. For example, a $1,000 increase in per capita income is associated with a one-point decrease in the percentage of Americans saying they are 'not too happy.' At the same time, a $1,000 increase in government revenues per capita is associated with a two-point rise in the percentage of Americans saying they are not too happy. In other words, not only can money buy happiness, but it may be that the government can tax it away as well.

"But beyond earning, taxing and spending, there is an even clearer link between money and happiness: charity. The evidence is unambiguous that donating money (and time) is one of the best ways to buy happiness. People who donate to charity are 40% more likely to say they are 'very happy' than non-donors. Psychologists have even tested whether charity makes people happy using randomized, controlled experiments -- the same procedure used for testing pharmaceuticals, except that, instead of administering a drug to one group and a placebo to the other, researchers randomly assign one group to act charitably toward another. The results are clear: Givers of charity earn substantial mental and physical health rewards, even more than do the recipients of charity -- empirical evidence that it is indeed more blessed to give than to receive.

"The bottom line is that the old axiom about money and happiness, properly understood, is quite wrong. So if you are so fortunate, enjoy the blessings of your abundance this holiday season -- and be sure to buy yourself a little extra joy via your favorite charity."

Wednesday, December 07, 2005

American industrial policy

Socratic dialogue is valued because the punch-line is articulated by the one who would benefit the most. Often the student, or in a court of law, the opposing witness. This is why lawyers and teachers try to perfect this approach.

On rare occasions, writers or speakers articulate the lesson that they should grasp (or should have learned), quite spontaneously.

Robert Litan was a deputy attorney general in the Clinton administration and part of the anti-trust team that went after Microsoft. He is now with Brookings and a contributing editor at Inc., where he writes the following (Dec, 2005):

"There's More Than One Way to Bust a Trust ... The Feds failed to breach Microsoft's monopoly -- but Linux and Google just might succeed. ... Looking back today, what I find interesting is that the market may be sorting out what the legal system could not ..."

And what would the market be doing if anti-trust industrial policy had prevailed? There would surely be fewer Linux- or Google-type ascendencies.

Tuesday, December 06, 2005

Shopping high

It does not take great insight to note that most people love to shop. A pair of eyes will do.

And a visit to state liquor stores in those states that still have them or memories of the retail experience in eastern Europe from the bad old days highlight collectivists' cluelessness (and vulnerability) on this score.

In the U.S., terms of trade have shifted in consumers' favor to the extent that we acquire ever more but are increasingly frustrated by the ensuing space and storage problem because the price of real estate becomes the binding constraint. I recall a short story (by T.C. Boyle?) that includes a couple who drained their swimming pool to use it for storage.

As if there was ever a doubt, Tara Parker-Pope in today's WSJ reports that, "[a] growing body of brain research shows how shopping activates key areas of the brain, boosting our mood and making us feel better -- at least for a while. Peering into a decorated holiday window or finding a hard-to-find toy appears to tap into the brain's reward center, triggering the release of brain chemicals that give you a 'shopping high.'" She goes on to cite the neuroscience that is now available on the topic.

Is it any wonder that shopping centers and malls have given way to lifestyle centers? These are the places where most of our most pleasing communal and open spaces will come from. It's all quite obvious and now also rooted in neuroscience.

Friday, December 02, 2005

Smart Growth Not So Lite

The Smart Growth folks can be hard to pin down. Sometimes they plug tough top-down land use controls. Sometimes they claim that they simply want large-lot and similar requirements out of the way so that innovative designs that respond to markets can come to pass.

Paul Weyrich takes them at their word, that it's the latter, and endorses a conservative New Urbanism.

Trouble is that when one looks at the charter of the Congress of the New Urbanism, one cannot square the stated ambitions with the simple idea that government simply has to get out of the way so that developers can cater to markets.

Thursday, December 01, 2005

Transportation planning

This morning's LA Times includes the following two items that caught my eye.

"MTA to Expand Rapid-Bus Service ... A mediator approves the agency's plan to more than double the number of routes to 29 by 2008 ... The number of rapid-bus lines in Los Angeles County will more than double over the next three years, making it easier for commuters to rely on public transportation and to move quickly around the region .

"On Wednesday a court-appointed mediator endorsed a MTA plan to meet demands for better bus service by expanding its rapid-bus program ..."

And, "Council OKs $40 Million for Exposition Rail Line ... The City Council has approved $40 million for the MTA to help build the Exposition rail line from downtown to Culver City. The 9.5-mile light-rail line is expected to cost about $640 million. The transit agency eventually plans to extend the line to Santa Monica."

L.A. county now has five recently-completed fixed guideway lines in operation. They include a $4.7 billion subway that carries slightly over 115,000 riders each day, three light-rail lines that cost almost $1-billion each just to build and between them serve 125,000 riders per day, and a recently opened busway that cost upwards of $350-million to build and carries approximately 10,600 riders per day.

These are all pathetically low numbers. The county's population is 10-million and the average person takes about four trips per day

My students and I recently applied a standard cost-benefit template to the five projects mentioned and found that, all things considered -- including generous assumptions about auto trips diverted and externality costs avoided, these five lines have a net cost to society of $560 million per year.

It takes a court order (and a lawsuit by the NCAAP and a group called the Bus Riders Union) to tell the MTA to add express bus service.

Tom Rubin reports that all of the MTAs routes could now be served by express buses -- had the money not been wasted on rail.

And what do local planners and politicians want to keep on doing? You guessed it.