Sunday, September 30, 2007

Reviewer's revealing remark

I have no plans to read Naomi Klein's The Shock Doctrine: The Rise of Disaster Capitalism but the review in today's NY Times by Joseph Stiglitz and the title of the review ("Bleakonomics: Namoi Klein tracks 50 years of global capitalism, spotting ruthless opportunism at every turn") could not be passed up.

Stiglitz's review offered nothing to get me to order the book but perhaps the review is an artifact all by itself. He suggests that the common ground between himself and Klein is that, "Market fundamentalists never really appreciated the institutions required to make an economy function well, let alone the broader social fabric that civilizations require to prosper and flourish."

I do not know who "market fundamentalists" are but the conclusion suggests a limited perspective. A short list of my favorite recent reads is on the booklist attached to this blog and it includes many books by bright economists who are not as blinkered as Stiglitz suggests. My list is short but over a half-million Google Scholar "hits" come up when the words "economics" and "institituions" are entered together. I did not click through all of them but just the first couple of pages bring up Douglass North, Armen Alchian, Oliver Williamson, Avner Greif, Bruno Frey, Barry Weingast, Dani Rodrik, etc., etc., etc.

Saturday, September 29, 2007

Asked and answered once again

In today's WSJ, Ron Bailey writes about a recent World Bank study (Where is the Wealth of Nations?) that also tabulates wealth per capita for various nations ("The Secrets of Intangible Wealth ... For once the World Bank says something smart about the real causes of prosperity" excerpted below). It is not tangible capital or resources but, rather, institutions matter and human capital matters -- and they beget wach other. The authors' choice of title is a propos. The same question was asked and answered by Adam Smith in 1776.

A Mexican migrant to the U.S. is five times more productive
than one who stays home. Why is that?

The answer is not the obvious one: This country has more
machinery or tools or natural resources. Instead, according to some remarkable
but largely ignored research -- by the World Bank, of all places -- it is
because the average American has access to over $418,000 in intangible wealth,
while the stay-at-home Mexican's intangible wealth is just

But what is intangible wealth, and how on earth is it
measured? And what does it mean for the world's people -- poor and rich? That's
where the story gets even more interesting.

Two years ago the World Bank's environmental economics
department set out to assess the relative contributions of various kinds of
capital to economic development. Its study, "Where is the Wealth of Nations?:
Measuring Capital for the 21st Century," began by defining natural capital as
the sum of nonrenewable resources (including oil, natural gas, coal and mineral
resources), cropland, pasture land, forested areas and protected areas.
Produced, or built, capital is what many of us think of when we think of
capital: the sum of machinery, equipment, and structures (including
infrastructure) and urban land.

But once the value of all these are added up, the economists
found something big was still missing: the vast majority of world's wealth! If
one simply adds up the current value of a country's natural resources and
produced, or built, capital, there's no way that can account for that country's
level of income.

The rest is the result of "intangible" factors -- such as the
trust among people in a society, an efficient judicial system, clear property
rights and effective government. All this intangible capital also boosts the
productivity of labor and results in higher total wealth. In fact, the World
Bank finds, "Human capital and the value of institutions (as measured by rule of
law) constitute the largest share of wealth in virtually all countries."

Friday, September 28, 2007

Getting closer

We know that "cities are the engines of growth", that entrepreneurial activity is key, that human capital is crucial, that there are resulting spillover opportunities -- and that spatial concentration is the result. Statistical tests are difficult because the web of influences is complex. But this has not stopped researchers and a large amount of published research has recently become available.

Much of this is conveniently surveyed in Entrepreneurship, Geography, and American Economic Growth by Zoltan Acs and Catherine Armington.

The authors also tap into an amazing data set on 14 million firms across the 394 U.S. Labor Market Areas (Longitudinal Establishment and Enterprise Microdata). Their data include new firm formation which is their proxy for entrpreneurship. Adding the regional dimension is very helpful and provides opportunities for testing across a variety of conditions.

What is missing (not the authors' fault) is how this plays out at the spatial micro-level. Why have land markets? So that locational choices that exploit spillover opportunities can be realized. This is why cities are the engines of growth.

We are not yet there but this volume gets us a little closer.

Wednesday, September 26, 2007

Conversation starters

As the population (here and many places abroad) gets richer and older with many more options, many of them via better technologies, stuff will happen. Seventy-five of the resulting trends are written about by Mark J. Penn and E. Kinney Zalesne in microtrends: the small forces beghind tomorrow's big challenges. The authors rely on survey data and some census data; they are not always careful about how they interpret what they find (their conclusion that, "The bottom 90% of Americans have been taking pay cuts." is ridiculous (p. 132))

But the book is an easy read. Most of the 75 trends that the authors cover are not really that surprising (more inter-racial marriages -- leading the pack are white males and Asian females -- more people using gyms, getting tattoos, enduring plastic surgery, etc).

But I had not known about "Cougars", women openly seeking younger men, with their own dating website. And there are some other surprises. Take this book to the next boring party or retreat and you will have some ready conversation starters.

In good company

If people are kind enough to include this blog in their list of Top 100 Academic Blogs Every Professional Investor Should Read, the least that I can do is call attention to it. It's nice to be in good company.

Monday, September 24, 2007

Pleasurable read

What did I know about IQ and intelligence before reading James R. Flynn's What Is Intelligence? Almost nothing. I had seen the stories about identical twins separated at birth. It's all heredity and nothing can be done. But most parents work hard to provide nurturing environments for offspring. Hope springs eternal.

Everyone knows that athletic records continue to fall. (And most of us have benefitted from some sort of chemical help almost from birth.) Likewise, the "Flynn effect" takes note of significantly rising IQ scores for some years. James Flynn points out that nature and nurture have interacted in beneficial ways. He makes a good case and offers a pleasurable read. What are some of the trends that matter?

Many do well these days because they can, moreso than ever before. "A greater pool of those suited by temperament and therefore inclination to be mathematicians or theoretical scientists or even philosophers, more contact with people who enjoy playing with ideas for its own sake, the enhancement of leisure, these things are not to be despised. And all of this has come about without an upgrading of the human brain through better genes or environmental factors that have a direct impact on brain physiology." (p. 174)

Sunday, September 23, 2007

The ears have walls

We remind students that there is a natural human tendency to "truck and barter" and that buyers and sellers are happy to see each other (this is not, unfortunately, obvious to everyone). And absent force or fraud, there are very few caveats. Externalities not easily subject to exchange usually come up.

But there is more. Prof. Alvin Roth writes about "Repugnance as a Constraint on Markets" in the Summer 2007 Journal of Economic Perspectives. The other two papers in the JEP Symposium on organ transplant bans document the staggering human costs in markets for organs.

Here is the abstract of Roth's paper:

This essay examines how repugnance sometimes constrains what
transactions and markets we see. When my colleagues and I have helped design
markets and allocation procedures, we have often found that distaste for certain
kinds of transactions is a real constraint, every bit as real as the constraints
imposed by technology or by the requirements of incentives and efficiency. I'll
first consider a range of examples, from slavery and indentured servitude (which
are much more repugnant now than they once were) to lending money for interest
(which used to be widely repugnant but no longer is), and from bans on eating
horse meat in California to bans on dwarf tossing in France. An example of
special interest will be the widespread laws against the buying and selling of
organs for transplantation. The historical record suggests that while repugnance
can change over time, it can persist for a very long time, although changes in
institutions that reflect repugnance can occur relatively quickly when the
underlying repugnance changes.

This is all interesting stuff. Some people are actually uncomfortable with any and all trade. But many of them routinely wear their "compassion" on their sleeves. They are complicit in unnecessary death and suffering.

It is thought that it takes gruesome photots to get some people to connect the dots. Illustrations of diseased organs will soon have to appear on cigarette packages in various countries. Animal-rights activists routinely post photos of abused animals. Conditions in poor third-world places are also used to elicit donations.

I have no idea whether dramatic photos of the near-dead on organ transplant waiting lists would have an impact among elites who high-mindedly support bans on organ transplants. Their aversion to (and ignorance of) exchange is so powerful that they would have thousands die each year.

Photos may be the way to go as long as the ears have walls.

Friday, September 21, 2007

Live closer to work ...

This morning's LA Times includes "To go green, live closer to work ... New study says planning compact mixed-use communities instead of suburbs would help save the planet from the effects of greenhouse gases." The full study can be found at the Urban Land Institute website.

Socialism collapsed but climate change arrived just in time to save social engineering. So there are now many suggestions on how to redesign our cities and our lives.

My student Bumsoo Lee has taken the most comprehensive look at the 2000 commuting data (some of it published in the Journal of Regional Science 47:3) and found that for the largest metro areas the longest commutes were for downtown workers. Specifically, 7% worked downtown and had 37-minute average commutes (one-way, autos only), 15% worked in sub-centers and experienced 28.5-minute commutes, while 78% worked in dispersed locations and experienced the shortest commutes, 27.2 minutes.

The social engineering is obvious: Move jobs out of the downtowns and into the suburbs.

Not actually. We live in a world of trade-offs and must think about the costs. Social engineers cannot do this very well and this is why socialism collapsed and why we look to markets to do what commitees of wise men and women cannot.

Wednesday, September 19, 2007


Once each year, the Texas Transportation Institute (TTI) releases its Urban Mobility Report and the same old dance begins. Media, politicians and many others fret over the news ("Drivers waste 72 hours a year in their cars ..." from this morning's LA Times), and quickly wheel out favorite "solutions" (usually politicized pork projects, including rail transit and carpool lanes).

But what do we know? 1. Traffic congestion is a no-brainer; it is the default rationing mechanism because politicians are reluctant to price access. 2. It is remarkable how good traffic conditions are in spite of the policy failures; average journey-to-work times in the largest U.S. metros were less than 28 minutes at last census count (for solo auto trips). 3. These good news are explained by flexible land markets; most employers and employees find ways to locate within reasonable distances of each other. 4. The TTI index misses this phenomenon because it is constructed from metro area-wide average conditions; most traffic relief is found by relocations away from the metro area's most congested parts. 5. Planners want to shut down this safety valve by increasing land use controls, making land markets less flexible. 6. New transit projects cause increased highway congestion because they take money away from road construction. California has pioneered this approach.

Now loop back to #2 on this list.

Monday, September 17, 2007

Happy to be happy

Just when I was reluctantly ready to accept the class warriors' idea that the prosperity-and-happiness link has less to do with how good I have it but, rather, where I place myself on the pecking order, along comes new NBER research wherein the investigators probe the links between nationality, age, happiness and hypertension.

They look for national differences in happiness and use blood pressure readings as objective measures of hypertension when making the inter-country comparisons. I have not read the study, only the abstract (parts below), but I measure my BP often and low readings make me very happy.

I also know that readings can be all over the place. And I seldom take a reading when I am busy enjoying work or play. Relative blood pressure readings, anyone?

In Hypertension and Happiness across Nations (NBER Working
Paper No.
12934), co-authors David Blanchflower and Andrew
Oswald draw upon data on 15,000 randomly sampled individuals from 16 countries,
and on other larger samples, to develop a measure of well-being related to the
incidence of high blood pressure. They find evidence to suggest that happier
nations report fewer blood-pressure problems. And, this seems to be true
regardless of the dataset used in the analysis. Nor do the results seem to be
caused by differing numbers of physicians across countries.

The authors' findings in this study rest on three assumptions:
first, that it is reasonable to treat their survey evidence on
high-blood-pressure problems as a proxy for true measures of hypertension.
Second, that people report high blood pressure in a more objective way than they
report levels of happiness. Third, that the patterns they find are not merely
the product of something special for this particular sample of

Sunday, September 16, 2007


I still do not know what asset price "bubbles" are. If I did, then I would also know what the "correct" prices are.

There is plenty of talk about prices that cannot be justified by "fundamentals" but most of that is in hindsight. The latest of many such discussions from The Economist clarifies nothing.

The current credit problems are prompted by house price declines that, in turn, further crimp liquidity. But this is not the implosion of the "house price bubble" that was the talk for so long.

This evening's 60-Minutes interview with Alan Greenspan shows him saying that he had no idea that there would be a sub-prime credit contraction -- or that there would be a serious problem.

Good for his candor and good for his helping to unravel the current problem from all of the media herd housing bubble chorus.

Political economy

In today's NY Times, Greg Mankiw writes about "One Answer to Global Warming: A New Tax ... The case for using a carbon tax to reduce emissions of greenhouse gases."

Comparing it to cap-and-trade proposals, he suggests that the tax is superior because cap-and-trade is likely to be politicized and abused.

And the carbon tax will not be?

He adds that the, "... natural aversion to carbon taxes can be overcome if the revenue from the tax is used to reduce other taxes."

Yes, it can but how likely is that? This raises the question whether policy advice or policy analysis with a political tin ear is at all useful. Mankiw is a smart and well meaning analyst and so are many others. But if we are serious about the idea of political economy, how can anyone turn a blind eye to the political half?

Friday, September 14, 2007

Themed monorails

Today's LA Times reports that "Vegas monorail finds it difficult to get on track ... High fares and long walks to stations have combined to hold down ridership ..."

They could cut the $5 fare and get ridership up a small bit -- from the dismal 50% of forecast. But that would increase the red ink. And it would still leave those long walks to stations.

How about no fares but slot machines on the trains? Each rider might deposit more than $5 and/or there might be more riders? Craps tables? Keno?

The article mentions that it's a $650-million private rail line run by a non-profit group. A for profit group might find better uses for this turkey.

Open source and closed source

There are about 2.2 million Google links re the Wikipedia accuracy question. While I have not yet read all 2.2 million entries, I get the picture. Open source is not perfect but it is not bad either. Today's WSJ includes:

Most Science Studies Appear to Be TaintedBy Sloppy

We all make mistakes and, if you believe medical scholar
John Ioannidis, scientists make more than their fair share. By his calculations,
most published research findings are wrong.

Dr. Ioannidis is an epidemiologist who studies research
methods at the University of Ioannina School of Medicine in Greece and Tufts
University in Medford, Mass. In a series of influential analytical reports, he
has documented how, in thousands of peer-reviewed research papers published
every year, there may be so much less than meets the eye.

These flawed findings, for the most part, stem not from fraud
or formal misconduct, but from more mundane misbehavior: miscalculation, poor
study design or self-serving data analysis. "There is an increasing concern that
in modern research, false findings may be the majority or even the vast majority
of published research claims," Dr. Ioannidis said. "A new claim about a research
finding is more likely to be false than true."

The hotter the field of research the more likely its published
findings should be viewed skeptically, he determined.

Take the discovery that the risk of disease may vary between
men and women, depending on their genes. Studies have prominently reported such
sex differences for hypertension, schizophrenia and multiple sclerosis, as well
as lung cancer and heart attacks. In research published last month in the
Journal of the American Medical Association, Dr. Ioannidis and his colleagues
analyzed 432 published research claims concerning gender and
genes. ...

It seems that closed source also has its problems. And it is painfully slow.

The wonderful possibility of open-source journal refereeing is that there are many smart people with time on their hands and/or the desire to be involved in the discussion. And good-bye to time lags that have no place in the modern world.

Monday, September 10, 2007

Have you heard the one about top-down planning?

I admit to being too weak to pass this one up. The LA City Council has discovered fast-food zoning. From this morning's LA Times:
Limits proposed on fast-food restaurants ... Health concerns
are cited for a proposed moratorium on such eateries in South L.A., which has
the city's highest concentration of them.

As America gets fatter, policymakers are seeking creative
approaches to legislating health. They may have entered the school cafeteria --
and now they're eyeing your neighborhood.

Amid worries of an obesity epidemic and its related illnesses,
including high blood pressure, diabetes and heart disease, Los Angeles
officials, among others around the country, are proposing to limit new fast-food
restaurants -- a tactic that could be called health zoning.

The City Council will be asked this fall to consider an up to
two-year moratorium on new fast-food restaurants in South L.A., a part of the
city where fast food is at least as much a practicality as a

"The people don't want them, but when they don't have any
other options, they may gravitate to what's there," said Councilwoman Jan Perry,
who proposed the ordinance in June, and whose district includes portions of
South L.A. that would be affected by the plan.

In just one-quarter of a mile near USC on Figueroa Street,
from Adams Boulevard south, there are about 20 fast-food outlets."To be honest,
it's all we eat," Rey Merlan said one recent lunch hour at a Kentucky Fried
Chicken. "Everywhere, it's fast food everywhere."Merlan said it wasn't likely
that a limit on new restaurants would change peoples' habits, even though he
thinks it's a good idea.

A Times analysis of the city's roughly 8,200 restaurants found
that South Los Angeles has the highest concentration of fast-food eateries. Per
capita, the area has fewer eating establishments of any kind than the Westside,
downtown or Hollywood, and about the same as the Valley. But a much higher
percentage of those are fast-food chains. South L.A. also has far fewer grocery
stores. ...

... While limiting fast-food restaurants isn't a solution in
itself, it's an important piece of the puzzle," said Mark Vallianatos, director
of the Center for Food and Justice at Occidental College.

This is "bringing health policy and environmental policy
together with land use planning," he said. I think that's smart and it's
the wave of the future."

Nothing about the fact that sellers bet their livelihoods on providing what customers might want.

And who knew that the USC students are among the victims? Who new that Occidental College has a Center for Food and Justice? And nothing compares to the quote by Professor Vallianatos.

In the goofiness sweepstakes, the professors and the politcians continue to battle it out.

Sunday, September 09, 2007

Sometimes, a cigar is just a cigar

In today's NY Times, Tyler Cowen writes "It's Monetary Policy, Not a Morality Play ... Cheer for the heroes and boo the villains (but only if there are any)."

That's always a worthy idea and I am trying to tie it to yesterday's blog re the Cato Journal's interesting symposium about monetary policy. It cites various policy errors made over the last half century. I am not sure that they rise to the level of villainy.

Jagdeesh Gokhale asks "Is the Fed Facilitating an Unpleasant Fiscal Arithmetic? ... Is the U.S. headed for an unprecedented economic disaster?" The worst numbers in the story come from unfunded Medicare liabilities.

Only last week, Hillary Clinton told an AARP audience that benefit cuts are off the table. The same piece cited Barack Obama countering that nothing should be off the table -- except privatization. At least Bush-Cheney-Rove (alias Simon Legree) once floated the privatization option.

I hope that I did not get carried away by Gokhale's piece. But I did read it just one day after finding the report Clinton-Obama position on the problem. Nevertheless, Tyler's advice is called for and his piece is now on my refrigerator door.

Saturday, September 08, 2007

Read this first

Is the international monetary system viable? Are America's twin deficits a problem? Is Fed policy responsible for more harm than good. Is inflation targeting a good idea? Will our unfunded social security liabilities wreak havoc? What are the economic risks as we asses the future?

And is the glass half-full or half-empty?

The Spring/Summer issue of The Cato Journal features a symposium on "Federal Reserve Policy in the Face of Crises". Reading the 16 papers was so informative and so enjoyable that I plan to go back to reread them in about a week.

Thursday, September 06, 2007

Land use reforms

Ed Mills is always a joy to read because he is smart and clear and also blunt. His "The Attrition of Urban Real-Property Rights" in the Fall 2007 issue of The Independent Review is must reading.

He ends with "What to Do?"
"The first step in remedying the situation should be to cease
making the controls more stringent: place a moratorium on further
controls. Second, many minor controls can and should be abolished
immdeiately with a few strokes of a few pnes. Third, the city [most of the
piece is about Chicago] should undertake a citizens' education program to confirm the
errors of its ways and to promise reform. Fourth, the city should begin to
relax density controls selectively. Permission might be granted for
immediate high-desnity development near highway interchanges, public transit
stops and commercial land uses. The result would be not only to intorduce
obviously desriable reforms, but also to make possible reductions in
commuting. Fifth, the city should abolish the requirements that a
residential building be brought to full compliance with current controls if the
owner modifies it significantly in any way. Finally and most important,
the city should commit itself to a series of five-year reforms to abolish almost
all land use controls."

Mills admits that these are "pipe dreams". I would add that, rather than criticizing planners' bias in favor of low densities, which does exist in many places, it is more generally the case that planners think they know where there should be high and where there should be low densities. And they are usually wrong on both counts because, absent markets, this is all too complex -- and just plain unknowable.

Monday, September 03, 2007

Perfect storm

The climate change scarce makes it possible for politicians at all levels of government to grab for the worst policies. In California, state politicos (the governor, the legislature and the irrepressible AG Jerry Brown) have found a new way to involve themselves in local land use planning.

The Sacramento Bee's Dan Walters (thanks to Brad Hill for the tip) writes about how high-density development and increased transit use have now risen to the top of California lawmakers' agenda.

Where to start? Most people do not want high-density living and avoid public transit. Years of policies that favor both have had no appreciable effect except to waste tons of money. (They also helped drive up home prices.) Further politicizing local land use and planning decisions is poison. California can do nothing to appreciably affect climate change.

Reason (Oct 2007, not yet online) includes Bryan Caplan on "The 4 Boneheaded Biases of Stupid Voters ..." They are anti-market bias, anti-foreign bias, make-work bias and pessimistic bias. These ideas are further developed in his wonderful book, The Myth of the Rational Voter.

The perfect storm, of course is when one policy embraces all four of these at once. That is apparently the genius of California's leaders.

Sunday, September 02, 2007

Not an urban legend

We may never know why the chicken crossed the road. But we now know why the traffic cop gave the ticket: because the city "needs" the money.

Judith Chevalier (in today's NY Times) cites the econometric work that identifies the link. "... money matters, even in traffic violations. They found a statistical link between a town's finances and the likelihood that its police officers would issue a speeding ticket."

Saturday, September 01, 2007

Memes or genes?

This has been a good reading year. Many of my recent blogs have mentioned new books that have been particularly enjoyable and worthy.

Many bloggers and reviewers have recently commented on Gregory Clark's A Farewell to Alms. I find it provocative, original (as far as I can tell) and masterfully argued.

"... since the Industrial Revolution we have entered a strange new
world in which the rococo embellishments of economic theory help little in
understanding the pressing questions that the ordinary person asks of economics:
Why are some rich and some poor? In the future will we be among the lucky? In
this book I have suggested ways in which the Malthusian era, through
differential survival of individuals, can predict success or failure for modern
societies, and also predicts a continuing future of economic growth." (p. 372)

Is it genes or memes? Is it culture or institutions? The now famous comparisons between (formerly) East and West Germany, North and South Korea, Taiwan and (formerly) Communist China were convenient and clear ways to cut through the culture vs. institutions riddle. But Clark argues for cultural differences as well as how and why they matter to the economic growth puzzle.

The book should launch a bundle of dissertations. One can only hope that the market for academic economists will not divert bright young scholars away from the project.