Tuesday, September 30, 2008


Wilshire was once Los Angeles' main boulevard. Driving over its decrepit pavement these days is pure Third World. Try anything east of Beverly Hills, including its storied Miracle Mile. Deferred maintenance is the rule and it has long been policy to divert auto user fees to public transit.

Not content with the waste and the damage done, there will now be a vote in California to invest billions on high-speed rail. The Baptists and bootleggers (see Bruce Yandle) for this one are greens and politicians. Demographia.com elaborates the gory details.

Monday, September 29, 2008

Wall Street physics

Joseph Stiglitz contributed the "Information" entry to The Concise Encyclopedia of Economics. He wrote, "Since about 1970, an important strand of economic research, sometimes referred to as information economics, has explored the extent to which markets and other institutions process and convey information. Many of the problems of markets and other institutions result from costly information and many of their features are responses to costly information."

Later in the essay, he notes that "The standard theorems that underlie the presumption that markets are efficient are no longer valid once we take into account that information is costly and imperfect. To some, this has suggested a switch to the Austrian approach, most forcefully developed during the 1940s and later by Friedrich Hayek and his followers. They have not attempted to 'defend' the market by the use of theorems. Instead, they see markets as institutions that have evolved to solve information problems."

And (disagreeing with Hayek) "The fact that markets with imperfect information do not work perfectly provides a rationale for government actions."

Some of us would add that government actions are also imperfect. Many years ago, Harold Demsetz warned about "nirvana economics."

Last night, on 60 Minutes coverage of the bailout, former Treasury official Roger Altman mentioned AAA ratings given to novel credit instruments that no one really understood. The market vetting institutions had fallen behind the innovations.

At econtalk.org, Pete Beottke talks about the economics of disasters. He mentions that mainstream economics in the 20th century went the way of physics (theorems) when it should have gone the way of biology (evolution).

Now we hear that the credit instruments that no one adequately understood were designed by physicists that the investment banks had hired.

Sunday, September 28, 2008

Wait till next time

Warren Buffett talks about how Fannie/Freddie were regulated and cannot decide whether to laugh or cry.

QUICK: If you imagine where things will go with Fannie and Freddie, and you
think about the regulators, where were the regulators for what was happening,
and can something like this be prevented from happening again?

Mr. BUFFETT: Well, it's really an incredible case study in regulation
because something called OFHEO was set up in 1992 by Congress, and the sole
job of OFHEO was to watch over Fannie and Freddie, someone to watch over them.
And they were there to evaluate the soundness and the accounting and all of
that. Two companies were all they had to regulate. OFHEO has over 200
employees now. They have a budget now that's $65 million a year, and all they
have to do is look at two companies. I mean, you know, I look at more than
two companies.

But read the whole interview because the popular wisdom these days is that we are paying the price for the orgy of deregulation that we have recently been through.

How and why will regulation be better the next time?

Saturday, September 27, 2008

Peggy Noonan and Dan Klein reflect

This morning's WSJ includes an excerpt from Peggy Noonan's Patriotic Grace: What It Is and Why We Need It Now (which I have not yet read). In the excerpt she writes about the collection of people milling and waiting at "Gate 14" (at any major U.S. airport), going through the "costly and embarrassing kabuki" of getting through TSA security. She notes that "Gate 14 doesn't think any of the candidates is going to make their lives better. But Gate 14 will vote anyway, because they know they are the grown-ups of America and must play the role and do the job."

This reminded me of Dan Klein's "Resorting to Statism to Find Meaning: Conservatism and Leftism" Dan begins this way: "Man is a meaning seeking animal. Meaning is developed and sustained in beliefs, communities, customs, and institutions. It is represented by symbols and identifiers. These components work together as a subculture." In the paper, he thoughtfully explores differences and definitions. How do people find meaning in conservatism and leftism as we know it? Dan also explains why liberalism [traditional definition] appeals to him.

It is a bit simpler for me. Statism carried to the extreme, where it becomes a religion (Hitler, Stalin, Peron, Castro, Milosevic, Kim Jong-Il, etc., etc., etc.) is vicious and evil. There are no worse forms of social organization. But democracy as we know it leaves room for populism which on these shores has not quite stooped to the lows we have seen abroad. But it's practitioners sometimes look in that direction.

Unlike Noonan's Gate 14 people, many of us sniff around every four years to see if we can find any redeeming qualities among the candidates presented to us. I'll have to read Noonan's book to see what is expected of grown-ups in these circumstances.

Friday, September 26, 2008

Your tax dollars at work

Wendell Cox has published his tabulations of 2007 mode choice commuting data from the Census Bureau's American Community Survey data. The data are for the nation and the metropolitan areas. Subtract data for the outlier New York metro area from the U.S. data, and note that percent working at home exceeds percent using public transit, 4.1% vs. 3.2%. This includes the many transit "successes" that we read about as gas prices began their ascent in 2007.

Today's LA Times reports "Sales tax measure to go on ballot" which refers to a sales tax increase to pay for an addtional $40 billion of public transit for California.

Throwing money at public transit (since about the mid-1960s) "to get people out of their cars" and onto transit has not done the trick, but that is irrelevant to politicians and greens of all stripes and parties.

Wendell's 2000-2007 comparisons also show a decline in carpooling. This is, of course, why we should build still more HOV lanes.

Thursday, September 25, 2008

Brand new chestnut

Two headlines from my morning reading belong together. From the WSJ: "Crisis Stirs Critics of Free Markets ... Around the World, Calls to Reconsider U.S.-Style Policies." And from the LA Times: "California Elections ... Prop. 10 would benefit key backer ... Billionaire T. Boone Pickens wants California to invest $5 billion to promote a plan with limited consumer benefits."

A favorite cliche among many groups is that U.S. economic problems illustrate unregulated capitalism running amok. That is how many continue to characterize the Great Depression and they now have a brand new chestnut.

Monday, September 22, 2008

The Regulators

Regulation can be an economic burden. The recent study by Rafael La Porta et al. is the latest of many interenational cross-sectional examinations that supports this view. Sam Peltzman is best known for his work on the dark side of regulation. And regulation in the U.S. has been rising during the G. W. Bush years.

In this morning's WSJ, Lanny J. Davis articulates the popular view that we have not had enough regulation. While L. Gordon Crovitz notes that Wall Street firms fell down because "For decades, the large Wall Street brokerages had armies of analysts who, when they did their jobs right, asked the hard questions and issued tough reports that often alerted both company executives and public investors to market moving issues. There are now half as many Wall Street Analyists as in 2000. Former NY Attorney General Eliot Spitzer eviscerated the profession with $1.4 billion in settlements and a new mandate for how the industry would be structured."

To be sure, Spitzer was a "regulator".

Sunday, September 21, 2008

Greed indeed

Steve Horwitz points us to Division of Labour for this fine passage:

On greed, let me repeat: If unusually many airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual. And let me add: This isn’t a morality play. What we’re seeing are the consequences of monetary-policy distortions of interest rates and regulatory distortions of incentives, amplified in some degree by private imprudence, not the consequences of blackheartedness.

I have now heard the "greed" explanation too many times for comfort. Adam Smith and many thereafter have had some things to say about self-interest. At what point does this one of the seven deadly sins become toxic? When (as the quote mentions) a number of policies and regulations line up in a very bad formation.

Inept business people deserve bankruptcy. Those engaged in fraud deserve jail time. House of Representatives members who accept large checks from Fannie and Freddie while "supervising" them, at least deserve an end to the right to gerrymandered districts. Senators that accept such funds ought to be shamed into returning them. Lest they be seen as greedy.

Saturday, September 20, 2008

Good news

Some environmentalists see markets as a problem, but others have grasped what economists have long been preaching, that markets offer the best hope for preservation.

For those who require convincing, this week's Economist includes "A rising tide ... Scientists find proof that privatising fish stocks can avert a disaster."

Read it and share it.

Thursday, September 18, 2008

Help is on the way

It would take an elaborate scorecard to track all the help that is coming my way.

This morning's WSJ includes a fine analysis by Zachary Karabell ("Bad Accounting Rules Helped to Sink AIG"). He notes:

Let's get a few canards out of the way: First, yes, stupidity and cupidity and complacency and hubris are involved, and yes, there is gambling in Casablanca. Second, the idea that there is this thing called "the free market" that governments tame or muck up with regulation is a fiction. Governments create the legal conditions for markets; markets shape what governments can do or are willing to do. Regulation versus free-market is a false dichotomy. Maybe in some theoretical universe, if we could start with a blank slate and construct society anew, it wouldn't be. But we exist in a web of markets and regulations, and the challenge is to respond to problems in such a way so that we decrease the odds of future crises.

And that is where AIG becomes instructive. Even good regulations can't prevent all future crises, especially ones that are the result of new technologies and changes that result from them. The capital flows, derivatives contracts and nearly frictionless interlinking of global markets today are the direct result of the information technologies of the 1990s. The implications weren't known until very recently, so it would have been nearly impossible for regulations to have prevented what is happening. But if good regulation can't prevent crises, bad regulations can cause them.

The current meltdown isn't the result of too much regulation or too little. The root cause is bad regulation.

Call it the revenge of Enron. The collapse of Enron in 2002 triggered a wave of regulations, most notably Sarbanes-Oxley. Less noticed but ultimately more consequential for today were accounting rules that forced financial service companies to change the way they report the value of their assets (or liabilities). Enron valued future contracts in such a way as to vastly inflate its reported profits. In response, accounting standards were shifted by the Financial Accounting Standards Board and validated by the SEC. The new standards force companies to value or "mark" their assets according to a different set of standards and levels.

The rules are complicated and arcane; the result isn't. Beginning last year, financial companies exposed to the mortgage market began to mark down their assets, quickly and steeply. That created a chain reaction, as losses that were reported on balance sheets led to declining stock prices and lower credit ratings, forcing these companies to put aside ever larger reserves (also dictated by banking regulations) to cover those losses.

Meanwhile, many people in Sacramento have been hard at work and this morning's LA Times reports "State warms to green proposal." The story points to a California Air Resources Board plan that would clean the air, grow gross state product, create jobs, etc. The plan includes a variety of measures -- including high-speed rail.

Wednesday, September 17, 2008

New deal

The impact of the Internet is profound in so many ways, but the effect on politics and elections is still unfolding. What (if anything) will happen to voter turnout -- in terms of how many and who?

In the September 11, 2008 Forbes, Peter Huber writes "Cronkite vs. the Web ... The real genius of the Web is that it lets people disconnect. That's why it has obliterated the old media."

Huber cites the well known remark by LBJ at the time of the Tet Offensive during the Vietnam War: "If I've lost Cronkite, I've lost Middle America." There will never be another Cronkite because the one large communications net is gone and there are now many smaller ones.

Smashing the gatekeepers, as evoked by Apple 1984, is well known, but the new conception of networks and the effect on elections and politics is fascinating to contemplate.

David Remnick writes about Stalin's use of broadcast radio in the USSR days ("Letter from Moscow: Echo in the Dark ... A radio station strives to keep the airwaves free." in this week's New Yorker)and. He notes that when Hitler visited Ukraine during the German occupation, he envied what Stalin had accomplished in radio broadcasting. All (legal) USSR radios were locked to just one station. Guess which one.

Tuesday, September 16, 2008

Political economy

Arnold Kling described folk Marxism a couple of years ago. Burton Folsom has written about the Myth of the Robber Barons, showing us there is always a horse race between the romantics and those who make it their business to dig deeper. In any case, read both if you have not already done so.

We now have a serious economic situation in the middle of a heated presidential campaign. So both sides in the campaign will sink to populist explanations of (and fixes for) the downturn.

This morning's WSJ includes a very nice op-ed by Jeremy Siegel. He points to regulators that dropped the ball (many still employed) and Wall Street money managers who made bad bets (many now unemployed). He makes no mention of the "Bush tax cuts." Repealing these is probably the main economic plank of the Democrats' platform. And I expect that they will be extraordinarily creative linking these to the credit market problems. But I recall Doris Kearns Goodwin telling the Jim Lehrer News audience that the Great Depression was caused by the "inequities" spawned by the 1920s boom.

If she can do that 70+ years after the event, and get away with it, linking tax cuts to today's credit market woes should be child's play.

Monday, September 15, 2008

Mind sets

The Great Depression prompted a bit of finger-pointing and current events on Wall Street will do the same. Reading the WSJ editorial pages for some years, I got the plot long ago. GSEs are a very bad idea.

But the many friends of Fan and Fred always pointed to early successes in getting more people into their own homes. This included showing the way so that secondary mortgage market securitization could take off -- on Wall Street and around the world.

The WSJ editorialists had been suggesting for some years that, in light of the growth of private secondary market securitization, Fan and Fred could go -- before they ever got "too big to fail".

The Economist's graphic on loan origination shares over the years (above) shows that the growth of private securitization did follow the growth of Fan and Fred securitization.

Policy wonks, however, should get used to the fact that politicized enterprises, no matter how shaky, are never subject to rational retirement.

I would not be surprised if among the many Fan Fred fans, there are those who think that Social Security is not a Ponzi scheme and others who claim that Ponzi schemes are really OK if guaranteed by the U.S. government

Sunday, September 14, 2008

Labor market discrimination

Skip Sauer and Russ Roberts discuss moneyball and baseball in this interesting podcast. Becker and Posner discussed competition, discrimination and law in their blog entry of a week ago. Linking the two is interesting. Labor market economics suggests that systematic discrimination against large minority groups can be costly to bigoted employers. Roberts and Sauer mention the fact that in baseball the National League integrated its rosters before the American League -- and beat them in inter-league play for many years until the AL owners threw in the towel. Why did it take them so long? Baseball owners enjoyed some "monopoly" status and the price of racial discrimination was comparatively small.

Financial regulation

There are two views of regulation. One, which I often hear these days, is that the regulators have failed, so let's get new and better regulators. This seems to be one view of OFHEO, the Fannie Freddie regulators. But that runs into the other view, that it's a fool's errand.

Public choice economics contributes to the latter view. In today's NY Times, Tyler Cowen writes "Too Few Regulations? No, Just Ineffective Ones ... the real issue is setting strong regulatory priorities to prevent outright fraud and to encourage market transparency, given that government scrutiny will never be universal or even close to it."

I cannot tell whether this is the proverbial third way. Legislators enact all kinds of things and worry about implementation and enforceability later, if at all. That's the nature of the beast. It is unclear that they'll ever get the regulatory part right. In the Fannie/Freddie case, it had to fail. Effectively regulating a highly politicized agency is not even in the cards.

So we are left with Job #1. Depoliticize these things. The jury is still out on whether after almost 100 years, we finally have a depoliticized Federal Reserve.

Thursday, September 11, 2008

Oy vey. Dog bites man

Today's LA Times ran the AP story excerpted below. Washington DC-econ does not get futures markets. But the practitioners of DC-econ stand ready to regulate them.

Study links oil prices to investor speculation
Large investors are cited as a primary reason for volatility.

WASHINGTON — Speculation by large investors -- not supply and demand -- was a primary reason for the surge in oil prices during the first half of the year and for the more recent price declines, an independent study concluded Wednesday.

The report by Masters Capital Management said investors poured $60 billion into oil futures markets during the first five months of the year as oil prices soared from $95 a barrel in January to $145 by July.

Since then, those investors have withdrawn $39 billion from those markets as prices have retreated dramatically, the report said. Oil traded at about $102 a barrel Wednesday on the New York Mercantile Exchange. "We have clear evidence the fund flow pushed prices up and the fund flow pushed prices down," said Michael Masters of Masters Capital Management, calling the amount of money moving into oil futures markets by large institutional investors in the early part of the year "way off the scale."

Masters said its analysis showed that investors "began a massive stampede for the exits" July 15 and that this caused the price decline.

"These large financial players have become the primary source of the dramatic and damaging volatility seen in oil prices," the report concluded.

The report was released Wednesday by House and Senate sponsors of bills to put additional curbs on oil market speculation and comes in advance of a report on speculation that might be released this week by the Commodity Futures Trading Commission, which regulates commodity markets. ...

Upside of trade that even protectionist-leaning pols can get

I have the impression that protectionism has always been a dicey political strategy. Many Americans earn their living working in export industries. Today's WSJ includes some wonderful graphics that show which metro areas are now the "export powerhouses".

The graphics also remind us that not only is all politics local (Tip O'Neill) but much of economics is local too.

We do not want our weather reports in terms of national averages, but that is how we do most of our economics. Perhaps as economic data get better, we will wake up to the problem of spatial aggregation.

Sunday, September 07, 2008

Falling in love

In today's LA Times, Diana Wagman writes "Once upon a time in politics ..." She concludes this way.

In 1984, I was a production assistant for a political media consultant. We had many Democratic clients, from a candidate for state Senate to Walter Mondale. We wrote campaign slogans and produced 30-second spots like mini-movies that spun the candidates' narratives precisely. We told their stories honestly, but we made them as dramatic as possible. As Alfred Hitchcock famously said, "What is drama, but life with the dull bits cut out?" It was after my year in politics that I moved to Hollywood. The kind of storytelling that happens here feels more honest.

Some years ago, Dan Klein wrote "The People's Romance: Why People Love Government (As Much as they Do)".

These past two weeks we have seen that some people also love politics and political conventions and candidates. Any kind of love (with the possible exception of the family dog) can be tricky. A follow-up to Klein's story is that falling in love with politicians can be very tricky. There are these clay feet

Saturday, September 06, 2008

An old story

Technological change is here to stay and probably accelerating, as we speak. These are truisms. The Economist (Sep. 6, 2008) includes "The road ahead ... The world's carmakers have mapped out their route to a greener future."

Whether it is prompted by prices, regulators or popular sentiment, progess towards lower emissions is a sure bet. This is the reason to part company with the Gore-Kyoto climate change alarmists.

It's an old story, but it bears repeating. I have no idea how strongly Sarah Palin holds creationist ideas. If she does, I fault her for that. Assume that a creationist occupies the Oval Office (perhaps that's already happened). Think about the possible harm. Now think about all the sophisticates on the left who are protectionists and/or modern-day Luddites. They want to run the economy (perhaps into the ground) based on climate change fears that assume today's energy technology will persist into the indefinite future. How harmful is that?

Finally, ignorance of any flavor is unattractive. But the one that postures as elite sophistication is the least attractive.

Thursday, September 04, 2008


Re Calvin Beale's work on counties (see below), I see that some bloggers are stuck wondering whether "rural" American Sarah Palin can appeal to "non-rural" America. Beale showed us that those distinctions are relics. David Brooks makes the same point in humorous fashion.


"Infrastructure" has a benign ring; "mega-projects" sounds a little scary and "pork" is, unfortunately, the four-letter word that is often the most accurate. Bent Flyvbjerg has made this point best in recent years. A very nice update appears in the current Miller-McCune. Hat tip to Barry Klein.

Calvin Beale

Today's NY Times includes an obit for demographer Calvin Beale. Over the years, he and USDA colleagues have mapped and categorized counties in ways that are indispensible these days that the urban-suburban-exurban-rural continuum is not what it used to be. Central city vs. suburbs distinctions are stale -- but still invoked by many who should know better. Beale was among the first to suggest a better way. He proved his point via the hard work that he did and inspired.

Wednesday, September 03, 2008

Net benefit

Teachers of economics explain consumer sovereignty, but are obliged to also explain the huge advertising industry without succumbing to the left's cliche about sinister consumer manipulation. John Wanamaker famously remarked that half of what he spends on advertising is wasted, but he could never figure out which half. But the promise of modern search and data collection techniques is supposed to make it possible to more accurately target ads. Chris Anderson writes about this.

This morning's WSJ includes "Drug Ads' Impact Questioned ... Targeting Consumers Didn't Lift Sales, According to Study ... Consumer advertising for prescription drugs had a negligible impact on sales products studied by Harvard Medical School researchers -- in a finding that may confound both advertisers and their opponents." The study apparently looked at TV ads, but modern marketing is supposed to be all about the discovery of niche sub-markets.

We can continue to hold to the idea that the web and better than ever data exchange are a net gain for consumer sovereignty.

Tuesday, September 02, 2008

The audacity of Volt

I blogged about the GM Volt (on Aug 23) after being puzzled by the TV ads shown during the Olympics. I know a bit more now, having listened to an interview with Jonathan Rauch on Econtalk.

The most fascinating part of the story is Rauch's conclusion that the big corporation has forced itself to go to a sort of Schelling self-command game. They set wildly optimistic deadlines to create and master new technology, going unusually public on a very risky fast track, pushing high-concept innovation in real time, in order to force itself not to drop the ball, as it has often done.

The story upends than the stale Nader-inspired Hollywood tale of cynical corporate scheming to stifle new technology. Capitalism is always a source of brisk change. Even Hollywood dullards should be able to grasp that.