Thursday, April 30, 2009

California Dreams

Here is Supertrain via Cafe Hayek.

But here is what train stations through California's heartland (Bakersfield, Stockton, Modesto, Fresno, Lodi) will be like when we have high-speed rail.

Tuesday, April 28, 2009

Worth reading

Phillip Blom's The Vertigo Years: Europe 1900-1914 is a delight. Here is how he sums up:

The revolt of unreason was a revolt against modernity itself. It held the idea of an ancient and immutable essence of man against the unstable identities of city folk, it articulated itself in the male backlash against early feminism, in violence and the cult of manliness, in reactionary politics. But it was not backward-looking in all its aspects: it also played an important role in Futurism, avant-garde art, and 'scientific' racial theories, in mysticism, and in the careers of men as different as W.B. Yeats, James Joyce, Adolf Hitler and Mark Rothko. The cult of unreason was important to movements as seemingly incompatbible as abstract modernism and fascism.

The years leading up to the Great War were (of course) much more than a belle epoque, after which the lights went out all over Europe -- once again.

The Big Lie

Few things in public discourse bug me as much as The Big Lie: We can get economic growth and energy/environment benefits in one stroke (or one free lunch).

Many politicians (including President Obama and Gov Schwarznegger and Mayor Villaraigosa, the ones to whom I send most of my tax dollars) cannot live with the hard (inconvenient) truth that if we want expensive technologies, there are sacrifices involved. The fantasy is routinely embraced by clueless journalists.

All of this is (and more) explained brilliantly in this paper.

Sunday, April 26, 2009

Go figure

From The Economist (April 25, 2009), here is something that I do not get. Just as the SEC gets ready to relax an oligopolistic arrangement that was poison, the FRB wants to maintain it.

The wages of sin ... The Fed is perpetuating a discredited oligopoly

BY MISREADING the risk in mortgage-backed securities and other “structured” products, the rating agencies Standard & Poor’s, Moody’s and Fitch played starring roles in the failure of finance. Their punishment? Oddly, the further entrenchment of their dominance, thanks to the Federal Reserve.

The Fed’s lending programmes, such as its commercial-paper facility and the Term Asset-Backed Securities Loan Facility (TALF), accept only collateral that has been appraised by a “major” rating agency, ie, one of the big three. This marks a setback for the seven rating firms that have been recognised by the Securities and Exchange Commission (SEC) more recently, including DBRS and Egan-Jones. It also sets the Fed in conflict with the SEC, which introduced reforms in 2006 to promote competition by speeding up the approval process for rating agencies.

The Fed has promised to consider expanding the list of eligible raters, but Ben Bernanke, its chairman, recently said he was “comfortable” with the big three’s revamped ratings models. Their rewards could be handsome: up to $400m in TALF-related fees alone, reckons Richard Blumenthal, Connecticut’s attorney-general. He has launched an antitrust probe and accuses the Fed of “rewarding the same companies that helped burn down the house”. Keen to restore securitisation’s credibility, Wall Street’s main trade groups, too, want the TALF opened up to smaller rating agencies.
Dan Curry, head of DBRS’s American business, notes that the Resolution Trust Corporation, which cleaned up the savings-and-loan mess in the 1990s, insisted on using firms of all sizes to rate the mortgage securities it issued. That gave a lift to upstarts, including Fitch. “Public agencies have tremendous power to influence the industry’s structure in times of crisis,” he argues.

The inspector-general for the government’s financial-rescue efforts this week urged the Treasury to scrap the use of credit ratings for TALF securities altogether and do the screening itself. That may seem far-fetched because investors still find comfort in ratings (a proposal to reduce money-market funds’ reliance on ratings was shelved last year after the largest funds voiced opposition). But better no ratings at all, perhaps, than those of a discredited oligopoly supported by a short-sighted central bank.

Saturday, April 25, 2009


High-speed rail for the U.S. is crackpot. Here is a report that spells out why. With apologies to Bruce Yandle, HSR is all about "Baptists and bootleggers", but with an assist from "deep thinkers" (Tom Sowell).

Supporters skip over boring considerations of cost-effectiveness and switch to the polar bears and rising sea levels. But any plausible accounting of HSR's external benefits does not improve HSR's sorry scorecard. One would hope that the Copenhagen Consensus put that idea to rest.

What can be done? Julian Simon succeeded in getting one of his antagonists to put up or shut up -- with his own money. (The latter may be pretty exotic for some of that crowd.) So HSR is a betting opportunity for many of us.

Trouble is we have to live long enough. These projects take a while to get going. And proponents are big on "the long view". One of my old professors once reminded us that at a zero discount rate, one can argue for filling in the Gulf of Mexico to grow turnips.

Thursday, April 23, 2009

Too big to fail

Joseph Schumpeter's Creative Destruction is a powerful two-word summation of the dynamics of capitalism. It explains much, including the four-word counterforce that it elicits: Too big to fail. A wonderful summary of how these two phenomena square off is in this week's New Yorker, Peter Boyer's "The Road Ahead: Smyrna, Tennessee, vs. Detroit." Actually, the plot involves Detroit, Smyrna and Washington. We had all heard the rough outlines of this story before, but consider this gem from Boyer's coverage:

G.M's most urgent problem was a crushing debt burden, much of it from its obligations to worker-benefit programs. The union workers had been promised lifetime pensions and full health coverage, and, after a 1970 strike they were also granted the option of retiring after 30 years. That meant that a worker who joined the company at eighteen ... could retire at forty-eight and collect benefits for more years than he'd spent as an active employee...

Part of the explanation comes via this quote from the perplexed former auto worker/union leader who cannot grasp how and why the party ended. "George Washington would roll over in his grave and call it treason for letting foreigners [Nissan in Smyrna and the rest of the 'Auto belt' that radiates out across the South from Smyrna] come in here and take away what we had built."

Monday, April 20, 2009


Porsches in China. Prostitution (and other illicit stuff) in Baghdad. I place both in the good news file. The first story would have seemed insane for most of the latter 20th century. The latter would have surprised those who had written off Iraq.

"Success" is overused and hard to define. But the idea of normalcy should include Porsches and vices. Getting to a semblance of normalcy is not bad.

Sunday, April 19, 2009

The trouble with the data

Ezra Klein posts this from CBO and one can hear the appropriate class warfare background music.

But because the data cover a time span of significant immigration from poor countries, who seriously believes that the comparison has any meaning? The people in these two snapshots of quintiles taken more than a quarter century apart are not the same people. Take the lowest quintile, where were the people counted in 2006 twenty-seven years ago? If they were already born, many were in central America. Are they better off now? Offer them free passage home if they step forward to admit their stupid mistake?

Why not estimate their pre-immigration dollar income equivalents and use that in the comparison?

National land use planning

I am at the American Dream Coalition conference in Seattle. Many interesting papers, among them Ron Utt's "President Obama's New Plan to Decide Where Americans Live and How They Travel." Utt sees an end to recent administrations' "benign neglect" of local land use questions. In the name of carbon footprints, Utt reports, the new administration has created a partnership between the U.S. Departments of Transportation and Housing and Urban Development. Involving these in a new national land use planning effort would be unprecedented.

There are several problems. Any evidence that higher density transit-oriented living is "energy efficient" is very shaky. And most Americans do not want to live that lifestyle. But growth controls and stunningly expensive rail transit (including high-speed rail for California; the rest of the U.S. may get medium-speed rail) have an irresistable appeal to the green left.

Re benign neglect, Richard Epstein writes that the courts have allowed eminent domain abuse by, local governments with respect to land use issues.

Is there a pattern here?

Wednesday, April 15, 2009

What would they do all day?

Poor President Obama. He proudly announces that a part of the "stimulus" came in under budget and he is quickly reprimanded by Paul Krugman. Under-budget is a bad thing when Keynesian stimulus is the plan.

And all of this is unfolding as large numbers of dummies are holding tax ("tea parties") protest rallies. (I have not yet found a Keynes for Dummies guide in print.)

Today's WSJ, includes this by Tom Herman:

Nearly 40 years ago, as a recent college graduate, I made a painful discovery: I couldn't figure out how to do my own federal income-tax return.

That was embarrassing, and it made me wonder what other Americans do. So I wrote my first major tax story: I asked five different tax-preparation services in the Atlanta area to prepare returns for a family of four with fairly typical finances. The results: At one extreme, a tax expert said the family was entitled to a federal income-tax refund of $652.04. But another said the family owed $141 -- a difference of $793.04.

That experience made me feel somewhat less dumb, but the article didn't have much impact: Since then, our tax system has evolved from a mess to a nightmare. The pace of change has accelerated in recent decades as lawmakers increasingly have tried to use tax laws to reward or punish conduct. The number of pages in the CCH Standard Federal Tax Reporter, which records tax law, regulations and related material, has soared to 70,320 from 26,300 in 1984.

More than 60% of all individual returns are signed by professional preparers, up from 46% in the mid-1980s. Joel Slemrod, an economics professor at the University of Michigan, estimates that the time and money individuals spend on tax compliance now comes to about $90 billion a year.

Tax simplification has not yet arrived. It may never happen. It is as arcane as why getting projects completed under budget is a bad thing. Besides, if the tax code were to be kept simple and transparent, what would politicians do all day?

Sunday, April 12, 2009

Don't know much about history

I have never taught macro-economics, but I can dream. I would start with MV=PY. One can spend the rest of the semester discussing all of its implications. Which M do we use? Can we measure it? What is V all about? But, most of all, the expression evokes an ideal world in which wealth and credit are determined concurrently. And then we can discuss the many cases where this does not occur. And before you know it, it's the credit-induced downturn we are now in.

According to a piece in today's NY Times by Eric Zencey ("Mr. Soddy's Ecological Economy"), a chemist named Frederick Soddy had once figured this all out. I had never heard about Soddy or this work (and Mr. Zencey does not mention MV=PY or Irving Fisher, but he does allude to Georgescu-Roegen's work), but it appears that Soddy and Fisher were contemporaries. The plot thickens.

Zencey's discussion of Soddy would be another way to introduce the problems of the macro-economy. One can never learn enough history -- or chemistry, it seems.

Tuesday, April 07, 2009

"Job Sprawl"

Some readers may have noticed that I have repeatedly visited these themes: (1) cities always have and always will decentralize; (2) doing something about it is neither desirable nor feasible; and (3) the whole discussion requires analysis at levels of spatial detail for which we do not have a lot of data.

In this light, have a look at Brookings' recent "Job Sprawl Revisited: The Changing Geography of Metropolitan Employment" This link links to the PDF for the full study. (HT to Ken Orski). The work updates earlier work by Glaeser, Kahn and Chu which pioneered the use of zip code data on job location. Even zip codes can be too large to capture what is going on, but let's not quibble.

The new study reports (gasp!) lots of "job sprawl" in America. Years of industrial policy ("smart growth") have only had measurable impacts on the cost side -- witness the effects on reduced housing affordability.

But what is odd about the report is that the author seems not to like her findings. Before the findings are introduced, the author does the obligatory tour of all of the (alleged) problems that "job sprawl" brings. Skip that and go straight to the findings.

Friday, April 03, 2009

European outcomes vs European policies

A touching (or creepy) faith in the power and efficacy top-down regulation is now in vogue. Wendell Cox just posted this summary of urban settlement trends in some of the major European cities. This is not the way it was supposed to turn out. Commanding the tides is hard work and so is ignoring people's preferences.

So the worst of both worlds is that the rosy dreams of the regulators are never realized, but the costs that they impose are borne nevertheless.

Thursday, April 02, 2009


Some people are in love with love and some are in love with revolution. The incoherent G-20 protestors (I saw some carrying a banner with "ABOLISH MONEY") may want to channel 1905 in St. Petersburg, 1965 in Selma or 1968 in Prague, but they do provide contrasts with the G-20 leaders. They want the western European heads of state to implement more economic regulation. The western Eurpoean heads, in turn, are badgering Barack Obama to become more of a regulator. But the U.S. President is trying to regulate as fast as he can.

For some perspective, the WSJ's Simon Nixon reports:

Anticapitalist protesters gathering in London for two days of demonstrations are missing the point. If there is one myth the credit crunch has surely exploded, it is that the financial system is a free market. The world is in a mess because the financial system wasn't capitalist enough.

True, there were some terrible regulatory failures, and politicians lacked the stomach to stop excess as bubbles formed. But successive bailouts over many years also distorted the banking system to the point where real price signals were swamped. Nothing in the current global recovery proposals suggests this lesson has been learned.

In a capitalist system, prices are set in the free market and providers of capital bear responsibility for their losses. Neither of these characteristics hold true of the banking system. The price of credit, the basic commodity of the financial system, was distorted first by implicit government guarantees to depositors and other providers of capital, and second by the tendency of governments to cut interest rates at the first sign of financial trouble.

Financial theory says the cost of capital to an enterprise should rise in line with risk. But banks during the boom were able to leverage themselves more than 50 times yet see their cost of funding fall.

That is hardly the sign of a well-functioning free market. Those who provided funding to banks correctly gambled that governments would ride to their rescue. Since the crisis began, implicit guarantees have become explicit and thresholds have been raised. The U.K. is even proposing to raise depositor protection in certain circumstances to £500,000 ($717,360), further undermining the principle of personal responsibility.

This government protection effectively extends to wholesale funding, too. With a few exceptions, including Lehman Brothers, bondholders have been spared losses as a result of bank failures.

Indeed, it has been axiomatic of the policy-maker response that bondholders should be kept whole to avoid the threat that the banking system would seize up completely or that the insurance industry, with large bond portfolios, would become the next domino to fall. Most Western bank bonds are now issued with an explicit government guarantee. The result is a distorted global financial system in which the true cost of capital is obscured.

In a fully capitalist system, there would be no guarantees. The market would ensure banks didn't become too big or too leveraged.

At least the current crisis is sure to lead to higher common-equity buffers for all. But since removing the guarantees and breaking up the banks is outside the realm of political reality, an alternative solution is to charge banks explicitly and upfront for all guarantees. The charges would rise in line with leverage. That at least would raise the cost of funding, helping to generate a price signal to the market.
Instead, global governments are taking the opposite tack. Unable to remove the guarantees and unwilling to properly charge for them because the banks remain too weak, they will try to limit the risks through more intrusive regulation.

The results, if that goes too far, should be clear enough: lower bank profits, less capital generated, less credit created, lower economic growth and more bureaucratic control over the banks and the wider economy.

The protesters should be careful what they wish for.

Wednesday, April 01, 2009

Dueling volumes

The March 2009 Journal of Economic Literature, includes Andrei Shleifer's review essay "The Age of Milton Friedman". Here is the abstract. Shleifer reviews two books that compare world economic performance from 1980 to 2005. One is an anthology edited by Leszak Balcerowicz and Stanley Fischer (Living Standards and the Wealth of Nations: Successes and Failures in Real Convergence) and the other is by Joseph Stiglitz and his co-authors (Stability with Growth: Macroeconomic, Liberalization, and Development).

These are dueling volumes and I have not yet read either one, but the title of the essay does reveal where Shleifer comes out. No suspense, but his analysis is worth reading.