Monday, May 31, 2010

Promises and uncertainties

Paul Krugman ("The Pain Caucus") writes that our economic problems stem from inadequate re-distribution because of (everyone else's) mean-spiritendess.

Mark Steyn ("We're too broke to be this stupid") says that politicized redistribution (here and abroad) got us into the mess, but we are now too poor to stay with it. Politicians here and abroad make promises they cannot keep.

Becker and Posner describe how and why social and economic policies in Europe came to be that way -- and why Americans should be wary.

Tyler Cowen notes that, no matter how you come down on fiscal policies (the aggregate demand management and/or redistribution varieties), watch out for the uncertainties that remain in the air. "Until the underlying uncertainty is resolved, the economy remains in the doldrums."

It seems to me that the underlying uncertainties have to do with promises made that cannot be kept -- and no clear way out of that bind.


Here is a more optimistic view.

Friday, May 28, 2010

In a dangerous place

I just found Luigi Zingales' "Capitalism After the Crisis" in the Fall 2009 issue of National Affairs. He makes several interesting points. First, unlike in the other western democracies, U.S. politics was for some years able to keep the electorate's general pro-market appreciation from morphing into pro-business politics. But this seems to have ended and pro-business has won. We are headed in the direction of "European corporatism."

The repeal of Glass-Steagall pre-dated the fall of the major investment banks, but these had not been its beneficiaries. Rather, the Gramm-Leach-Bliley repeal bill aligned the politics of all the financial players. Zingales thinks that this is one of the reasons we got Wall Street bail-outs. But that brings on public anger and populist politics. We are now, therefore, in a dangerous place.

We thus stand at a crossroads for American capitalism. One path would channel popular rage into political support for some genuinely pro-market reforms, even if they do not serve the interests of large financial firms. By appealing to the best of the populist tradition, we can introduce limits to the power of the financial industry — or any business, for that matter — and restore those fundamental principles that give an ethical dimension to capitalism: freedom, meritocracy, a direct link between reward and effort, and a sense of responsibility that ensures that those who reap the gains also bear the losses. This would mean abandoning the notion that any firm is too big to fail, and putting rules in place that keep large financial firms from manipulating government connections to the detriment of markets. It would mean adopting a pro-market, rather than pro-business, approach to the economy.

The alternative path is to soothe the popular rage with measures like limits on executive bonuses while shoring up the position of the largest financial players, making them dependent on government and making the larger economy dependent on them. Such measures play to the crowd in the moment, but threaten the financial system and the public standing of American capitalism in the long run. They also reinforce the very practices that caused the crisis. This is the path to big-business capitalism: a path that blurs the distinction between pro-market and pro-business policies, and so imperils the unique faith the American people have long displayed in the legitimacy of democratic capitalism.

Unfortunately, it looks for now like the Obama administration has chosen this latter path. It is a choice that threatens to launch us on that vicious spiral of more public resentment and more corporatist crony capitalism so common abroad — trampling in the process the economic exceptionalism that has been so crucial for American prosperity. When the dust has cleared and the panic has abated, this may well turn out to be the most serious and damaging consequence of the financial crisis for American capitalism.


Arnold Kling says: "What de-regulation"?

Wednesday, May 26, 2010

Enabling the enablers

Writing about U.S. business cycles in his wonderful textbook, Ed Leamer notes that eight of the ten post-World War II recessions are rooted in housing busts: "It's homes ... As far as homes are concerned we suffer from collective bipolar disease, swinging back and forth between manic buying and depressed waiting. In both manias and depressions, the housing market does not work right." (p. 196). He characterizes housing booms as giving rise to upward-sloping demand curves. Rising prices suggest more price rises and leverage opportunities facilitate boom-bust cycles. He goes on to discuss the "enablers" -- those who issue mortgages.

Russ Roberts singles out moral hazard from past federal government bailouts as the enabler of the enablers. Bond market participants relaxed their guard and went along for the ride because they had been given good reasons to think that government bailouts are likely -- especially re the GSEs, Fannie and Freddie.

Monday, May 24, 2010

Good news re the schools

When I voiced my disappointment over Pres Obama's letting Democrats abandon the DC voucher program, friends mentioned to me that he was preparing to take on the teacher's unions over charter schools. Yesterday's NY Times included "The Teachers' Unions' Last Stand ... How Obama's Race of to the Top Could Revolutionize Public Education" which reports that this is in fact the case. That would be very good news.

Yesterday's 60 Minutes included a report on the SEED School which was also very good news. It's a charter boarding school run on private and public money. If schools alone cannot do the job when the home is chaotic, create charter boarding schools.

Two plausible and uplifting reports on U.S. schools in one day. What a day.

Clones, not colonies

How did we get so rich?  Was it about “the West and the rest”?  Or was it about the Anglophone world vs. the rest?  James Belich in Replenshing the Earth argues that the British colonies were more clones that colonies.  And they maintained links with the “oldlands” unlike France’s colony in Algeria, Russia’s in Siberia or Spain’s in Argentina.  The author alludes to continuing reciprocal “re-colonization” (re-cloning?) meaning the boom-bust-encouraged links that seemed to have worked best in the Anglophone world – separated by politics and geography, but united by language and culture.  He shows why the newlands colonized by Spaniards (in the New World), Russians (in Siberia) and the French (in Algeria) never matched the levels of development nor the continuing benefical links to the oldlands that the U.S., Canada, Australia and New Zealand were able to sustain.

Saturday, May 22, 2010

Local schools

This study argues for (heterogeneous buyers concentrate their buying and search; high quality private schools may be found near some low quality public schools; school quality may be regarded as a luxury good) and finds a nonlinear relationship between school quality and house prices. 

One would think that this relationship adds to the incentives of homeowners to demand high quality schools.  Fewer limits on charter schools might help.  But getting from here to there has always been a problem, especially when it comes to improving school quality.

The value added of good schools is hard to identify.  High achieving families demand good schools for their kids, but also supply important inputs to successful education. That would be another reason for a nonlinear relationship between school quality and valuation.  This piece in the May 22 Economist reports mixed results from experiments that involved paying students to perform.  It's very hard to find a substitute for the educational inputs provided a home atmosphere in which learning is encouraged and valued.


Give neighborhoods the power to tax themselves -- and fix what they want to.  Arizona is apparently trying this approach.  It resembles Bob Nelson's thinking on how to fix neighborhoods.

Friday, May 21, 2010

Laugh or cry?

A newspaper story with the head "Invasion of the Full-Body Scanners" (today's WSJ) suggests that it is another report of TSA and airports and privacy issues.  But no.  This one begins with "My wife and I often experience the same things differently, but few as strikingly as the 3-D body scans we had in  New York clothing store." It turns out that when the writer went to shop for a suit at Brooks Brothers, they used a new electronic gizmo that used 16 sensors to produce hundreds of thousands of data points that described the man and from which the taylor created the perfect suit.  The wife was able to use the same technology at Victoria's Secret in order to get a better bra fit.

The punch-line for me was that the technology goes back to a federal government program of some years ago to find a high-tech way to keep apparel production costs down and jobs in the U.S.  It's protectionism-crony-capitalism all over again. 

Put this one in the laugh-or-cry file.

Wednesday, May 19, 2010

Not to worry

Robert Levy writes this in the latest Cato Policy Report:

PRESIDENT OBAMA: “We need to bend the health care cost curve. I want the food industry to cut chocolate sales by 25 percent.”

INDUSTRY: “But we would lose $100 million from the cutback.”

OBAMA: “Just raise the price of celery to recoup the $100 million.”

INDUSTRY: “Nobody will buy celery at the inflated price.”

OBAMA: “Not to worry. We’ll impose a fine on any family that doesn’t buy a sufficient quantity of celery.”

LEVY: Sounds inconceivable, doesn’t it? Scandalously, it’s more than conceivable; it may be reality. Obamacare— temporarily frustrated by Massachusetts voters—doesn’t require the purchase of celery, but it does require the purchase of health insurance. Here’s (roughly) how Obama’s actual conversation with the industry unfolded:

PRESIDENT OBAMA: “A lot of sick people can’t get insurance. I want the industry to cover preexisting conditions.”

INDUSTRY: “But we would lose a fortune if we did.”

OBAMA: “Just raise premiums paid by healthy people and sell more policies to those who aren’t insured.”

INDUSTRY: “If we have to cover preexisting conditions, healthy people won’t buy policies until they’re sick.”

OBAMA: “Not to worry. We’ll impose a fine on any family that doesn’t buy a policy now.”

Along similar lines, Forbes' car guy, Jerry Flint, discusses new federal miles-per-gallon mandates.  He asks, "Is it possible that car buyers will fall in love with smaller cars? The first of the new small cars to be built on this continent, the Ford Fiesta, will be here in weeks, but we really don't know how it will sell. Small cars really don't do that well now; Daimler sold only 1,397 of its tiny Smart cars here in the first quarter, and BMW sold only 8,728 of the somewhat more acceptable Mini. That compared with 103,039 Ford F-Series pickups." 

Not to worry?

Tuesday, May 18, 2010

Urban myths

Trendspotters keep looking for an end to suburbanization, but Wendell Cox reports that these folks misread the data.  "Suburb" and "city" are hard to define and this is why one has to be very careful. 

The May 2 NY Times included this graphic on how annual miles driven per capita has varied since 1956.  Gas prices matter as do levels of unemployment.  There is not much left to be explained by continuing suburbanization.

UPDATE:  OECD reports: "For the first time ever the number of people killed in road accidents has fallen below 150 000 in the 52 member countries of the International Transport Forum (ITF), excluding India. According to data released by the Paris based organization, which is part of the OECD family, road fatalities recorded the biggest decrease since 1990 with a drop of 8.9% in 2008 compared to 2007. Preliminary data for 2009 shows a continuing significant reduction in the number of road deaths for most ITF member countries, recording a drop of almost 10%."

And while we are on the topic, this book review in this morning's WSJ pins US suburbanization on (among other things) the interstate highway program.  Well, not exactly -- as some of us have tried to show.

Finally, in a better world, people would stop talking about "big solutions" and instead ask "at what cost?"  Dream on.  In todays LA Times, columnist David Lazarus wants LA to have a "world-class subway system."  Once again, evidence is of no interest.  In 2005, LA's 16-mile Red Line subway generated almost $300 million in annual losses, once the huge capital costs are included -- and even when external (non-rider) benefits of reduced auto use are counted.

Monday, May 17, 2010

City rankings

The WSJ's "Numbers Guy" recently wrote about the problems with the "city livability" rankings published by various magazines and others.  Readers love rankings so magazines and various groups will keep doing this. But urban economists model the spatial equilibria among cities as involving adjustments in housing (land) markets and labor markets (see Glaeser and Gotllieb's 2006 paper).  The simple result involves a four-way partition:  high- or low-amenity cities offer high nominal or high real wages depending on where housing prices end up.  New York is a high-amenity place with high nominal wages, but low real wages because equilibrium housing costs are high.   Were there fewer amenities (Houston?), spatial equilibrium indicates lower housing prices. 

The model leaves out differences in land use regulation, but these too should be endogenous.  The other problem is that the metro areas involved are too large, diverse and complex to easily fit the model.  Averages mislead.  There are usually wildly contrasting neighborhoods in each metro that defy the overall characterization.  This is the major reason that ranking the places that are the home of often millions cannot easily be done.

Stalker or stalkee?

Uncertainty is a fact of life, but we have ever more to say about it.  I always liked Peter Bernstein's way of summarizing progress in the field.  At the same time, I never believed that because we have had a good conversation about it (slightly beyond "do not put all your eggs in one basket") that we knew enough to do any more than whistle in the graveyard.  Nicholas Taleb famously makes this case.  He elaborates in this recent econtalk podcast.

This is why I was perplexed by Kenneth Posner's Stalking the Black Swan.  Posner owns up to his own recent investment missteps.  He describes how he diligently applied all of the latest business school/Wall Street tools (Monte Carlo modeling, probability trees, correlation analysis), but came up short.  His concluding chapter notes (what else?) that ya gotta have good judgment.  What would Taleb say?  It's not hard to imagine.

Thursday, May 13, 2010

Worthy read

I have greatly enjoyed Anthony Beevor's books on 20th century European history.  His latest (with Artemis Cooper), Paris, After the Liberation 1944-1949, may be my favorite.  Here is part of the summation:
The close of 1949 marks an obvious end to the immediate post-war periond, but the great issues of that time did not of course finish with the decade.  The three main ones coveerd in this book -- the Occupation, and the epuration as part of the guerre franco-francaise; the intelligentsia's admiration for revolutionary ruthlesness; and France's complex relationship with th U.S. -- either continued to affect Parisian life or resurfaced later.
That's quite a chunk of history to do justice to in just under 400 pages, but the authors do it beautifully.  Europe's convulsions of the 20th century will be a subject of interest for a long time, but this book offers an easily readable and well documented explanation of a big portion of what went on.

The current bailout of Greece may signal yet another new chapter.  A better grasp of the previous chapters is timely.

Tuesday, May 11, 2010

The social contract

Anne Applebaum explains that it's Time for Greece to Play by the EU's Rules.  She makes a compelling argument, but then adds this: 
Resistance could take forms more subtle than rioting. Athens, after all, is a city in which 364 people told tax authorities they owned swimming pools -- and in which satellite photographs reveal the existence of 16,974 swimming pools. If a tax or legal reform is perceived as a foreign imposition, will Greeks abide by it?
Makes you wonder.  It's tempting to believe that the Council of the European Union and the IMF and the US have dictated and that the Greeks have committed to change their ways.  But who believes it?  We have for so many years been told that the Europeans have a "social contract" by which everyone agrees to a certain welfare state. 

And this has always been held up as a shining example.

Sunday, May 09, 2010

Is California listening?

Andy Kessler writes about Europe's woes and the fact that one cannot slide into debt expecting no consequences.  He ends this way:
My guess is that the euro will survive, but no one will trust it like they used to. At the end of the day, it's an entitlement problem. In Greece, the public sector makes up 40% or more of the work force, with short weeks, lots of vacation and lavish retirement benefits. All of that needs to be paid for with real income, not debt, and the markets are anticipating the day of reckoning. One can only hope European policy makers listen to the market. I wonder if California and Medicare are taking notes.
The first thing you notice about Cyprus is affluence.  The cars are mostly new, the homes are new and large.  English almost everywhere, denoting an international presence.  Richard McKenzie and Dwight Lee wrote about Quicksilver Capital some years ago.  Wealthy Greeks and other Europeans have been moving to relatively low tax Cyprus for some years. 

Oh, and one more thing.  Cyprus' highways are much better than the potholed messes I experince in California.  Kessler says: Is California listening?  I doubt it.

Friday, May 07, 2010

Depraved or deprived?

Roger Cohen finds reasons to be optimistic about the Israel-Palestinian conflict. Let's hope he's right.

When you encounter cosmopolitan Muslims, our experience has been that they want to reach out and offer a positive image of their religion.  When you mention terrorists, they shake their heads and explain that these are the ignorant and poor who are easily brainwashed.

Trouble is that this is not exactly correct.  We now know that the Times Square bomber was enrolled in a graduate degree program in the U.S. (not that this denotes an unignorant state).  More to the point, economist Alan Krueger has studied a long list of terrorist attacks and finds that the perps all tend to be middle class and educated.  We need a better theory than the standard one ("I'm depraved 'cause I'm deprived.")

Thursday, May 06, 2010

Far fetched

In the May, 2010, Harvard Business Review, Ania Wieckowski writes about "Back to the city ... The suburban model of community is broken ..."  The article includes most of the popular cliches on the subject, including the silly one on obesity and suburbanization: people in the suburbs walk less than their urban counterparts. 

USC's Pengyu Zhu and I have been examining the latest (2009) National Household Travel Survey. While the survey's use of "urban" vs "suburban" categories ar much too broad, the data suggest that lifestyles in these settings differ very little.  Daily per capita frequencies of shopping trips were 2.32 (urban) vs 2.28 (suburban); for family and personal trips, it was 2.38 vs 2.28; for social and recreational trips, it was 2.29 vs 2.19; for visits to friends and relatives, the rates were 1.91 vs. 1.92.

We expect to find that demograhic differences explain most of the gaps found.  But the idea of real lifestyle differences between settings seems far fetched.

Monday, May 03, 2010

Good movie, good idea

Prof Gordon Wood's op-ed in the NY Times includes a sketch of the history of term limits in the U.S.  Not suprisingly, it is an old idea that meshed with the founders' suspicion of political power.  But Wood ends with this:
Although federal term limits have been confined to the presidency, the fear of entrenched and far-removed political power, as the present anti-incumbency mood suggests, remains very much part of American popular culture. Yet precisely because we are such a rambunctious and democratic people, as the framers of 1787 appreciated, we have learned that a government made up of rotating amateurs cannot maintain the steadiness and continuity that our expansive Republic requires.
But look at the entrenched committee chairs in both houses and tell me that these veteran professionals offer anything positive.  The "professionals" (as Mancur Olson and others have reminded us) are most likely to have settled into the rent-seeking-rent-extraction derby. Mr. Smith Goes to Washington is my favorite movie.

Saturday, May 01, 2010

Sources of discipline

It's May Day and a good time to be in Athens.  There are "manifestations" outside our hotel.  Public sector employees are not happy that generous benefits might end.  Private sector people are unhappy with their public sector colleagues for getting them into the mess.  Discipline will come from the outside or things will get worse.  Downward spirals can be really ugly.

James Carville famously said that he wants to be a bond trader in his next life because they have the power.  He probably meant bond markets.  At some point, sovereign debt becomes unattractive and downgrades occur.  Politicians' vote buying is a fact of life.  If discipline is not available from domestic sources, it has to come from abroad.  The constituencies for profligacy easily take charge.  Where is there a constituency for discipline?  We now have EU countries (the PIIGS?) that may be going the way of Argentina.

In the U.S. case, we have growing deficits, but a Presidential commission to look into the matter.  And we have a Federal Reserve promising that they have plans to some day unwind. 

The U.S. constituency for profligacy is also well established.  What are the odds of a serious constituency for discipline?