Monday, September 30, 2013

Not how this game works

The LA Times reports polling of California voters, the majority of whom now report buyers' remorse and worry over the California bullet train project. "52% want bullet train stopped, poll finds ... California voters are showing signs of buyer's remorse over the $68-billion bullet train project, poll finds." 

Sorry guys. That is not how the game is played. 

Sunk costs are irrelevant every time businesses drop product lines or even close shop. These are tough choices made every day. But sunk costs are seriously considered in emotional contexts. Marriage counselors routinely deal with some version of "I cannot leave this [unpleasant] relationship; I have invested so much in it." My guess is that such counselors do not then reach for the economic thinking.

It is not at all strange that sunk costs are taken seriously in politics.  When it is other people's money, we may as well go with unexamined impulses.

Here politics as usual where rhetoric matters.  The great practitioner of all this was Robert Moses. Robert Caro does a good job laying it all out in The Power Broker.  My copy is not handy but the key passage is cited by Peter Ubel here.

Is this a cynical use of power? Is there any other kind? Is the "buyer's remorse" of Californians relevant to anything?  Once some concrete is poured, it's all over.


Here is Timothy Taylor citing a wonderful paper by Cliff Winston.  The way transportation should be (Winston) and the way it is (Robert Moses, Jerry Brown and countless others) remain breathtakingly far apart.

Thursday, September 26, 2013

Beyond zero? (not a Fed funds rate story)

What is the most important thing we learn from economics? High on the list would be the idea of consumer sovereignty. That goes with the idea of the invisible hand.

Consumer sovereignty leads us to the idea of subjective choice and the conclusion that consumers evaluate options in consumption in their own personal ways.  Actually, they trade-off the various (many) aspects of any consumption choice.

This is why we say that judgments of "good" vs. "bad" substitutes are in the eyes of every beholder.

This is all old stuff but it comes to mind when one sees "College Football, Minus the Students" in today's WSJ.

The scene at home football games here at the University of Georgia is almost perfect. The tailgate lots open at 7 a.m. Locals brag of the bar-per-capita rate. The only commodities in greater abundance than beer are the pro-Bulldogs buttons that sorority girls wear.

There's just one problem: Some students can't be bothered to come to the games.

Declining student attendance is an illness that has been spreading for years nationwide. But now it has hit the Southeastern Conference, home to college football's best teams and supposedly its most fervent fans, giving athletics officials reason to fret about future ticket sales and fundraising.

As it turns out, Georgia students left empty 39% of their designated sections of Sanford Stadium over the last four seasons, according to school records of student-ticket scans. Despite their allocation of about 18,000 seats, the number of students at games between 2009 and 2012 never exceeded 15,000
Winning isn't even necessarily a solution. The average student crowd to see last year's Georgia team—which finished the season ranked No. 5—was almost 6,000 short of maximum capacity. Even at Alabama, 32% of student seats went unused by students between 2009 and 2012, when the Crimson Tide won three national championships. Alabama coach Nick Saban wrote a flattering letter last week in the student paper to recruit students back.

Georgia officials have been so concerned by student attendance that they reassigned 2,000 seats previously reserved for students to young alumni before this season. "It was a significant hole, and it was very noticeable," Georgia athletic director Greg McGarity said. "It was way too obvious."The inscrutable behavior of 18-to-22-year-olds is actually understandable in this case: For students today, there are more reasons than ever to skip the game.

The cellular reception at the stadium is bad. The nonconference schedules these days are worse. And the high-definition broadcast at home (or at the frat house, the bar or wherever) is gorgeous. The result is students are focusing on the few marquee games—like Saturday's matchup of No. 6 LSU and No. 9 Georgia—at the expense of others.

We have options as never before. Being at the bar (or wherever) in front of a large HD screen with closer rest rooms, perhaps a larger selection of beers (and more), often at lower prices (and no limits) than at the stadium appeals to many. Add better smart-phone reception, a controlled climate and much more and we see the results. Video on demand will only get better and cheaper.

So the biggest straw man is the thought that there is nothing like being there. For some, yes. But this is a moving target.  Attitudes change.  Many already have.

Dropping the prices of stadium seats my not end at zero.  Perhaps it might be a good idea to pay people to attend and fill those empty seats. That would make for a great looking stadium spectacle -- for all those watching on their big-screen or small-screen devices.

Tuesday, September 24, 2013

Phelps on cities

If you like reading economic history (how can you not?), one of the best I have seen is Mass Flourishing by Edmund Phelps. I am not sure I agree with his analysis of today's economic problems, but the first half of the book is splendid.  He asks the basic economic questions.  Why are some places rich and some poor?  Why did economic growth really get going in 1815-1820 -- and then in only a few places in Europe?  Phelps carefully evaluates all the usual suspects (culture and institutions being high on the list although he thinks they are linked). But then reports he is still short and something is missing.  I quote at length from pages 104-106 because his analysis is compelling.

Yet something is missing.  Why was it that, next to innovation in the 19th century, especially after the first quarter with its wars, innovation was so paltry throughout the 18th?  The answer may be that something may have grown to multiply or amplify the faint impulses of innovation – to potentiate the democracy and the vitalism that were already present at relatively high levels by the last quarter of the century.  But what might that something be?  Economic historians appear not to have identified it.  Why did innovation come earlier to Britain, America, and possibly Belgium than to France and Germany?  We do not have to share de Tocqueville’s impression that culture is everywhere the same to wonder whether differing intensities of the above forces argued to be central – the corporation, democracy, vitalism, and economic freedom – can wholly or largely explain why France and Germany got their dynamism later that the others.
The missing piece, which is obvious once one hits on it, is population density – the number of working-age persons in the country, excluding remote areas.  Not many innovations in a country can be encouraged by its culture and promoted by its institutions if there are few minds.  (Why, then, are Icelanders, with their small numbers, not backward and therefore poor?  The reason is their proficiency in English and Scandinavian languages virtually integrate them into the economies of America and Europe.)  Having more persons, all energized by vitalism and encouraged by democratic limits on arbitrary powers, surely increases the total number of new ideas being generated, even it leaves unchanged the number per generator.  Further, if the resulting new products and methods generally lead not to private use by the developers but to adoptions over the country – to diffusion – the end result is an increase in the number of innovations:  the new products developed by companies themselves and those developed by other companies, which grew in number with the increased population.  Thus, the more people there are in a rather integrated country to inspire, develop, market, and try out new ideas, the greater is its prospective rate of indigenous innovations per capita – provided the necessary institutions and culture are in place.  (Why, then, was China, despite a population far greater than that of Britain or America, not generating many innovations in the 19th century?  Or earlier?  There was a phenomenal abundance of entrepreneurs in China’s cities in the 18th century, the Irish economist Richard Cantillon reported in his 1755 study.  The reason is China was seriously lacking in the economic institutions or the economic culture of both needed for innovation, indigenous or exogenous.  It is far less lacking in the 21st century.)  If the economy of the West experiences more innovations per capita now than 100 years ago, it is mainly because there are many more people engaged in innovation in that economy;  it does not follow that every (or any) subpopulation of a given size generated more new products and methods. 
The benefits of increased population come not only from more creations, most of them available for adoption by others.  If new ideas and new products based on them are striking a country, they are likely to spread faster through the economy the more dense the population is – just as heat travels faster when there are more molecules and a disease is apt to spread faster (and farther) through the world the greater the population size.  Ideas are communicated very much like diseases.  More people, more relays.  Also:  more people, bigger market.  The Beatles could play 1,000 nights in Hamburg, that city being big enough, but not Liverpool.

It's the cities and their role in facilitating the exchange and development of ideas. Yes, it's Jane Jacobs but in the hands of a masterful economist. Phelps' broad brush uses a generalized population density measure but notice that he has to arrived at his story, having carefully explored the others contenders.

Urban economists have for most of the history of the field modeled the journey to work as the spatial organizing principle. Recently, they have rediscovered Jane Jacobs.  The exchange of ideas is a key dynamic force.  

Aggregating capital (as many economic theorists do) does great harm because we get economic growth if capital markets screen projects so that we get the good ones and do not invest in the bad ones. But we should no sooner aggregate land.  Location matters and sites have peculiar advantages. We want an assignment of activities to sites such that producers (including individuals) go where they think they can be productive.  This includes where they can burnish their thoughts and ideas.  Ray Oldenburg wrote about this.  Look at the title of his book.

Friday, September 20, 2013

Snowflakes and cities

There is so much in Vernon Smith's Nobel acceptance speech (recording here and reprinted recently in the AER) that I have been going back to it more than once. Start with the three quotes that he begins with. Look at the one by Herbert Simon.

We have become accustomed to the idea that a natural system like the human body or an ecosystem regulates itself. To explain the regulation, we look for feedback loops rather than a central planning and directing body. But somehow our intuitions about self-regulation do not carry over to the artificial systems of human society. (Thus) ... the ... disbelief always expressed by (my) architecture students (about) ... medieval cities as marvelously patterned systems that had mostly just “grown” in response to myriads of individual decisions. To my students a pattern implied a planner ... . The idea that a city could acquire its pattern as “naturally” as a snowflake was foreign to them (Herbert Alexander Simon, 1981, 1996, p. 33).

Cities as snowflakes does not mean that the cities or the snowflakes involve a central planner. I often cite an old David Brooks NY Times Magazine piece (April 9, 2000) in which he notes that, "The ritziest suburbs are filling up with urbanites who swore they'd never live there. To make them feel at home, retailers are rapidly turning suburbia into SoHo."  We get this outcome (and an uncountable number like them) from markets, not planners.

A propos Brooks, my student Qian An has found that the average time spent to get to a shopping destination in the large U.S. metropolitan areas was just over 14 minutes in 2009. It was just over 13 minutes in the suburbs. The travel time variance was also smaller in the vast and "sprawling" suburbs. That is one nice snowflake.

Sunday, September 15, 2013

The half-life of cliches is a thing to behold

Today's NY Times includes "Is Suburban Sprawl On Its Way Back?"  Not to beat dead horses, but it was never gone. Most Americans not living in rural places live in "the suburbs". This has been the case since 1970 (see Table 1-15)Wendell Cox has been flogging this issue for years. Bob Bruegmann spelled it out carefully in one of my favorite passages, as follows:
Most American anti-sprawl reformers today believe that sprawl is a recent and peculiarly American phenomenon caused by specific technological innovations like the automobile and by government policies like single-use zoning or the mortgage interest deduction on the federal income tax.  It is important for them to believe this because if sprawl turned out to be a long –standing feature of urban development worldwide, it would suggest that stopping it involves something much more fundamental than correcting some poor American land-use policies.  In the following chapters I will argue that the characteristics we associate today with sprawl have actually been visible in most prosperous cities throughout history.  Sprawl has been as evident in Europe as in America and can now be said to be the preferred settlement pattern everywhere in the world where there is a certain measure of affluence and where citizens have some choice in how they live.
The writer and editors of the Times' piece could also have benefited from just a little research beyond the likes of Smart Growth America. The article dwells on all the awful commutes that must be the fate of suburbanites. But there is more to the story. Prof Alex Anas has summarized substantial research on commuting and cities this way:
The data on the largest U.S. MSAs show that commute times increase only slightly with city size: the elasticity of the average commute time with respect to the number of workers was about 0.1 in 1990 and 2000. (p. 146 of this Handbook).
People and firms make location choices that are strategic rather that suicidal. This includes finding ways to avoid impossible commutes. But that is a matter of trade-offs and we all make individual choices, including lengthy commutes by some, all things considered such as schools, prices, other destinations, etc.

Looking at the bigger picture is always a good idea. But that old time religion casts its own spell.


Thursday, September 12, 2013


James Surowiecki has an insightful column on the sharing economy ("Uber Alles") in the Sep 16 New Yorker.

Owning is no longer all it's cracked up to be. There is a lot of slack in what is owned but not used. Much of the not-in-use stuff can now be shared because, thanks to the internet, transactions costs are falling.  People are OK not owning but sharing/renting. Re the signaling model, he cites NYU Prof. Ann Sundararajan, "Instead of being tied to owning one car, I can drive twenty different ones." There is a signal!

There will always be the lobbyists and their regulator buddies to slow things down.  Re the one-million dollar price of a NYC taxi medallion, economists have been saying all along that regulators can reasonably regulate safety without closing the market. Well look at this: "If these companies become more established, they’ll have to reach some kind of accommodation with regulators, perhaps along the lines of rules that California’s Public Utilities Commission recently proposed, which would let Sidecar, Lyft, and Uber operate if they implement certain safety and driver regulations."

For 2011, the ACS reports there were 138.3 million U.S. workers, of which 76.4% drove to work alone. Transportation planners rue all of the "wasted" empty seats being driven around. But that's the wrong question. Carpooling has high transactions costs but Surowiecki reminds us that car-sharing has transactions costs that many people are surmounting.

Monday, September 09, 2013

No warning label.

Perceived inequalities are on people's minds.  We spend a lot of time worrying over our status and devising signals that might boost our place in the pecking order.  The measured indicators, including what we earn, get the most attention.  No wonder this makes it into politics; class warriors feast on it. "Fairness" and "equitable" are almost impossible to define in practical terms but serve as indispensable rhetorical devices that are used interchangeably with "justice" in normal political discourse.

Economists are involved because they are skilled at interpreting the data that we have. Data on income distributions are widely available but all of the shortcomings associated with these measures as indices of well-offness are less discussed. This is why one would think that a symposium on "The Top 1 Percent" in the current Journal of Economic Perspectives (open access) is especially useful.

It's easy to be misled. Count dollars per person or dollars per household?  For inter-temporal comparisons, household size changes.  Count in-kind transfers?  How? These are bigger than ever?  What about consumer surplus?  Much of what I get via the internet is practically free but quite valuable.  What about person-to-person swaps?  The list goes on.

But the biggest data challenge of them all involves the "comparing snapshots" problem. Inter-temporal comparisons are complicated by the fact that many people move in the pecking order. Young people, for example, are most likely to move up as they leave school, go to work and eventually achieve seniority. But most of our data on income distributions do not account for this phenomenon. Not acknowledging the problem prompts many people to make the mistake of asserting that the passage of time accounts for increasing inequality.

Comparing the shares of national income that accrue to any group (such as the top 1%) over many years misleads. The normative claim that we do want to be able to test is one that recognizes income mobility. How much is there? How does that compare to other times and other places?

Yet, of the six papers included in the JEP symposium, only one (by Miles Corak) addresses the mobility question. The other six should carry a warning label. I say this in all seriousness because the eagerness to misinterpret the data -- and to suggest ever more redistribution -- practically defines the politics we have.

Thursday, September 05, 2013

Coase in urban economics

The passing of Ronald Coase earlier this week prompted many reflections on the man and the work.  I particularly liked this one. Most comments cited his two most influential papers, including his 1937 "Nature of the Firm."

Shorthand summaries of the paper's argument note that firm managers face many "make or buy" decisions. Buying involves transactions costs while making involves monitoring costs.  Management is hard work because these are tough choices that must often be revisited and reevaluated.

Another way to say it is to ask how much of any product's supply chain should be within the firm and how much should be beyond the firm. Here is a fine discussion of global supply chains in the modern world.

All this brings up the corollary of organization. Make or buy? If buy, then buy where? Locally or not? Needless to say, the way our cities look hinges on this elaboration of Coase's question. How much proximate co-location do we get? Consider these two views:

“ … a central paradox of our times is that in cities, industrial agglomerations remain remarkably vital despite ever easier movement of goods and knowledge over space.”  “Introduction” in Agglomeration Economics, E.L.Glaeser); and

“When co-location is infeasible, networks may substitute for agglomeration. This possibility of substitution means that small regions may survive and prosper …” “Agglomeration and networks in spatial economies” B. Johansson and J.M. Quigley.

I do not think there is a paradox. I do not think that it is either-or. The agglomeration vs networking choice is linked to the make-or-buy choice.  It has long been recognized that location and trade are part of the same puzzle. It is a huge and complex puzzle that Coase properly saw as way beyond "chalkboard economics."

Monday, September 02, 2013


Greg Mankiw likes the idea of carbon taxes ("A Carbon Fee That America Could Live With ... To deal with climate change, internalize the externalities"). This is is the part of economics everyone likes. It's in all the textbooks. But mainstream economics places less emphasis on the political economy context. Public choice analysis, if it is even included, appears in a separate chapter.

In the Mankiw piece, there is this, almost at the end: 
A bill introduced this year by Representatives Henry A. Waxman and Earl Blumenauer and Senators Sheldon Whitehouse and Brian Schatz does exactly that. Their proposed carbon fee — or carbon tax, if you prefer — is more effective and less invasive than the regulatory approach that the federal government has traditionally pursued.

The four sponsors are all Democrats, which raises the question of whether such legislation could ever make its way through the Republican-controlled House of Representatives. The crucial point is what is done with the revenue raised by the carbon fee. If it’s used to finance larger government, Republicans would have every reason to balk. But if the Democratic sponsors conceded to using the new revenue to reduce personal and corporate income tax rates, a bipartisan compromise is possible to imagine.
The IRS code is close to four million words. Why so complicated? Because every revenue measure is inevitably politicized. This is why Mankiw has to to end with "imagine" -- as in John Lennon.