Saturday, November 29, 2014

Micro to macro

Aggregation is the price paid for modeling convenience. There is always the question about the nature of the bargain. Many economists worry that macro-economics assumes away most of economics -- including choice and discovery. But Paul Krugman cites evidence that Keynesians have been right (mostly); Tyler Cowen says not so fast.

There is little debate that no one predicted the depth of the recent recession. Krugman and others are scrambling to claim that they did get the slow recovery right. There is the problem of not just extreme aggregation but also the fact that the models pay no attention to public choice considerations. I doubt they can have much usefulness.

The Journal of Economic Perspectives (Fall 2014) includes a symposium on Social Networks. How can anyone resist Vasco Carvalho's contribution with this title: "From Micro to Macro via Production Networks?"  The analysis involves taking a national input-output model and looking for supply chains among the 417 BEA sectors.

But (1) Supply chains are everywhere and formed at much greater levels of sectoral disaggregation than 417; and (2) Supply chains tend to be situated locally and much more interesting than what can be found from studying  a national IO model. Industrial organization discussions ask how much of any supply chain is within the firm and how much is outsourced. The associated spatial organization question is how much of the supply chain that is outside the firm is local. Cities are agglomerations of supply chains (parts or whole) -- within and beyond local firms.  Getting this part right would be a better micro-to-macro.

Monday, November 24, 2014

The other four-letter f-word

Many people like to assert "fair" this and that. They usually get away with it in spite of the fact that they do not offer useful definitions. Perhaps there aren't any. So this is a big scam. Politicians and other grand-standers love to align themselves with policies and proposals that are "fair."

The U.S. graduated income tax is a mess. The Economist (May 25, 2013; gated) published these details: Changes to IRS code since 2001 = 4680; number of words in the tax code = 4 million; man-years spent complying each year = 3 million; percent filers paying for help = 89%; money spent on compliance = $168 billion; taxes owed but uncollected each year = $400 billion. This is a "progressive" tax with strong leavening of (and invitation to) crony-capitalism and lobbying. The various meanings of "progressive" seem to get stranger all the time.

One can say that almost anything other than the status quo would be an improvement. Here is a Hall-Rabushka proposal. In this version, there is a 19% levy on all consumption above $12,600 -- for a family of four. This was suggested some years ago so the numbers would change. Indexing is surely possible.  This H-R proposal does build in a high marginal tax rate as soon as spending crosses the $12,600 barrier. Is that "fair?"

How about no exemptions but a guaranteed universal basic income ($50,000 per family per year?).  "Universal" as in for everyone.  The super-rich would probably use theirs for charitable donations.  Is all this "fair?"  Think about no welfare administration plus a vastly slimmed down and simplified IRS. The still unfolding Lois Lerner saga (30,000 lost emails found!) adds to the attractiveness of the proposal.

If we could only place (and collect) a tax on use of the f-word. 

Friday, November 21, 2014

The big issues

When you think about immigration, the gains from trade argument is fundamental and significant ("Trillion Dollar Bills Left on the Sidewalk"). The humanitarian angle is also profound; the accident of birth arbitrarily leaves many people in hell holes. One has to like liberalized immigration -- by all of the "rich" countries. It would be nice for the U.S. to show the way.

I cannot get Arnold Kling's "three axes" model out of my head. He suggests that different people emphasize one of three "axes". These include freedom vs. coercion, oppressor vs. oppressed, civilization vs. barbarism.  He suggests that libertarians focus on the first, progressives on the second and republicans on the third.  And the three often talk past each other.

But each of the three views holds a grain of truth. This is why liberalized immigration cannot mean "open borders." The latter would bring in some bad actors. What to do? Pres. Obama as well as his Republican critics talk about "securing the border."  This is rhetoric. The U.S. War on Drugs is almost fifty years old, involves billions of dollars, and countless civil liberties abused -- and has failed completely. Borders were not "secured."  Anyone who lightly banters this one around owes us an explanation.  The "hell" really is in the details.

What markets cannot handle is left to politics. The drafters of the U.S. Constitution knew that politics is a necessary evil and thought hard how to guide and contain it. Change would be subject to checks and balances.

 LBJ had very big politics on his hands with civil rights in 1964. He won and settled the controversy by winning in Congress, not by issuing an executive order.  I trust that some lawyers will opine that the executive order(s) that Obama described last night have a legal foundation.  But that is not the point. The big questions (civil rights as well as immigration) are only settled when the three branches of government find a way to agree. LBJ understood that. I have no idea what Obama is thinking.

Thursday, November 13, 2014

Third arrow?

The financial press has accepted the catchy label "Abenomics" re Japan Prime Minister Shinzo Abe's proclaimed three-pronged economic policy. There would be aggressive fiscal and monetary policies as well as "structural reform". The latter is the famous "third arrow" that has not yet been fired. Launching fiscal and monetary largesse is second nature to politicians here and abroad. "Reform" is another matter.  But it's absence means the other two legs of the stool will not accomplish much. In fact, that's been the case in Japan, the U.S. and much of Europe.

The three-pronged stool idea suggests an equal distribution of weight. So it's a bad analogy. The part that could make a serious difference is number three, reform. John Taylor explains that (i) post-2008, the policies that came from Washington were erratic and ad hoc; and (ii) "reforms" have been mixed at best, e.g., Dodd-Frank.

And what do we read almost every day? Discussions of whether fiscal and monetary policies been aggressive enough. But it's not just the politicians, it's (most) economists on that same page too.

Sunday, November 09, 2014

Zero-sum and negative-sum

Today's NY Times includes "The LeBron Stimulus ... King James may resurrect a basketball team, but can he save a city too?"  To be sure, any shock ("stimulus") redirects expenditures and thereby reallocates resources. But there is less than meets the eye because this does not necessarily amount to new wealth.

Fans and others who choose to redirect their personal spending are by definition better off. But new sports facilities built via edict (city hall crony-boosterism) also redirects spending but increased welfare is by no means assured.  Similar misunderstandings surround practically all discussions of government stimulus. Redirection is among sectors as well as places.

The biggest error is the one that sees war (even WW II) as a great economic booster. Does anyone need to be reminded that wars are great destroyers? War efforts can prompt new technological achievements which can add to wealth. But one has to ask: at what cost?  It's the old Econ 101 question that must be attached to all "good ideas" and associated policies

This brings us back to Cleveland and LeBron James. Can anyone point to new productivity? Do basketball-energized Clevelanders work smarter and harder? Does capital and labor that may stream towards northeast Ohio work better and smarter in its new setting? The Times piece evokes Keynes' "animal spirits" and suggests that "mood matters." But we do not know. Microsoft in Seattle was a source of great innovation. Would Microsoft in Portland instead have been any less innovative? New ideas are embedded in new capital but to what extent does this apply to re-directed labor and capital?  Unless we have strong reason to suppose otherwise, re-direction is zero-sum; politicized re-direction is probably negative-sum.

Wednesday, November 05, 2014

Gravity still matters

I used to think that "monopolistic competition" is an oxymoron. (But more than 46,000 cites at Google Scholar.) I was stuck on "mono" meaning "one". It is actually about the impossibility of perfect substitutes and the fact that we each make personal judgements about which are the "good" vs. the "bad" substitutes.

So whether we shop online or the old fashioned way is not a simple choice. They are imperfect substitutes and each occasion involves a peculiar choice for each of us. This is elaborated in David Bell's Location Is (Still) Everything. The gravity law of retail gravitation is still valid -- and cities will not disappear. Coming almost 15 years later, Bell's book is the one to place next to Frances Cairncross' The Death of Distance.

The gravity formulation recognizes the friction(s) of distance as well as the attraction(s) of mass. Again, on a case-by-case basis we have personal subjective valuations of each. This includes whatever affinities or loyalties we may have for "first movers" into any product line. It also includes whatever agglomerations or clusters we choose to live in or visit.

No one ever said that marketing (or Tiebout-sorting) is simple. We form (and manage) networks in the real physical world as well as via the internet.  Bell cites many examples where the uses complement each other.  We often go online to help us with old fashioned shopping.

My major quibble with Bell's book is that he applies the Zipf rank-size rule to cities -- not the entire metropolitan areas. City boundaries are political and not functional. There is no reason for there to be a good fit.

Monday, November 03, 2014

Old downtowns and new tech

Manhattan's downtowns are the model that many American city planners dream of.  But it is not a plausible model in most auto-oriented cities. You get street life when enough pedestrians use the streets to get around proximate destinations. Today's NY Times includes "Los Angeles, in the Rider's Seat ... The personal car is still king in Southern California, but smartphone apps for ride-sharing services have made the city's night life more like New York's when it comes to accessibility ..."

The promise of the combination of smartphones, broadband, apps and smart tech entrepreneurs is well understood and appreciated. I expect that this is just the start and that the stagnationists are wrong. But the real point here is that we have another case of 50+ years of policies and public monies poured into downtown LA's revitalization with little effect. Then two things happened with which policy makers had little to do. The fall in street crime and now the rise of Uber-type services. In fact, the latter has to fight off the efforts of policy makers in LA whose impulse is to sustain the city-sanctioned taxi monopoly.

Hayek thought that policy successes are hard to achieve because policy makers are inevitably data deficient; they are also hampered by inevitable politicization. But as in my previous post, it is possible to achieve policy goals in spite of the policies enacted.

Matt Kahn sees all of this as pointing to the importance of '"consumer cities."  Finally, tech does not give us the "death of distance" or any such thing. Rather, old tech (downtown) and new tech (Uber) can complement each other to achieve something novel. Cities will keep spreading out and old centers will gain in some places.