Sunday, January 25, 2015

Complexity models and policies

Here is a famous headline from The Telegraph, 5 Nov, 2008: “The Queen asks why no one saw the credit crunch coming … During a briefing by academics at the London School of Economics on the turmoil on the international markets the Queen asked: ‘Why did nobody notice it?’”

Since then, many others have asked the same question. There are now an uncountable (and counting) number of books and papers that explain it all -- after the fact. This will go on.

David Colander and Rolan Kupers (Complexity and the Art of Public Economy: Solving Society's Problems from the Bottom Up) provide a recent addition.  One Amazon reviewer calls it the "best economics book of 2014." Economists, CK write, are wedded to wrong and inadequate models.

They start off on a bad foot, attacking the straw man notion that most people are wedded to either a "market-can-fix-everything" or a "government-can-fix-everything" view. I dislike binary choices. And clearly, institutions and culture matter.In my view Deirdre McCloskey (Bourgeois Dignity: Why Economics Can't Explain the Modern World) tells that story best. Evolving norms matter a great deal and the phenomenon is absent from formal economic models.

Even those who will not go as far as Pres Obama's "you didn't build that" view understand that markets function best in the context of a credible legal infrastructure and a government that takes care of significant physical infrastructure.  Our challenge is to somehow invent a politics and a government that stops about there.

Colander and Kupers take conventional economics to task for trying to mimic the approach of physics; biology, they say, offers the better model.  Could be.  Their argument is that "complexity economics" is where the hope lies.  They mean that economics has to recognize the possibility of increasing returns, multiple equilibria, endogenous tastes, nonlinear dynamics and positive feedbacks.  CK want the possibility of "lock-in" to be recognized.  But how many of the original 1955 Fortune 500 are still on that list?  Very few.  CK claim that as we recognize the various realities that belong to complexity, we will come up with better policies, e.g. "complexity policies."  Will such policies meet the challenge I mention in the previous paragraph?  I liked the book but I am not convinced that the answer is "yes."

CK write about all the things that "government" "should" or "could" be doing.  They might delete "government" and insert the synonym "politicians" -- the ones we have, the ones I see on the nightly news.

Wednesday, January 21, 2015

State of the economy

Twenty-five years ago, Milton Friedman suggested that the U.S.was 45% socialist.  I prefer the label "crony capitalist" and the percentage may be higher than 45. Both of the major political parties are redistributionist; both want to redistribute in the direction of their political base. As office-seekers, and presiding over very large budgets, can they be anything else?  Perhaps we should not be surprised that the U.S. ranks 12th in the 2014 Heritage Index of Economic Freedom. Free the World also puts us at 12th. It would be nice for the U.S. to move up in both rankings.

Economically, we look much better.  According to comparisons shown in the 10th Annual Demographia International Housing Affordability Survey, as a nation, we are the best. The UBS Prices and Earnings report is my favorite. Their "Working time required to buy" table compares 72 of the world's major cities in terms of how many minutes or hours the average worker must work to purchase one Big Mac, one kg of bread, one kg of rice, or one iPhone 4S with 16GB.

Four U.S. cities are included, some of our most expensive places, Chicago, Los Angeles, Miami and New York.  But in the Bic Mac column, the U.S. cities are among the best, with the sole exceptions of Tokyo and Hong Kong. A Big Mac costs the average L.A. worker 11 minutes of work but it is just 9 minutes in Tokyo and 10 minutes in Hong Kong. The international range goes all over the place, mostly much higher.

We do pretty well in the bread and rice columns, but the U.S. and most of the other places listed have awful farm support policies.  We do very well in the time required to buy the iPhone; the U.S. four-city average is 31.25 minutes; only Geneva is better, at 23.5 minutes. Go figure.

All these comparisons and rankings are tricky and one has to be very careful.  But I caught parts of the State of the Union speech (and its reception) on TV last night. (John Stossel dreams of the speech he would have preferred.)  I did see the President take credit for the low price of gasoline.  No one laughed.

Considering our politics, the state of our economy is pretty good. 

Tuesday, January 20, 2015

Worth listening to

I had previously cited the work of David Theroux.  Here, David links the thought of C.S. Lewis to modern conceptions of liberty and the integrity of the individual.

Monday, January 19, 2015

Horse sense

Tyler Cowen cites The Horse in the City which I reviewed a while back.  This history is interesting for many reasons.

1. Most people fear the environmental effects of cars but have little knowledge of how much more polluted the cities were when we relied on horses.
2. Many routinely extrapolate negative trends to the point of inevitable catastrophe but fail to note how horse-manure doomsday never came; entrepreneurs, not an army of regulators, came to the rescue.

3. Those who rue the passing of a golden-age past are usually ignorant of the realities; it is usually these same folks who fear the future -- and who somehow know how to manage it.

4. Washington politicians recently saw the possible decline of the Detroit auto industry as ominous but the decline of the auto's predecessor, the horse, was not a calamity.

One can never know enough history. Read the book.

Thursday, January 15, 2015

Better than "smart"

Robin Hanson asks "Why not sell cities?"  You buy and own the city; you become the residual claimant (landlord) and can internalize all sorts of externalities. It could be a good deal.

I have often cited the shopping mall as an example of a single owner as the best possible land use planner (for that mall) because of the ability to internalize externalities.

The question always comes up about how scalable the mall example is.  Hanson alludes to some of the difficulties, especially with respect to governance and politics. Spencer MacCallum has famously suggested the hotel as a model for governance and public facilities and space use via contract. (The thing you sign when you check in or make the reservation.) Contracts respond to market forces and management has to choose, for example, who gets "free" wi-fi, gym access, bottled water, etc.

Bob Nelson has been writing about private communities -- and privatizing more of them -- for some years.  The privatizing part is not simple.

All three of the cited works deserve a hearing. Conventional city planning is stuck in a "smart" growth rut whereby growth controls and a bizarre approvals process have resulted in high costs and housing "affordability" problems. Connected crony developers get rich, as do lawyers and handlers who make a good living off the sorry mess.

At the same time, suburbanization trends continue. The promised "smart" benefits have not been realized but the costs have.


Arnold Kling on the same topics.

Monday, January 12, 2015

New economy

What do we know? Our economic data are not very good -- and probably getting worse as more of the economy creates hard-to-measure consumer surplus.  What do we pay for all the cool stuff we get for free on the Web?  Next to nothing.  How will we measure GDP and other stand-byes. Measurement challenges will hamper our understanding -- and forget about macro-economic forecasts.

This is why I do not understand the declinists and stagnationsts. New-economy industries (e.g. Silicon Valley) employ fewer people than in-its-heydey old-economy (e.g. Detroit). But this is just the start.

Many people have used Uber-type taxi services and understand its vast advantages. Networking and apps have been fashioned to reduce transactions and vetting costs to the extent that an army of new drivers (and autos) can step forward to serve another army of new customers.  Note that the app technology involved is stuff that is here now.  (Transportation economists used to worry about all the empty seats in all the cars out there. What to do?)

The Economist looks at the emerging phenomena in "There's an app for that."  Some call it the "sharing economy."  But we ain't seen nothin' yet -- and it's way beyond taxis. As new apps connect buyers and sellers in  a variety of fields, applications that we have not yet imagined will emerge.

More unemployed (and under-employed) labor will find things to do. More unemployed (and under-employed) capital, such as cars parked in garages, will find new work.

No surprise that start-up funding is growing.


I cannot decide whether peer-to-peer professional cuddling is part of the new economy.

Friday, January 09, 2015

World peace

Bloodthirsty primitives around the world have a way of hogging the news. But many of you have seen this YouTube and it does help. Watch it often.

I read Joshua Greene's Moral Tribes last year and will do so again after hearing him discuss his work with Russ Roberts.  Greene ends the conversation on an optimistic note.  Agreeing with Steven Pinker, that humans are becoming better and less violent and less nasty towards "the other", he concludes that humanity is slowly cobbling a meta-morality whereby we extend civility to an ever wider circle -- beyond the family, clan, tribe, etc. I think the data are on his side. As usual, there are very many ruts along the way.

Peace is a "cooperation problem," Greene writes. We have evolved moralities to gain the benefits of being peaceable. A meta-morality (world peace) would be even better.

Thursday, January 08, 2015

Real politics

The Affordable Care Act (ACA,"Obamacare") is apparently not popular with many Americans. But stay tuned; not all of the law has kicked in yet. To quote a prominent House leader, "we have to pass the bill to find out what's in it."  That is one way to digest 2000+ pages of law. Why so much heft? There were apparently many Bootleggers and Baptists to bring on board.

Finding out what is in this monstrosity is now slowly happening and some likely erstwhile supporters are not happy. Harvard faculty have recently been vocal about the fact that their ox is being gored. This post at The Incidental Economist includes a chart that makes the point.  Harvard faculty enjoyed a generous plan that is subject to an Obamacare "Cadillac" (high-end plan) tax. To avoid it, Harvard is making some changes that reduce coverage --slightly. Read the whole post.

It is interesting that ACA defenders talk as though the choices are the pre-ACA status quo or ACA. Another path would be to de-regulate insurance and medicine to the point where something close to a market emerges. Let people shop and make choices with respect to insurance coverage and care; give them the incentives to take lifestyle choices (diet, exercise, etc.) seriously. Provide vouchers to those below the poverty line.

But a simpler and common sense approach would leave Bootleggers and Baptists in the cold. It is amazing that the textbooks still teach a "median voter model" -- whereby policies and programs preferred by a mythical median voter are enacted.


Health Care Policy 101 (by Arnold Kling) 

Monday, January 05, 2015

Red States, Blue States

Richard Florida wrote about income inequality, comparing the various states in yesterday's NY Times. There is apparently quite a lot of it in the "Blue" states.  Are they "blue" because of greater inequality or do we get inequality from progressive policies and leadership?

Unfortunately, it is not simple. In a Bootleggers and Baptists world, it is hard to settle on the role of the state in the U.S. (all levels of government, all taxes as well as expenditures) as a force for greater or less inequality. Crony capitalism rewards cronies and the cronies are everywhere: left, right and center.

This morning's LA Times reports "After two-year delay, construction on California's bullet train is set to start".  This is the kind of blue-state stuff that will do nothing for the state's poor people.

In fact, the latest wrinkle in the California HSR story is that dedicated revenues will be made available from the State's cap-and-trade program. Leave aside the merits of the program, will higher prices for fuel have a progressive effect on the state's Gini coefficient?  Gasoline taxes, for example, are keyed to purchases and not the income of the purchaser. California is the 6th most unequal state in Florida's ranking. But give them time.


Brad DeLong comments on the Florida article.  One of his take-aways is that Blue states must invest more in infrastructure.  California is hell-bent on doing so in a big way.  Does the HSR nuttiness mean we will have less to invent in the mythical "infrastructure" that everyone seemingly prays for?

In a better world, every time that some well-meaning person prescribes "infrastructure", this book falls out of the sky -- and, we hope, does not hit him or her on the head.