Wednesday, February 24, 2016

Land use

Today's WSJ reports "Companies Pay Workers to Live Close to the Office: Subsidies help firms attract new hires to high-rent areas, such as New York City and Silicon Valley." High growth places will prompt high costs unless housing markets are allowed to function. Workers may try to keep costs down via longer commutes but this has downsides -- as the story explains.

Restrictions on development are serious in places like New York and California. But supply and demand cannot be denied. So there are consequences (and costs). The political process we have is not likely to be of any use. Places like California and New York will have to accept growth (and well being) below what they might otherwise enjoy. That will also have consequences. But these will most likely be more of the same -- which will only make matters worse.

Progressive Era thinking gave us the idea of municipal zoning. Land uses would generate externalities and top-down wisdom was required to get land use right. The Coasian idea that externalities could also prompt private bargains had not yet come along. And once there is a top-down rationale, it has staying power. Politicians (and their private cronies) and the greens love it.

But Jane Jacobs, among others, recognized that the clustering of land uses can be amazingly complex. The nature of possible knowledge spillovers between different projects and different lines of work cannot be grasped or implemented top-down.

The complexity story also suggests that many urban economists and planners are wrong. It's not simply one number, density. Ideas are essential and many successes come from knowledge-sharing. But knowledge-sharing is also mysterious.

Here are the latest U.S. commuting data. Which occupation has the longest commute? Construction workers do not work at a single site and some job sites can be out of the way. But which occupation is in second place?  Computer science and math. Many of these people exchange code electronically. Perhaps they economize on housing (and commuting) costs by living further away and going to "the office" fewer times. They can be connected from wherever. So much for just simple density. So much for the idea that any of this is simple. Admitting this and retreating from heavy-handed and restrictive land use controls would help.

Sunday, February 21, 2016

Things to cheer about

The definition of "luxury" is always changing. I would not trade places with Louis XIV. He can have his luxuries. I like mine. Real prices keep falling and availability keeps increasing. That's a lot of new consumer surplus. Consumer surplus is not measured by GDP or other conventional accounting. Those who beat the drums over increasing inequality should pause to notice the amazing "democratization of luxury."

It is interesting that the stagnationists (see Adam Davidson in today's NY Times mag) complain about slowing productivity growth but rarely mention the increasing availability of the goodies. Google trends shows that "digital divide" is cited less that it was ten years ago. Of course. Prices have come way down and access is better than ever for many more people.

We often hear that the 747 is so yesterday -- and we never got flying cars. But many more are able to fly. The latter strikes me as the more auspicious and the more interesting.


I found this just after I posted.  There is lots of evidence on the same theme. 

Tuesday, February 16, 2016


What to do about populism in politics? Populist impulses are always around.  Sometimes they dominate as in inter-war Europe and Japan.

Specifically, what does one say to supporters of Bernie Sanders and Donald Trump? The New Yorker's James Surowiecki raises the question but offers no suggestions. He does say that both candidates are threatening what the writer thinks is a decades-old U.S. political consensus. The WSJs William McGurn says "Grow, Baby, Grow: The Republicans have a great message about economic growth for middle America. Why make it so boring?" Great question. His Exhibit A is the campaign of Mitt Romney.

There is very little debate that Barak Obama sought to be a transformational figure. Many cheered him on in this effort; others did the opposite. The brewing fight over the next Supreme Court appointment will be over this divide.

Transformational efforts are a big deal and very likely to have backlashes. So blame the popularity of Trump and Sanders on Barak Obama?  There is no easy proof. Future historians will write the story.

Tuesday, February 09, 2016

Punish who?

Historians still argue about the causes of the Great Depression. Arguments like that will also go on re the Great Recession. Nevertheless, pundits and politicians (and and the NY Times editorial page, among others) complain, for example, that "no one went to jail." See here that "America got fleeced and no one was punished."

Who should go to jail? What do we know?  The pre-conditions for forest fires accumulate over many years; an unpredicted spark then sets off the fire. Likewise, at least ten political-economy events interacted to form a “perfect storm” -- the best descriptor we have until these are sorted out

 1. Federal Reserve policy. In the years 2001-2006, the Fed kept short-term interest rates too low too long (in the bust fear of deflation -- even during 4% GDP growth). Low interest fanned a speculative bubble in real estate. This was followed by typical over-reaction when the Fed tightening in 2005.
2     2. Local land use policies.  The housing price bubble was magnified by (varying) state, local development restrictions; these made local housing supply less elastic (many local “bubbles”) and further boosted home prices.
3     3.  Federal housing policy.  Since at least 1968 (GNMA loan guarantees), it has been national policy to promote home ownership. Policy makers promoted home ownership -- and pushed debt (and speculation). More recently, 20% down payments were no longer required; underwriting standards were steadily loosened. Over-leveraged households were encouraged.
4     4,  Many new savers around the world. World’s middle class grew by 2-billion+ in recent years (“Burgeoning bourgeoisie” Economist,Feb 14, 2009). There was a new large international demand for developed-country (mainly U.S.) assets which prompted a huge asset inflow to the U.S. Banks easily over-leveraged. 
4    5. Advances in finance. Securitization made it possible to tap into more money available for mortgage lending.More risk-spreading; international pools of capital made available (advantage of gains and losses spread far and wide). But loan originators did less to screen out high-risk borrowers. Regulators did equally poor job assessing sub-prime loans packaged with good loans in a single financial security 

6     6 Moral hazard. Previous bail-outs encouraged risk-taking and over-leveraging; profit-loss system requires possibility of loss. Public choice economics explains bail-outs; corporate bondholders/creditors less vigilant if 100-cents-to-the-dollar bail-outs are expected -- 100-cents-to-the-dollar bail-outs became public debt
            7. Too few SEC-sanctioned bond ratings groups. Call it oligopoly. Competition would have been better.  Many inflated bond (including mortgage-backed securities) ratings.  Risk-averse pension fund by-laws require a certain allocation of the portfolio to be AAA -- by one of big-three ratings agencies.  Regulators require less capital held -- if against AAA-rated government bonds; greater leverage allowed if AAA-rated mortgage-backed security.
       8. Normal due diligence by auditors and regulators overwhelmed. There never were “unfettered free markets.” Where/when/how would we get better regulators? Financial innovation usually outpaces regulators capabilities.
       9. Panic policies (start with Dodd-Frank) and panic messages from policy makers. Robert Higgs might say these prompted extraordinary “regime uncertainty”.

       10.  More bad Fed policy. Post-2008, member banks were paid interest on their excess reserves at the Fed. This bailed out many banks – and also reduced their lending.

So, who should go to jail? Best not to ask the politicians who had a hand in all but one or two my top ten.


Central bankers, now including Janet Yellen, are talking about or actually doing negative interest rates. We hear that there are three kinds of macro-economic policy: fiscal policy, monetary policy, economic reform (which can include tax code reform). The first two have apparently failed to deliver real growth. The third remains the much discussed but seemingly untouchable "third rail".


The problem with policy.  Found this at MR.

Saturday, February 06, 2016


Who controls the controllers? Who regulates the regulators? And, ever since "nudge" was discovered as a policy option, who nudges the nudgers?  These questions are seldom asked by social engineers. Of course not. Holman Jenkins, in today's WSJ, alludes to the people in charge of timing traffic signals. He writes, "Red-light cameras show us the flaw in the theory that government will 'nudge' us into doing the right thing." He cites "... the habit in many jurisdictions of setting yellow lights at or below the three-second minimum in order to ring up more tickets even at the cost of creating more accidents."  "Soft paternalism" is an idea that nudgers like but t-bone car crashes are not so soft.

Behavioral economics challenges the "rational man" assumption. But everyone knows (from early childhood on) that things are priced, for example, at $1.99 rather than $2.00 for the obvious reason that people are wired in ways that make the insignificant difference meaningful. And that goes to show that we are not 100% "rational". Yes, sellers may take us for fools but there are limits because they also want our return business.

But it does not work this way the public sector. Replacing regulators with nudgers does not "solve" the fundamental problem. "Softening" it does not solve the basic problem. 

Monday, February 01, 2016

Elections, war, peace and tech gadget addiction

Very few people in Iowa will soon caucus in that state's primaries. Political junkies feast, nevertheless. 

Voter participation in the U.S. is low. Public choice economists say they know why: most people have figured out that the odds that their vote can make a difference are very low. Theorists call their disinterest "rational ignorance". Outsized influence then accrues to interest groups. Those who cannot pass up team sports also remain involved -- for the thrills.

Buchanan's "Politics without romance" represents profound insights. Bryan Caplan goes further and suggests irrational ignorance.  Many of those who do vote (and/or participate somehow) embrace policies that will actually hurt them.  In a recent post on his blog, Caplan opines that most Americans' politics can be described in terms of their ADHD (Attention Deficit Hyperactivity Disorder) -- and that can be a good thing; they espouse awful policies but their ADHD causes them to not embrace these with any tenacity.  We are saved from the full consequences of the worst policy choices by a general lack of determination and follow-through.

Awful political choices have been with us through recorded history. Witness the many pointless and horrific wars. Steven Pinker sees these declining; our worst instincts are (very slowly) receding. That or mass ADHD, as we sink into in ever more tech gadget addiction.