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.

Friday, October 31, 2014

The real world

Hydraulic fracturing is partly responsible for a positive "oil shock". "How Plunging Oil Scrambles Geopolitics" by Prof. Brenda Shaffer (gated) in today's WSJ looks at discomfort in Russia, Venezuela and Iran. But there are positive effects in all of the oil consuming nations also. Administration policy did not see this one coming; they do what they can to impede fossil fuel production and push hard for "renewables." 

We also have new records on Wall Street. High asset prices (that reward "the rich") are another one of those embarrassments because Washington policy (on its face) was to help everyone but "the rich." Policy (here and abroad) that keeps interest rates low do a so-so job providing an economic recovery but they do push up asset prices. Good for asset owners. What about the poor and the middle class?  Not so good. Here is a nice NYT summary.

Central planning is hard work. At best, you hit the target you want to hit. At worst, your policies backfire. We have neither. For the case of oil, we get a windfall of good economic outcomes from policies that are the opposite of those executed. For the case of asset prices, there is also a windfall but not the one policy makers had in mind. It could have been much worse. The worldview our policy makers use is seemingly not of the real world.

Sunday, October 26, 2014


The Economist of Oct 25 includes "The geography of joblessness."  The piece cites new studies, not the same old cross-sectional "spatial mismatch" research of the 1960s and 70s, using newer longitudinal data less likely to confuse cause and effect. Higher unemployment, the cited studies show, can be linked to residential location further removed from areas of high job concentrations.

One of the suggestions made in the piece is to "improve" public transit. As with most discussions of "the need" for more infrastructure, there are many ways to spend more money. Not all of them are beneficial. Transit spending in the U.S. has been rising for decades with almost nothing to show for it.

But been-there-done-that. The original spatial-mismatch work was used to justify transit subsidies back in the day. A significant social and economic problem would be "solved" via policies and politics dear to Bootleggers and Baptists (B & B).  But the long-term decline in public transit's share of passenger miles has not been touched by the massive subsidies.  Meanwhile, unemployment and underemployment have been rising.

Unemployment and underemployment are difficult and complex problems. They probably have a lot to do with poor public schools, lack of skills, poor of work habits. But these are beyond the realm of  B & B policies. The mismatch is between the problems and the policies.

Friday, October 24, 2014


Here is Peter Boettke calling attention to a PBS story with and about Walter Williams. Watch the clip.

I find that Williams is always worth listening to. He explains basic economics as clearly as anyone. This is particularly important because too many college econ courses are obscure and forgettable. Williams also has a personal history that is worth hearing about.

Call your local affiliate for date of showing -- or go to this list. I will not be able to see the program. LA is not on the list, neither is NY, Chicago, San Francisco, Seattle, Portland, etc. I see only two of the large U.S. metros represented: Philadelphia and Washington, DC.

Station managers and/or their audiences in most of the large cities seemingly have a narrow (predictable) view of diversity.

Wednesday, October 22, 2014

Networked innovation

Many people saw PBS' various installments of Steven Johnson's How We Got to Now. Here is the book which is equally enjoyable. In fact, the book is crammed with great visuals and parallels to the TV presentation (though not in the same order). This may be a new thing: market a book and a TV series that are practically interchangeable; watch the popularity of the one prompt interest in the other.

Economists see a world of supply chains. I like supply chains of ideas; we get smart and we get ideas by interacting with each other.  Johnson likes to string inventions together ("networked innovation"). Gutenberg got people to read; many then discovered that their eyes were not so good; the people who had found how to work with glass also found a way to make lenses for seeing-eye glasses; it was not long before we got to microscopes and telescopes and all of the science these brought forth. Johnson evokes chains like these throughout the book.

Once clean water was possible via chlorination, there were public baths. Once we had these, women's bathing suits became skimpier. Historians of ideas are supposed to make connections and some of Johnson's will be challenged. But what fun. "Before the rise of municipal pools, women bathers generally dressed as though they were bundled up for a sleigh ride. By the mid-1920s, women began exposing their legs below the knee; one-piece suits with lower necklines emerged. Open-backed suits followed by two-piece outfits followed quickly in the 1930s. (p. 149). And we know the rest of the story.

Sunday, October 19, 2014

Just-so stories are just human

We love narratives. We produce and consume just-so stories all the time.  In today's NY Times, Konika Banerjee and Paul Bloom ask "Does Everything Happen for a Reason?" They add, "Of course not. But studies suggest we have a natural urge to think so."  We are pattern-seeking. This is a very practical tendency acquired via evolution. It has the well known downside that jumping to conclusions entails risks. Nevertheless, Banerjee and Bloom wind up this way:
Some people are more prone to find meaning than others. In large-scale survey studies also reported in the journal Cognition, we found that highly paranoid people (who tend to obsess over other people’s hidden motives and intentions) and highly empathetic people (who think deeply about other people’s goals and emotions) are particularly likely to believe in fate and to believe that there are hidden messages and signs embedded in their own life events. In other words, the more likely people are to think about other people’s purposes and intentions, the more likely they are to also infer purpose and intention in human life itself.
WHATEVER the origin of our belief in life’s meaning, it might seem to be a blessing. Some people find it reassuring to think that there really are no accidents, that what happens to us — including the most terrible of events — reflects an unfolding plan. But the belief also has some ugly consequences. It tilts us toward the view that the world is a fundamentally fair place, where goodness is rewarded and badness punished. It can lead us to blame those who suffer from disease and who are victims of crimes, and it can motivate a reflexive bias in favor of the status quo — seeing poverty, inequality and oppression as reflecting the workings of a deep and meaningful plan.
Not everyone would go as far as the atheist Richard Dawkins, who has written that the universe exhibits “precisely the properties we should expect if there is, at bottom, no design, no purpose, no evil, and no good, nothing but blind, pitiless indifference.” But even those who are devout should agree that, at least here on Earth, things just don’t naturally work out so that people get what they deserve. If there is such a thing as divine justice or karmic retribution, the world we live in is not the place to find it. Instead, the events of human life unfold in a fair and just manner only when individuals and society work hard to make this happen.
We should resist our natural urge to think otherwise.
We have also developed the scientific method of inquiry whereby we seek to do better than be "just-so" storytellers.

Just-so storytelling is the way most people discuss the everyday price gyrations on asset markets. Stock markets have had a bad October -- and there is no end of explanations.  Also in today's NY Times,  Robert Shiller discusses, "When a Market Theory is Contagious ... Is the world suffering 'secular stagnation'? Yes or no, the idea alone keeps hurting stocks." Shiller notes the prominence of "thought viruses."

These viruses and many other just-so stories are always out there. But buy-and-hold investment strategies are too boring for many. They flock to the casino with predictable results.

Thursday, October 16, 2014


The LA papers are full of worries over the local drought but have yet to discover, pricing, incentives, and politicized misallocations. This is why I was happy to find Eduardo Porter's "The Risks of Cheap Water" in the NY Times.

Water can be metered and sold. There is no reason other than politics for nutty politicized allocations. Politicians do like politicized allocations. There is a nice post on all this by Alex Tabarrok at MR. Gary Libecap has been all over California water policy missteps for some time.

Milton Friedman quipped, "If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand.” People smiled. But in California, we have droughts, popping water mains, water cops to patrol who waters when. Dirty cars are now a local badge of honor. It's funny bit it's not.

Wednesday, October 15, 2014


Getting my own medical care, I have encountered more than a few medical professionals who are practicing  here from abroad and who treated me very well.  I was glad they are here and I expect that they are also better off practicing medicine in the U.S. than in their native land. Good old fashioned gains from trade.

This morning's WSJ includes an op-ed by E. Fuller Torrey, "How the U.S. Made the Ebola Crisis Worse ... The total number of Liberian doctors in America is about two-thirds the total now working in their homeland."  Torrey wants the U.S. to produce more home-grown health professionals so that this kind of thing cannot go on. Expect others to call for restrictions on how many professionals from abroad are allowed to practice here. Gary Becker advocated auctioning immigrant permits to the highest bidder. That would not address the problem that Torrey writes about.

The very big problem is the one Adam Smith wrote about many years ago.  Some nations are rich and some are poor. And whereas some poor places can become rich (as in East Asia), many others are less likely to make the transition. Local tribalisms and civil wars (and their consequences) stand in the way. The way to address the problem that Smith addressed is to allow in more Liberians (and others) rather than fewer.

It is worth repeating that a flailing Pres. Obama, eager to leave some kind of a legacy, can do more for the legacy (and for the world) by moving away from his left-wing-hack platform (minimum wage, high-speed rail, green energy, and all the rest) towards reformed immigration. He even says he wants this but is blinkered by U.S. politics as her perceives them. That is not legacy stuff.

Open borders is the idea but that scares too many Americans. An enlightened president would promote a version that trades all of the nutty restrictions now in place with plausible controls: no lunatics, no psychopaths, no fanatics. The enlightened part and the serious work would be to fashion these. The rest of the job would be to knock enough heads in Congress to get it passed into law. Barack Obama would have left a worthy legacy.

Tuesday, October 14, 2014

All the way down

Tyler Cowen cites Jean Tirole's Nobel-winning economics as exemplifying elaborations of principal-agent theory (and problems).  Who do you trust to carry out an agreement? Which parts of the deal are implicit and which are explicit? 

There is the regulator and the regulated. The regulator is beholden to the legislature. The legislature is beholden to the voters, Perhaps. Tirole gets credit for formalizing the story. Here are two equations I remember from way back (undergrad days?): 50% + 1 = 100%; 50% - 1 = 0. This describes voting rules in most democracies. In fact, it is 50% of those bothering to show up and to vote, not 50% of "the electorate" and not 50% of those eligible.

So it is principal-agent problems all the way down.  A great achievement of the advanced economies is the widespread extension of trust to strangers. McCloskey cites Bourgeois Virtues. But these can only go so far; where they end is where principal-agent difficulties show up.