Confidence soup

Holman Jenkins writes about "The Auto Emissions Crackup ... 'sophisticated state failure'" It's not just VW.  He mentions nine other auto-makers that have been forced to issue recalls (or worse) for similar emissions tests tampering. Could it have been any other way?

Prostitution and hard drugs have been "illicit" and illegal for some time. Enforcement has failed. Prohibition re alcohol consumption in the U.S. had to be rescinded via Constitutional amendment. Unenforced/unenforceable laws and standards are not hard to find. But vote-hungry politicians enact them anyway. Posturing is often involved.

In the auto emissions case, political posturing gives us impossible standards and automakers can cheat or go out of business. "Sophisticated state failure" sounds about right.

The slow recovery (here and abroad) strongly suggests that risk-taking has retreated in the face of policy-inspired uncertainty. Paul Krugman mocks all this as the "confidence fairy".  Alberto Alesina responds (in part) on Econtalk.  So is people's confidence way down?  It's fair to say that in desperation more and  more voters are ready to gamble on unusual candidates for high office (previous post). That looks like a desperation move. Call it confidence fairy. Call it turtle soup.

ADDED

Abysmal GDP growth.


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Regulation is not free

It can't happen here

Peggy Noonan comments on the 2016 presidential campaign in the WSJ, She is quite unhappy, as are many people. "That Moment When 2016 Hits You ... Because too much is being lost. Because the great choice in a nation of 320 million may come down to Crazy Man versus Criminal."

Many people will have many questions. Is this where the electorate goes after eight years of an administration bent on being transformational? Is this where the electorate goes in the age of twitter? Is this where the electorate goes after years of political correctness encroaching on school curricula? Someday there will be dissertations and books.

Those are hard questions. What are we to do with economists' models of the (mythical) "median" voter?  That model has often been applied to the choices that voters make in local elections. William Fischel writes about "homevoters". In suburban areas where most residents are owners rather than renters, they are keenly interested in how local public policy issues might impact the value of their home, their primary financial asset. As such, we expect their votes to be "rational" from their point of view. If, for example, they expect local schools to be improved by a proposed measure and if they see the link between home value and local school quality, they will compare the tax-price (to them) of the proposal with the expected home value appreciation and vote accordingly.

But can this type of economic voter rationality be seen anywhere else? "Rational" is complex and has to be defined in narrowly -- which works in the case of the homevoter example. But looking around (as does Peggy Noonan), what is before us is much more complex. We have seen voters (the public) lose their minds in other countries. We kept saying "it can't happen here."

ADDED

Instability

Infrastructure chorus

What do we know?

1) Infrastructure in much of the U.S. is in bad shape. In the current New Yorker, James Surowiecki reminds everyone of this once again. Where do I go to claim $1 for every such essay written?

2) Most U.S. local governments in the U.S. are in bed with their public employees' unions. Pension obligations are huge (often unfunded) and have first claim on infrastructure (and other) revenues (see my April 7 post).  On a related theme, politicians here and abroad love pork mega-projects. These are prone to cost overruns; normal infrastructure maintenance gets postponed (often indefinitely). There are no ribbon-cutting photo-ops for repair and maintenance projects. And nothing can stop the California Bullet Train project.

There is seemingly a taboo among most commentators to connect these two realities. Pork (by definition) is unlikely to be de-politicized.  What we can do, however,  is to only take seriously discussions of infrastructure "needs" where the writer/speaker also pays some attention to where the money already allocated is going.

BTW, here is Matt Kahn re LA's new Expo Line. And last January (and after 40+ years(!) of cheer leading), an LA Times writer looked at the numbers for LA rail transit and reported the colossal waste.

ADDED

When you hear the standard laments about infrastructure, ask how the spending plans can be made pork-proof. Also ask about the California bullet trains which has no redeeming qualities. 

Cities, growth, talent, location choice

When it comes to economic growth, it is all about human capital. Add the importance of human capital externalities, and you want cities with properly trained and skilled work forces. This morning's WSJ reports that one of employers' favorite data sources in this quest is LinkedIn profiles. "Companies Flock to Cities With Top Talent."

I have argued that the importance of location choice within cities cannot be overestimated. Here follows an abstract of a talk I will give at USC today on "Cities and Economic Growth: Emergent Spatial Organization"

Prosperity and economic growth require robust specialization and exchange. This means the formation and maintenance of numerous complex supply chains. These include supply chains for things and supply chains for ideas. The latter can be via transactions and/or realized positive externalities.

All supply chains have a geographic dimension. Firms carefully choose what to make vs what to buy and also where to buy it, from near or far. The whole system tends to a pattern of locations that denote realized transactions (and transactions costs) as well as realized externalities. The city remains a competitive producer if these costs are contained.

Cities have been seen as “engines of growth.” This means they offer attractive supply chain formation and management opportunities. Networking and location opportunities are significant as these choices are made. Flexible land markets denote more such opportunities. Cities are the spatial realizations of many complex supply chains. This is much too complex for top-down planning.

Getting to Denmark?

Francis Fukuyama (among others) asks how we can "get to Denmark."  He means, how can we emulate that country's seemingly efficient public sector.  He cites the problem of U.S. public sector unions: "Today, these same public-sector unions have themselves become part of an elite that uses the political system to protect its own self-interests. ... the quality of American public administration has declined markedly since the 1970s, in no small measure because of these unions' ability to limit merit as a basis for promotion." (p. 163-164 of Political Order and Political Decay). With rare exception, a visit to your local post office or DMV (or similar agency) will bear this out.

This morning's WSJ includes yet another op-ed on how to fix America's infrastructure. "Finding the Money for America the Fixer-Upper" by George Shultz and John Cogan. Reform health care, social security and public pensions and the money will be there.

But I am not sure that such reforms in our lifetime are plausible. And more money fails to fix anything if the system is flawed. (Example, large public school districts.) In light of the politics now on display, is there a plausible challenge to the influence of public sector unions? Unlikely.

Free lunches

The free lunch fantasy is a favorite among politicians. It often garners enough support from voters to tip an election. The Santa Claus fantasy works on kids until (approximately) the age of five but the free lunch fantasy seems to work on enough people (voters) of all ages.

It is interesting that the LA Times occasionally broaches the idea that the money will have to come from somewhere -- including higher retail prices and fewer low-skilled people hired. "Some restaurants face pressure to trim menus and staffs under California's wage hike." There will be price hikes for those who shop at low-price outlets and job cuts for those with the fewest prospects.

TV talking heads have noted the interesting labor market "experiment". What will be the effects of the biggest minimum wage boost ever? We hear this a lot. Is not federalism supposed to be an opportunity for competing sub-national units to experiment and innovate? Are not the states supposed to be the "laboratories of democracy" in the words of Supreme Court Justice Louis Brandeis?

That abstraction supposes state officials seeking the best economic outcomes for their state, not the class warfare fantasies of those who run so many state legislatures. And, as David Henderson reminds us, "Don't Experiment on Non-Volunteers." Their lives are not a free lunch for the social engineers -- or for the posturing class warriors.

This NY Times op-ed predicts that there will be more gainers than losers. But who gains and who loses? Among the losers may be those who most need to break into the world of work. Social engineering is so hard. 

Productivity and all that

Here are two similar news items from this morning: "Online Groceries Becomes Next E-Commerce Battleground ..." and "E-Commerce Boom Roils Trucking Industry ..." We can be sure there are many others on the same theme.

Is there a productivity slowdown? Is it apparent or real?  Here is a SIEPR debate on the topic. Watch the whole thing.

It's the data. If we rely on traditional metrics, Hal Varian mentions various products that are no longer sold in the volumes they once were -- like cameras even though we take many more photos without them, using our smart phones. The conventional GDP data are ever less useful in these kinds of productivity assessments. On the other side, Nick Bloom does not dispute any of this but answers in terms of the uneven distribution of the benefits. But, again, the data that depict uneven benefits suffer from the same problems that Varian addresses.

There are an uncountable number of disparities in the world. How tolerable are these? How acceptable ("fair") are they? I briefly mentioned the politics in the previous post on the politics we have.

In the year of Clinton-Cruz-Sanders-Trump, is it time to address the most important question? How can we reduce the ambit of politics and thereby have some insurance against political disasters? Tyler Cowen poses the question.

Scary

Andy Puzder writes about "Why Restaurant Automation is on the Menu."  Here is more (H/T MR). More now seen in Sweden but probably coming your way (H/T Craig Newmark)

Just in time for the next pronouncement that minimum wage hikes have no costs. Here is Hillary Clinton's latest (H/T Craig Newmark). The panderers will swear that the moon is made of blue cheese -- if it would get votes.

I thoroughly enjoyed Robert Gordon's (no relation) The Rise and Fall of American Growth.  He likes the years 1870-1940 best. This the period when Americans' consumption opportunities (health, transportation, entertainment, labor-saving devices in the home and the factory, etc). expanded as never before. Gordon suggests that many of these were one-time leaps and are unlikely to be repeated.

Who can tell? We do know that tech will get better and opportunities to substitute for low-skilled labor will only grow. Are politics and technology accelerating away from each other? It's a scary thought. The irony is that the people who talk this way insist that they are put on this Earth to "help people" -- and mostly to "help" the less fortunate. Also scary.

ADDED

Here they are.

Elite opinion

It's very hard to reconcile the "you have more to fear from slipping in a bathtub than from terrorism" meme with the coverage of the horror experienced in Brussels and other places that have been hit. Perspective is always elusive but rhetoric and sloppy thinking are easy. Yet, Barack Obama invoked the same idea in his recent interview with Jeffrey Goldberg. Well and good to remind people that the greatest thing to fear is fear itself, but credibility matters too.

Everyone takes risks all the time. We have come to terms with (adjusted our actions to) the riskiness(es) we know. We have been in and out of bathtubs, autos, and airplanes and have accepted the plausibility of the low relative frequencies of mishap that have been reported to us. But this leaves out the impossible-to-assess risks of using airports or trains stations in Brussels -- and places unknown.

When enough people are put off by the tone and substance of elite opinion, they start looking around for other sources. We get the likes of the current crop of presidential contenders. 

Dealing

We live better than our lowliest ancestors because we have learned to cooperate. The two sources of non-zero-sumness in our lives are market transactions (gains from trade) and love (chosen other-regardingness). Writing in today's NY Times Magazine, Adam Davidson notes "Donald Trump's obsession isn't just egotism. It reveals a dangerous and outmoded vision of the whole economy." The transactions ("deals") that Trump knows best are zero-sum. Davidson notes that coming out of the crony world of New York real estate, this makes some sense.

Yes, there are inevitably winners and losers from some international trade agreements (see my March 16 post) but the net gains are immense. Finding ways to assist the losers should start with the lower public schools. Those who nevertheless support the lower school status quo (except the standard call for more public moneys) are no more than hypocrites.

This is where Donald Trump and Bernie Sanders see eye-to-eye: the market economy is simply a place of conflict where I get the better of you or vice-versa. Mutually beneficial exchanges (which occur daily an uncountable number of times) are missing from their world.

Here is Scott Alexander's review or Trump's Art of the Deal. But it matters less whether Trump is real good or real bad at zero-sum deals.  The problem is that these are the only trades he knows about.

ADDED

More on zero-sum politicians.

Doomsday failure

I happen to have been in Washington DC the night before the great Metro shutdown. It appears that some power cables were bad and had to be replaced quickly over safety concerns.  The night before local TV news was full of the usual traffic doomsday coverage. Who would go to work? How? Would lateness to school be excused? (Yes) Would teleworking be allowed? (Yes). How much surge pricing would Uber require?

The next morning, I took an Uber from Georgetown to Dulles for just over $40 in just over 30 minutes. No surge pricing. No traffic. My driver mentioned that there had been no problem all morning.

It was about the same when LA's 405 shut down for 24 hours recently. "Carmageddon" came and went; the hype and fears were wrong. Note this from the Wikepdia coverage: "In reality, traffic was lighter than normal across a wide area ..." It was also this way back in 1984 for the LA Olympics. Traffic doomsday never came. People are not stupid and make all sorts of plans and adjustments.

Doomsday predictions have a long history of being wrong. But people do like to worry. This tendency seems to overcome credibility concerns. Will climate change cause massive coastal flooding? Have beachfront property values been falling or rising?

Cosmpoplitan complexity

You would think that Smithian specialization and exchange as the basis of our prosperity is a no-brainer. Sad to say, you would be wrong. This WSJ op-ed notes (once again) the sad state of political discussion on this issue in the U.S. this year. It's not just Trump. Cruz, Clinton and Sanders pander to the same "low-information" (polite expression) crowd.

All of them make personal consumption choices that involve many supply chains that cross multiple international frontiers. This includes your pair of Bentleys, Mr. Trump. Even U.S.-label autos are sure to include all sorts of parts that cannot be said to be "domestic."

Establishing any boundary beyond which trade is taboo (my front yard, my city, county, state, country, hemisphere) means higher costs. All of this may seem abstract when "the best argument against democracy is a five-minute conversation with the average voter." (W. Churchill)

Nevertheless, supply chains and their cosmopolitan complexity is the story. It must be emphasized again and again.

ADDED

David Autor and Russ Roberts discuss winners and losers re trade with China. All shocks are redistributive, even ones that are net beneficial.

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Economists react to the conversation.

"The burbs"

Aggregations and simplifications are often useful. The downside is that they can obscure more than they reveal. Here is a discussion re capital aggregation. "Harbors and hammers" was the way Sandy Ikeda once described it. Arnold Kling worries over simplifications that see the economy as one big GDP factory. We throw away the field's signature intellectual achievement, the understanding of how an uncountable number of complex resource allocation choices are coordinated in a decentralized manner.

When it comes to land and location, the mantra "location, location, location" makes the point. But the people who study and discuss cities, still insist on categories that are ever less useful. "Suburbs" vs. "central cities" dichotomies are still popular. The many places that describe where most Americans live and work are no longer simply "bedroom communities". That was a post-WW II label. It hangs on as a cliche.

We get reports such as a "More and More People are Renting. Thank the Suburbs" from the WSJ. It cites recent NYU Furman Center research.

"Suburbia" is much more varied and much more interesting than back in the day when the name had meaning.  Most important, there is choice out there. A la Tiebout, people care about local government, and most especially local school districts.  There are about 13,500 school districts in the U.S., most of them in "the burbs" -- compared to just over 3,000 counties.

In a better world, there would be universal school choice, most importantly for the poorest among us who are forced into the worst schools -- and locked into them for the sole benefit of the teaching establishment and its political allies. You know who you are.

Until a better day arrives, most families with children will be evaluating the choices available to them. They will not look out there and see one homogeneous glob.

ADDED

Re the problem of aggregation, political candidates are again arguing that free trade "hurts America" or "hurts Americans."  It benefits most Americans by way of lower prices when they shop.  It also benefits most Americans by incentivizing innovation and punishing inefficient operators. Surely, there are some short-term losers. Defining and estimating "most", "some" and "short term" is the challenge. It is ignored when the rhetoric sticks to simplifications and aggregations.

Design of cities

Hayek called attention to the fact that not all orders involve a designer. There are also spontaneous orders. Matt Ridley (among others) elaborates. Some writers note that cities too can be thought of as spontaneous orders. Perhaps emergent order more accurately describes the ongoing evolution,

But both, designed and emergent orders, play big parts in our lives. Everything on my desk within reach involves intelligent design. But these are all the winners of design contests that we call "the market." In that sense, they are also emergent.

Americans still refer to city maps, but Germans (and many others) call it the plan of the city (Stadtplan). Is there such a thing. Many architects have dreamed of designing major parts of cities. They surely have designed large and notable urban structures and environs, including parks, airports, train stations, civic buildings and halls, cathedrals, public squares, theme parks, mega-malls, arcades, etc. So why not go bigger? How scaleable is design?

In between the various grand projects are very large numbers of much smaller projects (even the occasional stand-alone home or store). These also have designers but these designers must pass a market test. Can the resulting aggregation be called a plan? It is actually an emergent phenomenon. Failing to grasp all this, many simply call the vast developments (dark matter) beyond the monuments "sprawl."

This is the question implicit in Wade Graham's Dream Cities: Seven Urban Ideas That Shape the World. The author examines the ideas of various designers who dreamed of going big. The usual big-think suspects are mentioned: Burnham, Howard, Le Corbusier, Moses, Mumford, Soleri, Speer, and many more.

None can touch Corbu, "He prescribed three main 'DECISIONS' [caps in original] upon which the plan would be executed: '1. Requisitioning the land for the public good. 2. Take an inventory of our cities' populations: differentiation, classification, reassignment, transplantation, intervention, etc. 3. Establish a plan for producing permissible goods; to forbid stoic firmness of all useless products. To employ the forces liberated by this means in the rebuilding of the city and the whole country." Frustrated, Le Corbusier turned to the Soviet Union ..." but "... the Soviet authorities didn't bite either ..." (p. 91).

The following is much better."Productive cities are rarely planned and built from scratch. They evolve from the myriads of actions of their inhabitants. They are works in progress and they remain works in progress, responding as indeed they must, to new challenges and new opportunities." (Angel and Blei, 2015).

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.

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.

ADDED

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

Transformational

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.

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 post-dot.com 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.

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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.

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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

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            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.

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       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.

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       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.

ADDED

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".

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The problem with policy.  Found this at MR.