Tall buildings

Some years ago, Peter Drucker neatly summarized the evolution of cities in the modern age.

"In 20 years Japanese office workers may still commute, packed shoulder to shoulder, to downtown towers. But no one else in the developed world will. Office work, rather than office workers, will do the traveling. Tomorrow’s big city is no longer going to be the office center.

"The exodus is already under way …

"The modern big city is the creation of the 19th century’s ability to move people. Everyone in Dickens’ London walked to work except the owners, who lived over their shops or their counting houses. But then, beginning in mid-century, people began to acquire wheels – the railroad first, then the omnibus and the streetcar (horse-drawn, of course, for many decades), the subway and the elevated train, the automobile, the bicycle. Suddenly large masses of people could move over great distances to where work was. And the elevator added vertical mobility. It was this ability to move people, that, more than anything else, made possible large organizations, business, hospitals, government agencies and universities.

"By 1914, every single one of the means to move people into an office-centered large city – and to enable the office workers to live outside it – had been developed. But they did not have their full impact until after World War II. Until then only two cities had skyscrapers – New York and Chicago. Now every mid-sized city world-wide boasts a “skyline” and even in mid-sized cities people commute.

"This trend has clearly reached its end, has indeed widely overshot the mark. Tokyo’s office workers have to live more than two hours away just to get a seat on the train. ….

“Information and the Future of the City” by Peter F. Drucker, The Wall Street Journal (April 4, 1989).

The Economist has just published a list of cities with the most skyscrapers ("Tall buildings"). According to Drucker, the ranking must be read in (roughly) the reverse order, indicating the extent to which cities have overshot the mark. Perhaps island cities (downtowns) get special consideration.

"Hong Kong has 7,417 skyscrapers, more than any other city, ... a building must be over 35 metres tall to qualify as a skyscraper. New York ranks second with 5,444 skyscrapers; Los Angeles has just 450 ..."

Of course, downtown boosters everywhere are still pushing to move skylines in the wrong direction. And to get there they revert to some of the worst excesses (and largest subsidies) available to local governments.

Let's (not) talk about race (contd.)

Having suggested, yesterday, that it is poison to mix race with politics, I am reminded that politics and race are also routinely intermixed with education. More poison.

David Beito calls my attention to events at Grand Valley State University. Beito's post suggests that Professor David Leidig at GVSU could benefit from some instruction re free speech and free inquiry. Such as: OK to disagree; not OK to censor; not at universities; not at universities in the U.S.

Alas, episodes like this are all too common. Exposing them is a full-time necessity.

Let's (not) talk about race

The Census Bureau has just released a first report ("We the People of More than One Race") on findings related to their innovation in 2000, allowing respondents to identify themselves as belonging to more than just one race.

Casual observation suggests that mixed-race pairings are increasing -- as are mixed-race offspring. If the trend continues, as I expect it will, the politics of race in the U.S. may be upset, as I hope it will be.

The U.S. Census Bureau began collecting data on race in 1790, for all the wrong reasons. They continue the practice, in my view, for all the wrong reasons.

There has never been a discussion of race that has not been politicized. We scoff at Nazi and Apartheidist and Jim Crow race classifications but (read the report) continue to do much the same, straining to come up with pseudo-scientific politically correct definitions.

Self-assessments of race and national heritage have, in any event, been shown to be subject to fads and politics.

There is hope. As the increasingly ambiguously defined mixed-race population grows, as it will, many will begin to find the whole business laughable. And the race-mongers (mostly now on the left) will be put out of business.

The blink of an eye

Most people crossing streets and boulevards make it to the other side. Most of them look at oncoming traffic and make a judgment. Or somewhere in their nervous system, they are specifying, estimating, solving complex systems of equations, inverting matrices, extrapolating and deciding -- very quickly.

In Blink: The Power of Thinking Without Thinking, Malcolm Gladwell covers a lot of ground, evoking examples, episodes, studies and science that support the idea that our snap decisions tend to be pretty good. We often wisely decide (know?) that the marginal costs of extra serach are not worth it.

As we get wiser about actual decision making, we pose ever more challenges to conventional decision theory. We also get wiser about many related topics, as addressed in a terrific symposium on the "Distinction Between Information and Knowldege in Economics" in the current Econ Journal Watch.

Evidence with theory

Yesterday's LA Times (April 3) ran a banner op-ed by Richard Rothstein that included various quotable passages. For example, "Cheapskate Conservatives Cheat Students ... True, spending and achievement don't always go hand in hand, but the conservative argument still doesn't make sense."

Well, uh, yes. Unless one can explain the failure of spending to matter. A government-run highly politicized and unionized system is not up to the job, no matter how much is spent.

Wendell Cox offers a compelling set of statistics on transit use in America's largest urbanized areas (in 2002). Transit's share in all of the U.S. urbanized areas is just 1.6%; remove NYC and it is barely over 1%.

This is after many hundreds of billions of dollars of taxpayers subsidies. By itself, the numbers prove nothing. But what Richard Rothstein and the LA Times and the other special interest toadies omit is that there is a very good explanation for the numbers. Most people prefer personal transportation and purchase it as soon as they can. They also prefer personal communications (few in cell-phone-nation could fathom party-line telephone service), personal over communal kitchens, personal toilets over communal privies, etc.

Not only is there good "theory" to go with the data. But the explanations are simple and intuitive.

This morning's WSJ includes a letter to the editor by a writer who identifies himself as a law professor. Responding to P.J. O'Rourke's recent op-ed re transit, the writer notes, "[i]f 'nobody' uses mass transit, why do I usually have to stand up every time I am in the New York and Washington subway?" The writer explains that there are cities where transit use is low but that is because transit service is low in these places.

No, it is not "chicken and egg". The proof is the negligible impact of mega-dollar transit subsidies -- over, at least, the last forty years.

Too little, too late, but historic

James Carroll's Constantine's Sword: The Church and The Jews -- A History is built around the thesis that the Holocaust was the logical outcome of Christianity's history and evolution. Carroll writes that Vatican II was an important break with the past, but did not go far enough and that a Vatican III is necessary.

Through all of this, Carroll gives great credit for the progress that has been made to Pope John Paul II and to the role that Cardinal Karol Wojtyla played in the 1965 conclave and, in particular, in shaping Nostra Aetate, absolving Jews of responsibility for the Crucifixion.

Very late in the game but, nonetheless, a historic shift. Carroll's narrative is bleak with very few heroes, making his depiction of John Paul II so auspicious.

Paying too much for roads

Just a few years ago, Dan Klein wrote about "Planning and the Two Coordinations," a timely piece because we hear again and again about the virtues of top-down coordination. Top-down planners may cede the point that North Koreans do not live nearly as well as South Koreans -- even that central planning is the problem -- but will usually suggest that some systems just cannot function without coordination from the top.

The regular Congressional spending orgies over fuel tax moneys, highway trust funds and many thousands of resulting pork projects are usually justified by the logic that widespread networks must spring from centralized authority.

The latest to examine (explode) this idea is Gabriel Roth who authored Cato's Policy Analysis No. 538, "Liberating the Roads: Reforming U.S. Highway Policy."

Roth reminds readers that decentralization, federalism and choice worked well before the trust fund and can do the job again, and much better than the existing system.

Here is the executive summary:

Deliberations on reauthorizing the federal fuel tax dragged on through the summer of 2004 and were not completed in the 108th Congress. Whether the fuel tax and the transportation programs it funds should be renewed is the central question of this paper.

A federal role may have been necessary to finance the Interstate Highway System in 1956—the year the federal fuel tax was enacted—but the system is now complete. The Federal Highway Trust Fund was established specifically as a means to finance highway construction. It is now a slush fund for Congress to fund programs aimed at appeasing special interests and financing non highway projects. The power of Congress to finance road projects was supposed to sunset in 1972 but instead continues to this day. In addition, federal regulations increase construction costs and stifle innovative policy experiments in the states.

Before the federal government took on the role of financing highways in 20th century, that role was assumed entirely by state governments and, before that, the private sector. This study makes the case that there is no longer any role for the federal government in the construction and financing of roads. Significant reform must include phasing down the federal fuel tax and giving back to the states full responsibility for highway programs.

On "horologic schizophrenia"

Those who, like anyone sensible, hate re-setting clocks twice a year (sooner than you think). This very enjoyable review of what appears to be a fun book may ease the pain. From today's WSJ "Bookshelf":


Does Anyone Really Know What Time It Is?
By BILL KAUFFMAN March 31, 2005; Page D8

Spring ahead, fall back.

Oh, must we?

This weekend brings Daylight Saving Time, that puzzling ritual of mass clock-winding ill befitting freeborn Americans. And now, just in the nick of time -- OK, 86 years too late, but time is malleable -- comes novelist Michael Downing with "Spring Forward" (Shoemaker & Hoard, 202 pages, $23), a lively history aimed at debunking the "uncanny idea of falsifying clocks to delay the apparent time of sunset."

Ben Franklin proposed the conservation of daylight in a whimsical 1784 essay, but the real father of Daylight Saving Time was British architect and -- crucially -- golfer William Willett, who deplored "the waste of daylight" in a 1907 pamphlet. The British royal astronomer ridiculed Willett's plan, suggesting instead "that between the months of October and March the thermometer should be put up ten degrees."
The strange history -- and disturbing implications -- of Daylight Saving Time.

It took the exigencies of World War I to convince governments to adopt Daylight Saving Time. (The claim was that it would cut back on energy use, though evidence was scant.) The success of DST in Europe was not lost on the scheme's U.S. advocates. They "had long been dismissed as caddies for the interests of the leisure class," writes Mr. Downing, but now they "shifted the battle from the golf links to the trenches." Setting clocks ahead, they promised, would permit scarce resources to be shifted to munitions. "Daylight's proponents wrapped themselves in the flag, appropriated the war effort" and won. They painted their foes -- a "coalition of miners and farmers, Populists and Republicans, ministers and movie moguls" -- as, literally, the forces of darkness.

"From the first," notes Mr. Downing, "farmers opposed Daylight Saving, which was an urban idea of a good idea, hatched in London and cultivated in the cities of Europe and the northern United States." New York City-based merchants subsidized the DST campaign, though Broadway suffered when darkness -- and curtain rise -- was delayed.

Indifferent to the arguments of the daylight-mad Chambers of Commerce, cows proved unwilling to adjust their milking habits to the new time. Nevertheless, President Wilson smugly lectured husbandmen that the farmer's "life and methods are more easily adjusted, I venture to think, than are those of the manufacturer and the merchant."
Illinois Rep. Edward King charged that DST benefited "the pleasure-seekers, the swivel-chair ornaments, and the golf players" by giving them an extra hour of daylight for their decadent recreations. Critics referred to DST as "golf time." And indeed, Daylight Saving was a tremendous boon to golf, as duffers might stride the links till 9:30 of a summer night. President Wilson was "a genuinely fanatic golfer," but he hid the niblick under his hairshirt, emphasizing sacrifice rather than pleasure.
Farmers demanded, and got, DST repealed after the war. The battle over time shifted to the states and cities, with the populated East the stronghold of the time-shifters. In one act of chrono-tyranny, Connecticut made it illegal to display the wrong time on a wristwatch.

Yet as the perceptive Mr. Downing observes, the claim by DST foes that they were defending "God's time" was specious. God's time had been junked in 1883, when the railroad industry, frustrated by localized timekeeping, adopted Standard Time. Within minutes -- or months -- governments across the country reset their clocks accordingly. In the old laissez-faire America, cities kept their own time. If it was 11:32 in Buffalo it might be 11:41 in Albany, and so what? Is not variety the spice of life?

Not to the iron horse. Heaven forefend that states and cities might set their own times, wake to their own sunrises. Efficiency eclipsed the sun as the American timekeeper. The U.S. was divided into four standard time zones. Thus noon comes simultaneously to Detroit and Bangor, sun be damned.

Those who love daylight but dislike compulsion -- President Harding among them -- supported "voluntary" DST. That is: Wake up earlier! Make the day's events conform to the sun's time; in spring and summer, begin work, school and baseball games an hour earlier. Alas, noncompliance doomed this sunny compromise.

In 1942, FDR reimposed DST as a year-round measure. He called it "war time." Once again, peace brought repeal, and the states of the union tick-tocked, as Mr. Downing puts it, in "horologic schizophrenia," which also goes by the name of federalism. By 1965, 18 states observed DST, 12 did not, 18 more "halfheartedly participated," and contrarian North Dakota and Texas observed "daylight in reverse," winding their clocks back one hour. Calculating interstate airline and bus schedules was a job for savants.

But then uniformity rode in on her pale gray horse. Since 1966 we've sprung ahead when Washington says to, though Arizona, Hawaii and eastern Indiana stubbornly refuse to adopt Daylight Saving Time. For the rest of us, DST now runs from the first Sunday of April to the last Sunday of October, or seven months a year, "which means that Daylight Saving Time has become our Standard Time."

Stripped of its bogus efficiency arguments, Daylight Saving Time amounts to an extra hour for shopping and golf. Middle-class consumers are pitted against farmers -- and we know who has the numbers. By 2000, writes Mr. Downing, "the number of Americans living on farms was approximately equal to the number of Americans who were permanent residents of golf-course communities."

The bogeymen have trounced the dairymen. Spring ahead, and fore!

Mr. Kauffman's most recent book is "Dispatches From the Muckdog Gazette" (Henry Holt/Picador).

Intellectual gridlock

After complaining about the state of local roads and highways, LA Times correspondent Ralph Vartabedian manages the following: "Toll roads reduce congestion, not only by increasing road capacity but by reducing demand. If we want to do that, then why not slap tolls on every congested interstate with electronic meters? To me, that seems like bad capitalism. Roads are public goods and efficient open transportation has served our economy well for over 100 years."

And the U.S. Census' American Community Survey has just been released. The Census Bureau reports that, "For the nation as a whole, the average daily commute to work lasted about 24.3 minutes in 2003." The nation's worst commute is in NYC (38.3 minutes) because of heavy transit use.

What can one say? 1) In spite of the absence of efficient pricing, we do pretty well (while people spend as much time complaining as they do commuting [to paraphrase a wise colleague]); and 2) We dismiss pricing and, instead, go for awful second-best policies, contriving and relying on strange logic streams, as the one cited above.

Soft landings

"For the third time in five weeks, bond markets have weakened to face the bad, if not terrible news. They are cooling down, not melting down." This from "American bond markets: A sated appetite" in The Economist, March 26.

Prices are supposed to move to clear markets and usually do. That's the good news. When prices move precipitously, for whatever reason, things can go bad. Soft landings vs hard landings -- and all the talk of "bubbles" that might "pop".

Comparative static analysis, by definition, has almost nothing to contribute. Whether dynamic analysis can be helpful is still unknown.

What is known is that in the world beyond economic theory, modern capital markets and modern information markets work to limit the frequency and the impacts of surpises. Once again, the real news is that spontaneous innovation and ingenuity are everyone's best bet.

The U.S. image abroad

For all we know, historians will debate Ronald Reagan's role in the USSR's collapse for many years. Likewise, George W. Bush and the spread of democracy (and market-friendly governance) will be a topic of debate for some years. Either way, these two men are likely to have a place in history way beyond the fact that they were White House occupants.

Bush has his critics and among his dumbest foreign policy initiatives, in my view, is putting Karen Hughes (or anyone) in charge of a campaign to burnish America's image overseas. International elites will always object to what we stand for. So what?

An LA Times (3/27/05) op-ed re modern Isreal notes: "It is fast-paced, cutting edge, daring and more than occasionally hedonistic. It is a cosmopolitan embrace of a modern state whose citizens yearn for worldliness, travel and openness."

Similar aspirations and yearnings can be found through of much of the of the world. What most young people want is clear. It is a modern Western lifestyle (warts and all, as they say). That's the way it is and that is why the West will keep on winning.

Having Karen Hughes or Margaret Tutweiler or anyone run a White House-based PR campaign has nothing to do with any of this. Rather, it misses the main point -- and risks doing much more harm than good.

Institutional entrepreneurs

Google Scholar cites 1,730 links to "Coase Theorem" but only 37 to "Institutional Entrepreneur", an economic agent celebrated in Anderson and Hill's The Not So Wild, Wild West, which I have cited admiringly before.

Much has been written on what we should really get from the Coase Theoreom (or from the Prisoners' Dilemma, or from the Tragedy of the Commons, etc.). The most important take-away has to be about the remedial actions that are prompted, ones that expand property rights and exchange, usually by finding ways to lower transactions costs. These typically have profound welfare implications.

I enjoy growth theories that endogenize technological change. Again, we will long wonder what took so long? But even better is history through the prism of entrepreneurial actions with profound welfare consequences. Entrepreneurs that bring iPods and Blackberrys to market are to be admired but those that conceive and develop new property arrangements to overcome Prisoners Dilemma problems are even more attractive.

A similar class of heroes are those that develop technologies that overcome state-sanctioned monopolies. Satellite dishes sprouting in Third World backwaters give people new information options. Closer to home, I will soon replace cable with a satellite dish, overcoming the cozy arrangement hatched between local cable operators and the local city council.

Vibrant places

Whether it is Richard Florida's "Creative Class" or Joel Kotkin's "Nerdistans" or David Brooks' "Patio Man", there is no question that evolving lifestyles beget new neighborhood types. As with all else new, these can be mixed blessings.

Tom Kirkendall sent the pointer that the NY Times has discovered "Vibrant Cities Find One Thing Missing: Children". A prominent former President might even point out that it depends on the meaning of "vibrant."

"Portland is a great city that attracts a lot of educated people," the article quotes one resident. "But the real estate is becoming outrageously expensive. And then you get wealthy singles and wealthy retirees. What's missing are kids. And that feels really sterile to me."

"Sex and the City" is also vibrant. Fun for a short visit but few would want to live (it) there for any length of time. The Times piece focuses on the Pearl District of Portland. Portland boosters have taken to calling their city "The Intentional City". The Law of Unintended Consequences, however, remains in play.

Old and New Europe

When capital and labor are mobile, governments are prompted to compete -- even lowering tax rates. Today's WSJ lead editorial ("Germany's Epiphany"; link only works for subscribers) provides some data to corroborate the point. An accompanying table shows national and local tax rates for 12 OECD countries for 2000 and 2005; ten of twelve (excluding UK and Japan) had lowered tax rates -- even though politicians and their programs everywhere surely "needed" the money.

"When eight formerly communist countries in Central Europe joined the EU last May, German Chancellor Gerhard Schroder was among the earliest and loudest critics of their tax-cutting ways. Low tax rates 'are not the way forward' for Germany's new eastern neighbord in the EU, he warned on the eve of the Union's enlargement.

"Well, what a difference a year makes. Last week Mr. Schroder announced plans to cut the federal corporate tax to 19% from 25% -- which just happens to be the corporate tax rate of Poland, one of the new EU members Mr. Schroder was so critical of last spring."

"Old" Europe learning from "new" Europe.

Defying gravity

Forbes' Rich Karlgaard writes about Ken Kam's fund: "He's created a fund, MOFQX, that has a low-risk beta score of only 0.48, yet has more than doubled the returns of the S&P since it was founded in November 2001. MOFQX's return is calculated after Ken skims off a hedge-fund-like 1.95% management fee. But who's complaining?"

How does Kam do it? Marketocracy.com is his "virtual stock market" that anyone can play for free. Karlgaard likens it to fantasy baseball and notes that there are 70,000 player/fans. The cool part is that Kam tracks players' success and identifies the current best 100 (players know about this) on a month-to-month and two-years rolling basis. There are 1,400 "superstar" investors and Kam picks the 100 best of the best each month to manage the MOFQX portfolio.

Kam sounds like an innovator who understands that the web signals new markets and new information conduits. Call it open-source fund management and note that it defies gravity, being off the risk-return trade-off schedule that we take for granted.

Full circle

Rummaging, I found Michael F. Bryan's October 15, 1997 "On the Origin and Evolution of the Word Inflation" Luckily, the Cleveland FRB's "Economic Commentary" series is maintained online.

Why can't textbooks be this clear? Bryan's piece includes a fascinating series of definitions of inflation offered by economists and others over many years.

His conclusions are worth repeating. "Without being tied to the money supply, any price increase seems to have an equal claim on the word inflation. Indeed, today we regularly read reports of a seemingly endless variety of 'inflations.' When the word is used as a description of the price level, an anti-inflation policy can easily be characterized as being against any price increase, including higher wages! This is simply not the case. An anti-inflation strategy is concerned with a particular type of price increase -- a rise in the general price level stemming from excessive money creation. When viewed in this light -- the light provided by the word's original meaning -- a zero-inflation objective for the central bank becomes a much more sensible goal."

Reading the full article shows that, having come full circle, we have covered a lot of ground.

Not locked in

Path-dependence and the lock-in of inefficiencies and errors suggest beguiling alternatives to market-based explanations. Trouble is that the evidence presented for lock-in is weak (Liebowitz and Margolis).

The simplest example must be U.S. settlement change. The Europeans made a mistake and originally landed on the wrong North American coast. That error has been relentlessly corrected over the years. The Census Bureau's mean and median centers of population have been steadily moving southwest for years; the sunbelt-frostbelt migrations are well known; empirical models of migration consistently show that climate matters.

Do people move to places with warm summers, warm winters, or moderate variance between the two? Looking at 1990-2000 city growth, hot summers explain best. These places may also be attractive because they were also cheap. Perhaps because they had been hot and undesirable before cheap air conditioning and affordable swimming pools.

Be that as it may, people are very busy correcting the error that the Pilgrims and many others made, starting in the early 17th century, landing on the wrong coast -- and very far away from the left coast.

Memes, genes and progress

All flora and fauna represent genetic lines that have survived. We have a clear enough understanding of natural selection to appreciate this.

In recent years (at least since Richard Dawkins' The Selfish Gene appeared in 1976) we have also considered memes (ideas that are self-propogating and transmitted) and have wondered about what selection process governs the ideas that have (and will) survive. In the age of the internet (and blogging), this is ever more interesting.

Heath, Bell and Sternberg have reported on experiments that test the emotional selection of ideas vs. the informational selection of ideas. The latter seems practical and is traced to Oliver Wendell Holmes' evokation of the "marketplace of ideas" (in 1919). Alas, the authors present experimental evidence for the importance of emotional selection.

There are no straight evolutionary lines when it comes to genes or memes. In the latter case, the evolutionary dead ends are the ones associated with rumors, urban legends, conspiracies and the like.

Will new technologies (themselves based on good ideas that have survived) such as modern communications cause informational selection to gain a new edge over emotional selection? No one knows. But I do not know how it could be any other way.

Political gridlock

Today's lead editorial in the WSJ ("The Gerrymander Gauntlet" -- link only works for subscribers) lauds Gov. Schwarzenegger's effort to get Californians to stand up to the political class. "California lawmakers are so adept at designing their own districts that of the 153 seats -- 80 Assembly, 20 state Senate, 53 Congressional -- theoretically up for grabs last November, not a single one switched parties."

The article includes a map that shows Rep. Lois Capps' district which hugs the California coastline, from Oxnard in the south to Monterey county in the north, 200 miles long. One presumes that Capps and her staffers reach out and touch her constituents but relying on hybrid vehicle technology only.

Both parties are complicit, as are their enablers, who like nothing better than an entrenched political class that takes care of business and overcomes "political gridlock".

TIPS

When TIPS (Treasury Inflation-Protected Securities) were introduced in 1997, investors were offered a new option, whereby they could hedge inflation risk. Analysts were, at the same time, provided with a simple way to measure anticipated inflation: simply compare yields on equal-maturity Treasuries, TIPS vs conventional, and observe the extra compensation that investors want in order to to forego the hedge.

Yet, it is never that simple. The FRB of Cleveland's Nov 2004 Economic Commentary features "Expected Inflation and TIPS" by Charles T. Carlstrom and Timothy S. Fuerst. The essay includes evidence of that inflationary expectations (as measured by University of Michigan and FRB of Philadelphia surveys) and the gap between equal-maturity yields have not matched. It also cites plausible theoretical explanations. TIPS buyers not only are insured against whatever inflation actually comes to pass but they are also immune from the risk of making bad guesses. Hence, the yield gap overstates expected inflation. Another reason to be wary of the yield gaps is that, to date, TIPS are somewhat less liquid than conventional Treasuries.

TIPS are a fine innovation but the investor's life is complex. Something new and something old.

Ponzi again

Pay-as-you-go social security is a Ponzi scheme backed by the power to tax. This makes it acceptable (even attractive) to some. The LA Times' Robert Scheer (March 8) writes that, "The problem with Social Security is that it isn't broken, which is precisely why the president is so eager to destroy it." Later in the column, Scheer embraces the idea of lifting the $90,000 payroll tax cap.

In 1947, the Bureau of the Census' P.K. Whelpton published Forecasts of the Population of the U.S., 1945-1975. He wrote, "With regard to the fiscal problems of social security, it should be realized more generally that if the 'old age and survivor insurance' program is to continue to be supported by pay-roll deductions and employers' contributions, the rising ratio of elders and producers will necessitate the accumulation of large reserves, or an increase in the withholding rate. The former means force savings by 'covered' workers and employers, deposited in the U.S. Treasury."

Whether 2005 or 1947, demography and the the Ponzi logic are iron-clad. Taxing more (and more) is the only way out. Those who, like Scheer, welcome this ask: "What's the problem"?

History that counts

Scholarly interest in property rights was eclipsed during what Brink Lindsey aptly referred to as the Industrial Counterrevolution. Yet, it has been making a comeback in recent years. Among the most enjoyable of recent scholarly works has been Terry L. Anderson and Peter J. Hill's The Not So Wild, Wild West: Property Rights on the Frontier.

"The 'wild, wild West' image suggests that rents were dissipated through racing and fighting. In contrast, the 'not so wild, wild West' image suggests that rents were captured and nurtured as individuals and groups peacefully defined and enforced property rights and engaged in market transactions in which those rights were exchanged" (p. 14).

Both images, the authors suggest, have some usefulness. Perhaps after enough work by scholars such as Anderson and Hill (and many others), more people will come to realize that there is more to history than just the one image. Indeed, we owe much of our well-being to the power denoted by the latter image.

Credible money

Econ principles students are taught that markets are a wonderful data source; opportunity cost signals are always being generated and updated. Freely varying prices are a good thing. A changing "price level" is not such a good thing and comes from mismanaged money supplies.

Some students are even taught that defining the price level is hell. "Steering by a faulty compass" in the Feb 26 Economist takes up the question and cites arguements for including asset prices (including house prices) in the proper price index.

There are seemingly good arguments for almost any index. That's the problem. "Given the elusiveness of a perfect price index, central banks should keep using conventional, narrow inflation targets, but be prepared to undershoot them temporarily if house or share prices soar ... and although the calculation would be tricky, central banks migth usefully publish broad price indices ..."

It appears that the only way out of the morass is clarity, credibility and transparency. Adopt an index, publish it and stick to it. Read their lips: no new indices.

Ponzi

Inanimate objects facilitate bad behavior. Guns, lotteries, McDonald's, the stock market, etc.

I cannot figure out what John Allen Paulos is up to. Like any author, he may simply be keen to sell books. By way of background, Paulos had been writing books that are great fun for those who enjoy math and statistical puzzles. Yet, his latest, A Mathematician Plays the Stock Market (summarized in his op-ed in Monday's WSJ and also in other venues), re-tells his tale of woe re his WorldCom holdings. Smart man falls in love with his stock picks and holds on much longer than he should; smart man looses lots of money; smart man writes (and writes) about all this and may become a poster-child for behavioral economics or anti-social security reform or whatever.

Given all of this, the nanny state has to keep and protect us -- via a Ponzi scheme that is trillions of dollars in the red. One which seemingly smart people point to as a source of security that must be "saved".

Ponzi-schemes backed by the power to tax can last forever. What is wrong with this picture?

Invisible hand trumps dead hand

Low transactions costs and clear and credible property rights give us exchange, efficiency and the prospect of prosperity. Yet, we live in a world where transactions are often costly and property rights limited. In an open system, however, these problems are also opportunities. A dynamic analysis would highlight the fact that entrepreneurial activity, if given the chance, could develop remedies -- ways to lower transactions costs and/or make property rights enforcement feasible. This is how the ambit of the exchange economy expands.

The problem is that regulators and politicians, responding to "market failure" often rush in and preclude inventiveness. Eric Brousseau cites the internet as an example of success because technology moved too fast for the regulators.

The web, then, is rife with illustrations of how rights and costs were successfully managed bottom-up, creating exchange and welfare-enhancing possibilities. Ebay is just one of many examples.

Ownership society

"'Market-augmenting government' is the answer Mancur Olson developed in response to the question of what type of government is needed for economic growth. The idea that markets are the best mechanism for facilitating growth now dominates prescriptions for economic development, but the circumstances in which markets develop are not fully understood ..." So begins the first chapter of Omar Azfar and Charles A. Cadwell's excellent anthology Market-Augmenting Government: The Institutional Foundations of Prosperity.

The book's contributors highlight the details of market-augmenting government. In addition to having to fathom the details, we have to jettison the politics of the New Deal and also the mindset that sees widespread market failure everywhere. The current move to an "ownership society" is apparently a no less than a serious first step on this road.

"Voices of Iraq"

No matter what one thinks of the Iraq war, Voices of Iraq (Magnolia Pictures, 2004 on DVD) is a must-see. "The producers of this grounbreaking doumentary distributed 150 digital video cameras across Iraq to enable everyday people -- mothers, children, teachers, sheiks, even insurgents -- to voice their perspectives on issues such as war, terror and the democratic reform. The result is a unique tableau documenting Iraqis' lives, and their hopes as they struggle with years of turmoil and strive to build a civil society. Note: Contains graphic content" (from the wrapper).

We will never know how representative the views expressed are. My impression is that they are moreso than what I get from the evening news. There is tragedy (mostly remembrances of the past regime) and hope and optimisim. Mainly the latter.

Interestingly, among the of-hand on-camera comments are references to Saddam's link to Al Qaeda and Syria's link to the inusrgents (which is also celebrated on interspersed jihadist recruitment video).

The project itself once again demonstrates how new technologies (in this case the user-friendly cameras) undermine the gatekeepers. It may have been a worse year for Dan Rather than he knows.

"Despotism by stealth"

The Economist reports on current eminent domain litigation in the U.S. under the heading "Despotism by stealth." Governments that enforce property rights can also take them away. Eminent domain is litigated because "public purpose" is a very slippery slope. In various times and places, schools, hospitals, roads, liquor stores and restaurants have been "private" and they have been "public".

How, then, to put the genie back in the bottle?

I have no idea how the lawyers and judges will approach this. Roads and highways could all be private. So could schools and all the rest. Bruce Benson adds that holdout problems are not typically large enough to justify eminent domain. The long list of abuses cited in The Economist make his point.

"Good government" is a chimera while limited government can be more easily defined and specified. That would be in a better world. In the interim, the only way is via judges on the bench who are sensitive to the strong links between property, liberty and prosperity.

The rhetoric used by many in Congress has it that these are the judges who would "turn back the clock." Yes, some clocks do need serious re-setting.

Micropolitana (again)

How to get a useful handle on The Great Dispersion? The OMB and Census Bureau's new Micropolitan areas define something in-between a rural and an urban place. They are usually counties focused on small central cities (between 10,000 and 50,000 pop.). Even so, there are almost 600 of them and they span a huge range.

Lang and Dhavale sliced and diced the data the in many ways. Their ten fastest growing Micros grew by 67% in the period 1990-2000. These were within 100 miles (average) of the nearest Metro area. Those ten Micros nearest a Metro area (34 miles average distance) grew by 7% over the decade. This was less than the country as a whole.

Another way to go is with the USDA's new "Urban Influence" codes. These denote three types of Micropolitan areas: adjacent to a large Metro area (above 1 million pop), adjacent to a small Metro area (less than 1 million pop), or not adjacent to any Metro area. Only the first group grew faster than the U.S. in the 1990s in terms of people. But, both the first and the third grew faster than the U.S. in terms of private sector jobs. In fact, the first group topped all other USDA-area categories in terms of retail and wholesale job growth. The third group was first in terms of manufacturing job growth.

The Great Dispersion is a many splendored thing. We are just beginning to understand it. George W. Bush carried 97 of the 100 fastest growing counties last Nov. Perhaps he and his people have a clue.

Kyoto and the Popperian question

Yesterday was Kyoto Protocol Day. Why not pose and answer the Popperian question? In an exchange on climate change in the Jan-Feb 2005 edition of The Freeman, reader Dan Karlan and writer Christopher Lingle do just that.

Karlan asks: "What evidence would cause you to reconsider your position and accept the position you have so far rejected?"

Lingle rises to the occasion and writes: "First, I would have to see evidence that reconciles the differing data from surface temperatures that suggest a warming trend with the data from weather balloons and satellites that do not support the notion of a warming trend. I would also have to see evidence that modeling of climate involves more complexity so that solar flaring and water vapor can be accounted for. These natural phenomena are much more important in influencing climate and weather than the combined actions of mankind. Indeed, one large volcanic eruption will disrupt weather patterns and alter climate to a much greater extent than decades of anthroprogentic effects."

Refreshing and useful.

More good news

The Economist reports a rebasing of its 160-year old commodity-price index. Chinese demand has lately burst on the scene but the bottom line is still that commodity prices are now at 30% of their 1845 index value. This is literally through thick and thin, including population expansion from approximately 1.5 billion to near 6.5 billion, most of them consuming appreciably more (and longer) than their great-great grandparents.

Cause and effect are always tough calls. Yet, the economic explanations offered by Julian Simon and others look much better than anything else on the horizon.

In the U.S., the pessimists write most of the books but the optimists win most of the elections.

Core competence

One of the things that makes Robert Higgs' Against Leviathan so enjoyable is that Bob's anger is rooted in his erudition. Our liberties and our wealth are regularly expropriated under the cover of law and due process. Under the U.S. Constitution, we should do much better.

The sorts of episodes that Higgs notes are, of course, part of an open-ended book. Today's LA Times includes "City OKs Hotel Subsidy Deal". The LA City Council voted 14-0 to throw $177 million at a Anshutz Entertainment Group to build a hotel near the white-elephant LA Convention Center. No mention in the story that there is a hotel industry that has long avoided making an investment like this. Or that the LA Convention Center (as well as billions of dollars spent on LA's downtown over the years) have been nothing but waste and graft.

The story right below the one about the hotel deal notes that the same City Council had voted against hiring extra police just the day before the hotel vote. The Council (and their LA Times acolytes) also regularly moan about not enough cash flow to fund all sorts of "needed" city services.

Governments do not waste time developing core competencies. Driving LA's deteriorating pavements these days takes its toll on eveyone's autos -- including womens' and minorities'.

Progress a good thing

A refreshing analysis of the Procter & Gamble-Gillette deal by James Surowiecki in the current New Yorker ("The Customer Is King", but no link to the article that I could find) notes that, while the popular view is that these manufacturers need the added clout to deal with powerful Wal-Mart, it is more likely that Wal-Mart's clout really reflects consumers' new power. "The real transformation of the past 30 years is not the rise of the of the American retailer but the rise of the American consumer. That's why Wal-Mart is so tough to negotiate with and so relentless in its quest for lower prices and lower costs." Yes, progress is a good thing.

Wal-Mart The Predator has become almost a staple of mainstream media. Yet, the old-media New Yorker maintains the good sense to have writers like Surowiecki who occasionally rattles the blue-state worldview.

Big Picture

Dismantling the New Deal was never going to be quick and easy. Yet, any U.S. President that takes on social security and farm subsidies in the same term deserves some credit. We do not, of course, know how these initatives will turn out.

Both programs are regarded as entitlements by vocal and well organized groups. Both of these constitutencies and their supporters will demagogue the "deserving poor" theme when and where they can.

That's all old news. What may be new is the fact that environmentalists have begun to worry about subsidized farming and 401(k) savers have learned about compound interest and equity. And these are both groups that are growing in size and influence.

Nothing like a growing middle class when it comes to undermining the New Deal platform. And once the platform has been splintered, the middle class will will grow and prosper even more, etc.

At least the Big Picture looks pretty good.

Agglomeration and clustering

There is no "death of distance", no matter how cheap communicating becomes. Rather, the many advantages of clustering will continue to be attractive -- but available over a larger space so that the many costs of crowding (including congestion and high-rise development) can be avoided. Lower Wall Street represents a tight 19th-century cluster whereas Silicon Valley is a spread-out modern cluster (even spanning SF Bay by some estimates). Pierre Desrochers has been writing about this evolution for some years. He evokes Jane Jacobs, among others, describing the variety of actors and roles that create fertile soil for innovation.

The trouble is that planners and policy makers around the world have embraced the idea that they can create and/or manage successful clusters. What if their heavy hand stifles creativity instead? What if this variant of industrial policy pushes resources to the wrong places at the wrong times? To ask the question is to answer it.

In the face of all this, many scholars are looking at models of increasing returns and path-dependence. These forces cannot be denied. Rather, the question has to do with how important they are.

Globalization is one way to describe the unpredictable dynamics of the movements of labor and capital. Another is to look at U.S. county-level private sector job growth. Looking at just the 100 largest counties (by pop. in 2000), thirty-year growth rates ranged from -36% (St. Louis) to just over 400% (Orange county, FL); the median growth was 90% (Fulton county, GA). Is there momentum? Inevitably, yes. Momentum is a default last-resort investment strategy only.

Competing and behaving

Michael New's reporting on Colorado's Taxpayers' Bill of Rights (TABOR) is convincing and enlightening. The payoffs to Colorado residents in terms of economic success are already clear.

Two questions emerge: 1) How did Colorado do it? and 2) Why have the other states been so slow to follow suit? According to New, Colorado's success was serendipitous, bottom-up, and underwent a nasty birth. Then Gov. Roy Romer compared the upstarts to Nazis and terrorists. Hysteria is always revealing.

Astute tax reformers in other states now have the advantage of the Colorado example. Blue states are less likely to be early adopters.

Yet, in the new world of political blogging, voter initiatives and activism by fed-up entrepreneurial types, we may be getting nore TABORs in more states. As we do, mometum will develop. There is no escaping the fact that in the modern world of ever more mobile labor and capital, governments have to compete -- and behave.

Thinking about what matter most

If the last ice age subsided 15,000 years ago and if the material condition of humanity began its stunning ascent 300 years ago, then the last 2% are the stand-out years that raise all of the interesting analytical questions.

The intuition is that, very roughly, a virtuous cycle is at work: economic freedom begets prosperity and prosperous people demand economic freedoms. The evidence for this view has been accumulating. My favorite contribution is the recent Cato Journal piece by Gwartney, Holcombe and Lawson. The policy implications cannot be overstated.

We are also lucky to be alive at a time when such analyses are possible and are being well done. In the same issue of the Cato Journal as the GHW piece, there is one byMeir Kohn ("Value and Exchange") that tracks the most recent evolution of economic thinking.

No trade-offs here

Land use regulations crimp supply and push up housing prices. It's a no-brainer but it always helps to have hard evidence to assure that nothing is overlooked when applying Econ 101. Some of the evidence is presented in a recent paper by Glaeser, Gyourko and Saks.

I have never been able to understand how so many people can voice concerns for the plight of the poor and at the same time champion highly regulated land markets. They seem to resolve the paradox by insisting that "affordable housing" be mandated -- when not directly supplied by the state. But these approaches also have repercussions and costs.

But they also expand the role and reach of the state and, perhaps, that is what is so attractive. Expanding the role of the state, they enlist developers who are attracted to what is proferred and who reciprocate, etc.

The textbooks highlight equity-efficiency trade-offs. There are some, to be sure. Yet, these are mainly absent from the world of policy, where we simply get less of both.

Really Smart Growth

Today's WSJ included a special section on "The Top Ten Trends in Ten Industries". Some are familiar. Yet, picking and/or ranking things like this may be thought of as a fool's errand. As always, the future will be full of surprises. But, trend spotting is fun.

Architecture trend #6 is "Cars vs No Cars ... Despite loud protests from smart-growth advocates, the rapid spread of suburban-style sprawl isn't slowing. Yet, there's a parallel movement of dwellers into more pedestrian-friendly communities, closer to downtown ..."

Yes and no. Last Monday's post cited the 2001 National Household Travel Survey. Comparing it to its 1990 precursor, trips per person were up in all places by all modes for all purposes. Rising incomes will do that.

We tend not to price travel correctly and that is one of our huge domestic policy failures. (We compound the error by spending hugely on ineffective second-best policies.) Given all that and sharply rising incomes, flexible land markets come to the rescue and "impending gridlock" remains forever impending (Steve Polzin's way of putting it). It's really quite amazing.

So, let's strive to keep flexible land markets free and flexible. Freer is better. Let's call that Really Smart Growth.

Ami Eden's NYT op-ed, Playing the Holocaust Card, will stir controversy. He makes the important point that it is still important to measure one's outrage. Prince Harry's antics are not in the same ballpark as Egyptian mainline newspapers that write about Indian-Israeli-U.S. nuclear testing causing the tsunami -- and that this was part of a larger program of mass-murder (cited by Melik Kaylan in yesterday's WSJ).

Well meaning people often feel an impulse to evoke the memories of the victims of unspeakable crimes. Others love to drape themselves in the mantle of other people's suffering. Many have no idea in which of the two categories they find themselves.

In a better world, bigots would not be bigots. In this world, evoking the terrible suffering of the victims of genocide must also be done with some
thought and some trepidation.

Watching young school kids being marched through Anne Frank Haus last year and seeing the bored look on their faces gave me the impression that some fine-tuning would not be a bad idea. The European extreme right is already linking Holocaust remembrance with PC.

Housing bubbly

Here is MarginalRevolution on Robert Schiller's new edition of Irrational Exuberance and house price bubbles.

Some writers have never met a bubble they didn't like. The allusion is to something that suddenly pops, meaning that prices go over a cliff.

Supply and demand suggest that this is unlikely but we are talking about asset prices that necessarily include a speculative component -- one that is subject to self-fulfilling prophecies and mood swings.

In that case, the high end of the housing market may be at some risk. But, absent a decent definition of high-end housing, we have very little to go on. Or to worry about. When multi-million dollar homes shed some of their value, the losers will not be those households with most of their wealth tied up in their homes.

Sixty years

Larry Summers suggested that innate sex differences as an explanation of natural science career success differences might be an hypothesis to be explored by scientists of good will. His critics have included scientists who prefer that the question remain out of bounds.

This is the week of the 60th anniversary of the Auschwitz liberation and an occasion for some reflection on that era. Nazi Germany and other places included high-brow types who had an easy time pontificating about innate differences. Many who should have known better in this country also said and wrote stupid -- and ultimately vicious -- things about race.

Poor Larry Summers. He assumes that the scientists in his day and age who might investigate differences in gender performance are better souls than the freaks we see in history.

His optimism is, in my view, refreshing. Even appealing. Some of us believe that in 60 years a corner has been turned.

Manpower planning

Immigration is a tough issue because open borders run up against security concerns but controls empower all sorts of politicized gatekeepers and also create brutal black market trade.

The Bush compromise initiative on temporary work permits appears to have been lost in identity group politics.

Globalization is the best international anti-poverty policy and migration reform is a key part of globalization.

Against this very harsh background, it is almost humorous to read about the Canadian immigration official who got into trouble, "when it was revealed that she had issued a permit to a Romanian woman who had worked on her election campaign. To the prurient delight of the opposition, the woman was a stripper who had come to Canada in 2003 (along with 552 other Romanian women) under a special programme to fill a shortage of labour in the 'exotic-dancing' business." (See the full story in the January 22, Economist).

One of the dumbest ideas from 1970s American politics was "manpower planning." It appears to be alive and (not) well in Canada.

Not So Smart Growth

The "Summary of Travel Trends: 2001 National Household Travel Survey" (Dec, 2004) is full of data and findings to occupy urban researchers for some time.

In spite of years of "Smart Growth", 2001 was the first year that there were more vehicles per household than licensed drivers per household (1.89 vs 1.77).

2001 was also the year that saw a reverse in previous increases in worktrip speeds. Yes, the average commute was getting faster between 1983 and 1995 (covering three previous surveys). No more.

Was Smart Growth to blame? All we can say for sure is that it didn't help.

We do know that the 1995-2001 period was a time of rapid income growth. Not only did people have greater access to private vehicles but as people become wealthier, they travel more -- just as they consume more of everything.

We are back to the old story. If policy makers want to "do something" about auto travel, they have to price road access and parking correctly. Nothing else works. Most U.S. policy makers are, however, bent on trying anything but proper pricing. Not smart.

Drink and density

Google finds 32,500 sites that talk about urban sprawl and obesity. I imagine that many of them include the currently favored causality story.

Now, the NY Times reports high levels of alcohol abuse in Manhattan. Google is not as helpful here because I do not have a good single-word antonym for sprawl.

Peculiar environments draw particular populations. People, once there, also tamper with their environments. The interactions are complex but the sprawl-obesity link has been irresistable for many commentators.

Could high-density living cause alcohol abuse? The observed link has now been reported by the NY Times. Is there causation? Does alchohol abuse cause high-density development? Unlikely. Does some force in nature simultaneously prompt imbibing and high-density development to occur in close proximity? Also unlikely. Are tipplers disproportionately drawn to and enabled by Manhattan-type environments? For the case of NYC, that's the thrust of the Times report.

Those who worry about sprawl have cited the obesity studies as ammunition for their case. Now, it appears, they have to deal with the news about booze.

No one ever said that environmental determinism would be simple.

The way we live

"The suburbs" is a huge topic -- and also a cliche magnet. Many books, movies, editorials, conversations -- and policy discussions -- revert to flimsy stuff.

A helpful typology is now available from Brian Mikelbank, in the most recent Housing Policy Debate (Vol 15, Issue 4).

Whereas the author cites too many interjurisdictional "tensions" and not enough complementarities for my tastes, his statistical work highlights the amazing variations in the suburbs -- rather than the all-white, uniform, bedroom community, rich, and well schooled stereotype that too many writers and analysts cannot seem to do without.

Third Rail

George W. Bush has touched the "third rail" of American politics and the big debate is here. Whatever one may think of George W., he deserves much credit.

The Social Security reform discussion has actuarial, economic, political, social, cultural, you-name-it aspects and I see lots of interesting materials almost every day.

Jonathan Clemens in today's WSJ includes some (some) of the basic math that we should be looking at. Here it is.

"Doing the Math on Private Accounts:Why Investors Will Want to Fund Them"

January 19, 2005; Page D1

"You may not like the idea of Social Security private accounts. But you will almost certainly want to fund one.

"I am not arguing that the partial privatization of Social Security is a good idea (I have my concerns), and I am not arguing that private accounts will fix Social Security's financial problems (they won't). But suppose Social Security is overhauled, and suppose, as many pundits expect, that we end up with a mix of traditional Social Security benefits and private accounts, as called for in "reform model 2" suggested by President Bush's 2001 Social Security commission.

"At that point, you will face a critical decision: Should you direct part of your payroll taxes into a private account, or should you continue to put everything into the traditional Social Security system? As best I can figure, it's no contest: You should go for the private account.• Model behavior.

"When I sat down to analyze reform model 2, I thought I was in for some heavy-duty math, comparing potential rates of return. But in fact, the break-even rate of return is built into the model -- and it's so low it makes private accounts look awfully attractive.

"With model 2, you would have the option of putting four percentage points of your payroll taxes, up to $1,000 a year, into a private account. The rest of your payroll taxes would continue to flow into the old system and eventually earn you the right to a monthly check. That check, however, would be smaller than the check you would receive if you continued fully funding the traditional system.

"How much smaller? In calculating the reduction, the Social Security Administration, or SSA, would make two assumptions, explains Jeffrey Brown, a finance professor at the University of Illinois at Urbana-Champaign and a staff member on the 2001 commission.

"First, it would assume that the dollars in your private account grow two percentage points a year faster than inflation. Second, when you claim your traditional benefit, the SSA would assume that you simultaneously took the money in your private account and used it to purchase an immediate annuity that pays a lifetime stream of inflation-indexed income, just like you get from Social Security. The SSA would then reduce your traditional benefit by this hypothetical monthly income.

"Keep in mind that these are just the SSA's assumptions. The SSA won't care how your account has really performed, and it won't insist you buy an inflation-indexed annuity.

"Confused? Maybe an example will help. Suppose that, if you had continued to shovel all your payroll taxes into the traditional system, you would receive $1,500 a month at age 66. But instead, years earlier, you opted for a private account. Based on its two assumptions, the SSA calculates that your private account should generate $500 a month. As a result, the SSA would reduce your $1,500 traditional Social Security benefit by $500, leaving you with $1,000.
Model 2's methodology can also be applied to family and survivor benefits, Prof. Brown says. For instance, if your full Social Security benefit was $1,500 a month and your spouse never paid much into Social Security, he or she would qualify for $750 based on your earnings record. In that case, if your assumed income from your private account was $500, your combined benefit would be reduced to $1,750.•

"Private benefits. The hope, of course, is that your private account will grow to generate more income than the SSA assumes. And there's a good chance it will, because the break-even rate of return -- just two percentage points a year above inflation -- is so low. Indeed, you should be able to beat the break-even with a fairly conservative investment strategy.

"Not being forced to annuitize is also a big advantage, says John Cogan, a member of the 2001 commission and a senior fellow at the Hoover Institution at Stanford University. With your private account, you could delay buying an annuity until your 70s or, if you are in poor health, skip the annuity entirely and instead pass on the money to your heirs.

"Make no mistake: None of this will fix Social Security's financial problems. In fact, the transition to private accounts could create a huge fiscal mess. Instead, the fix for Social Security lies in other solutions, like raising taxes or slowing the growth in traditional benefits.

"Let's say that traditional benefits are pared back, so that your full benefit is reduced from $1,500 to $1,300. In that case, if your private account is assumed to generate $500, you would receive just $800 from Social Security.

"As this example suggests, benefit cuts and tax increases will hit everybody, whether they plunk for private accounts or continue fully funding Social Security. But while the pain will be felt by everybody, only those who opt for private accounts will have the chance to make up the lost ground, by earning more than two percentage points above inflation.

"How easy will it be to beat that threshold? I asked Baltimore fund manager T. Rowe Price Group to calculate the probabilities, by analyzing the historical performance of different investment mixes. The results, shown in the accompanying chart, don't reflect investment costs, and future results could be lower. Still, if history is any guide, the odds of beating the break-even rate look pretty good."

The Ears Have Walls ... But There Are Exceptions

The best ideas come from the bottom and percolate up. It's an old concept; cultures that make room for bottom-up innovation can be expected to do better. There is anecdotal evidence that past U.S. military successes generally corroborate the idea.

Now Dan Baum, who has been doing superb writing about Iraq for The New Yorker, contributes "Battle Lessons" (Jan 17 issue; I could not find the link but Dave Green writes that it is www.newyorker.com/fact/content?050117fa_fact ) in which Baum highlights how web-savvy troops in the field have been creating websites, over which they share life-saving pointers learned the hard way.

"Little by little, the Army is absorbing Companycommand.com and Platoonleader.org. In 2002, West Point put Platoonleader on its server and a year later added Companycommand; both sites now have military addresses. The Army also began paying the Web site's expenses. It sent all four of its founders to graduate school to earn PhD's, so that they can become professors at West Point, where they will run the sites as part of their jobs ..."

The Pentagon does lots of silly things but, apparently, there are also occassions when the top knows to listen to what good stuff percolates its way.

The Question

Many thanks to Brad Hill for pointing me to the FT's "Into the heart of suburbia." Bush and the Republicans, as everyone knows, are strong in exurbia and beyond. As more Americans move into these environs (which they surely will), will they change the culture (and politics) of these places, or will the culture change them? That is the question which writer James Harding poses. He does not come down on one side or the other but does a wonderful job framing the question.

Liberty vs. Security

Computers and modern electronics are marvels but less so in the hands of government agencies. The federal government has been a serial offender. Remember the many IRS upgrades that weren't? Yesterday's story about the FBI's $171 million software problem is only the latest in a long series about how agencies could not bring themselves to get it right. Some people are not surprised.

In a world of tade-offs, some of them only exist in theory. Type I and Type II errors are supposed to be inversely proportional. So are equity and efficiency. So are security and freedom.

The latter trade-off is missing in action. The FBI's computers and, too often, policing everywhere provide illustrations. Privacy infringement by government is a lesser problem than many imagine whenever the agencies are incompetent.

That's the good news. A casual reading of events reveals that, too often, we give up freedom and privacy but without even the quid pro quo of extra security. In this sort of world, the only loss in the software example is the dollar cost. Neither security nor privacy are impacted.

Bottom-Up Social Security

A growing mountain of evidence and argument addresses our other-regarding side. (Some even deride the homo economicus straw man.) A fun read is Darwin's Cathedral by David Sloan Wilson. The religions that have flourished resulted from adaptive evolutionary forces that selected practical arrangements for supporting group fellows. (I was a co-editor of The Voluntary City, which presents supporting examples assembled and sifted by various scholars.)

The social security reform debate (and the one to follow re Medicare/Medicaid) focuses a lot of attention on private accounts and what we can/should do about those who completely blow it. This aspect is on almost everyone's mind -- but to varying extent.

What happems when the other-regarding impulse is extended beyond the identifiable groups that once formed religious groups? The welfare state is a poor response because it involves collective action problems and ungainly bureaucracy.

A limited state role (vouchers and credits) would allow scope for voluntary group actions (including schools and insurance pools). The standard objection is that these might "re-segregate" society. Yes and no. The group impulse may be as strong as ever. Neighborhood associations across America are growing. Not all function as communities but many do. It is probably a good idea to let them form schools and insurance pools as they see fit.

The welfare state would the be the last and not the first resort.

Learning Capitalism

Reading the Thomases (DiLorenzo and Sowell) is always great fun; they are prolific, they are clear, they are smart and they are very angry.

In How Capitalism Saved America, Thomas J. DiLorenzo surveys the American capitalism story from the pilgrims to FDR to Michael Moore.

Somehow, we survive and even prosper in spite of the fact that widespread ignorance enable statist policies (not to speak of ideas and rhetoric) to persist.

Private school curricula are unlikely to be much more enlightened than public school curricula. The good news is that homeschooling is an option; parents and others can now find ever more helpful resources on the internet.

That may be the only way to teach young people that FDR did not "save capitalism". It somehow survives in spite of the fact that most of its beneficiaries do not grasp its essentials. They would not learn about them in the curricula of America's lower and higher schools.

When Doris Kearns Goodwin was still featured on the occasional PBS evening news interview, she would rotuinely explain to her audience that increasing "inequities" of 1920s capitalism "caused" the Great Depression.

Money in Politics.

"Campaign finance reform" never does "get the money out of politics." Yet, the faith that "good government" is just over the horizon continues to entice educated people, now about a hundred years after the Progressive Era.

So it is no suprise that the Bipartisan Campaign Reform Act of 2002 (McCain-Feingold) is a flop. "Money Keeps Talking", by Julian Sanchez in the Feb 2004 Reason, includes data on money spent by the candidates in 2000 and 2004: $3,042 million vs 3,862 million. I could not find similar tallies in the major newspapers.

Big government means big stakes which means big attempts to buy influence. Smaller government is the only alternative.

That's not a serious option. The real, serious options are laid out in a recent Brookings study and involve further election campaign law reforms.

Some Help is on the Way

Help is on the way. But we can always do better. The LA Times and many others focus on government emergency grants. The currently pledged $350 million (about the cost to pay for one mile of the LA subway, Wendell Cox reminds us) by the U.S. places us fourth (after Australia, Germany, Japan). Yet, those who produce and follow these rankings are missing two very big stories.

Today's WSJ features pieces that call attention to two other important sources of help (both short pieces reproduced below). We do very well in the realm of private giving. At the same time, we fail badly in terms of our discriminatory trade policies.

"Tariff Tsunami"
(WSJ, January 6, 2005; Page A16)

"Senate Majority Leader Bill Frist is in Sri Lanka today bearing tsunami relief, one more worthy effort amid thousands. But if he really wants to do some long-term good for that nation's victims, he'll return to educate his fellow solons about the numbers in the chart below.

"A friend of ours scoured Census Bureau data for 2003 and pointed out some eye-popping statistics showing how U.S. tariffs discriminate against the world's poor, including in particular those in Sri Lanka. The duties paid on Sri Lankan garment exports to the U.S. in 2003 were $238.5 million -- which was more than the total duties ($227 million) paid that same year on every product exported to the U.S. from all six countries of Scandinavia.

"That's despite the fact that Scandinavia exports roughly 12 times more to the U.S. than does Sri Lanka -- $23.8 billion versus $1.8 billion in 2003. The average U.S. duty rate on products from those rich nations of Northern Europe is about 1%, while the average rate on Sri Lankan goods is 13.8%, and 16.6% on the bulk of its exports, which happen to be clothing. The combined GDP of those six European lands is about 10 times the size of Sri Lanka's, with far higher per capita incomes. If there was any doubt left that U.S. protectionism discriminates against the world's poor, this ought to end the debate.

"Americans of all faiths and incomes have been donating tens of millions of dollars to assist the Christmas tsunami victims. This is a tribute to our generosity. But there is no amount of aid that would be more meaningful to more people in Sri Lanka than to lift U.S. tariffs on its textile exports. Perhaps when Mr. Frist returns, he'll bring the matter up in the Senate Finance Committee."



"Private Acts of Giving"

By ROBERT A. SIRICO, WSJ January 6, 2005; Page A16

"The outpouring of money to help the victims of the tsunami has been marvelous to behold. At press time, the Red Cross alone had collected an astonishing $69.2 million in cash. The grand total raised by private dollars will be many times that amount. Though aid alone can never restore what was lost, the expression of goodwill that the money represents is an inspiration. It may also point the way to reforming the way foreign aid is undertaken and managed in the future.

"Of the $108.5 billion given by major countries in foreign aid and investment in 2003, the U.S. contributed 35% or $37.8 billion. The next highest giver was the Netherlands. It is neither here nor there to consider the percentage of national income because, when looking at the U.S., all budget items seem small by comparison with overall productivity.

"Also in 2003, donations to foreign countries -- that is, not collected via taxes and spent by the government -- were the largest part of foreign aid, amounting to even more than government gives. Research by Carol Adelman, the leading scholar in this area, found that private aid in the year 2000 was $35 billion compared with government aid of $9.9 billion.

"Private giving was on the rise even before the tsunami. Foundations and individuals are increasing contributions. One reason is that it is more effective and targeted directly at the needs of the people and their communities. I know from experience that the groups involved in private giving are more agile and manage money more efficiently. In fact, Ms. Adelman and others have speculated that the trends are so strong in the direction of private giving that foreign aid is being privatized to some extent.

"Many of the same problems of the old-style welfare state afflict foreign aid today. Countries become dependent. Foreign aid feeds political corruption, and -- what's called the moral hazard -- rewards bad economic policies rather than encourage economic reform. Private aid, however, has nowhere near the same level of problems as government aid. It tends to go to individuals and private institutions rather than governments, so it doesn't feed corruption and the problem of moral hazard is reduced.

"Now we have a spectacular demonstration of the ability of private groups to respond to disaster in ways government never could. Private aid agencies responded to the tsunami victims first, doing the most difficult work, even as governments were still managing PR issues over whether they are "stingy" with others' money.

"President Bush has asked his father and Bill Clinton to lead a new fund-raising effort to help tsunami-stricken regions. Cynics might argue that this effort is akin to the mayor arriving just in time for the ribbon-cutting at the local mall. But the Bush administration understands that the future of foreign aid is very much bound up with private efforts and that the contributions of governments can only go so far.

"Whatever the future of foreign aid, we can see that the path leads toward relying less on government and more on private foundations, churches and NGOs -- all buoyed by the generosity of everyday individuals. We may yet find a way to end foreign aid as we know it."

It's the Aura

Was it UC's Clark Kerr who memorably mentioned that the alumni want college sports (successes), the undergrads want sex and the faculty want parking?

In I am Charlotte Simmons, Tom Wolfe has a lot to say about two of the three. Big-time college basketball are nicely rendered -- as was big-time college football in A Man in Full.

My team had a dream football season, capped by last night's Orange Bowl sweet victory.

The NCAA, every economist knows, is an exploitative cartel. Sanctimonious university presidents (and other enablers) shell out big bucks to the coaching staff (and others) while insisting that the "amateur" nature of the sport requires that they abide the cartel.

Whereas some top schools have stopped playing (U. of Chicago is everyone's favorite example), other top schools are models for Wolfe's novel (Duke and Stanford). What are they thinking? The big revenues do not justify the big expenditures. Yet, Wolfe reports, these places know what they are doing. "It's the aura," he writes.

I think he's right. The market value of all of my students' diplomas became slightly greater overnight. Exploiting a few black males (and some others), the university brass would say, is justified.

It's the aura.

Convergence and Competition

Convergence of communications technologies and how it will upset "monopolies" (imagined and otherwise) has been moving forward for some time. According to the WSJ story (below), it is about to take off. I believe it. I also have no clue how it will unfold but the unpredictability of it all is the hallmark of the process. There will be many bets placed and some of them will be good ones.

"A New Tech Battle for the Home
As Industries Collide and Gadgets Morph,Competition Reigns for Home Technology"

By DON CLARK Staff Reporter of THE WALL STREET JOURNAL January 3, 2005; Page B1

"Get ready for another round of technology convergence, bringing more choices -- and more confusion.

"Phone companies are offering TV programming. Cable companies have added phone service. Cellphones are now computers, cameras, video players, navigation and messaging devices. Other gadgets are merging, adding hard drives and Internet connections. Every form of entertainment has turned digital and is zipping around the globe and the home on a high-speed wire, or a wireless network.

"The scene, as industry executives prepare for the annual Consumer Electronics Show in Las Vegas this week, has never seemed more chaotic. The extended forecast: more of the same.

"Indeed, competitive pressures are likely to cause new products and services to merge. Cable and phone companies are already rushing to offer competing 'triple-play' bundles of voice, video and high-speed Internet access, for example, not only to seek more revenues but also to keep customers of their core services from defecting.

"'If you don't have the broadband pipe, five years from now the likelihood that you will keep the entertainment or voice assets diminishes,' says David Dorman, AT&T Corp.'s chief executive officer.

"The pressures could push more companies as well as technologies together, with industry giants likely to look for partners and acquisition targets outside their already-consolidating markets. Forrester Research analyst Ted Schadler, in a new study by the Cambridge, Mass., firm, makes a case for such cross-industry acquisitions as Hewlett-Packard Co. buying Eastman Kodak Co., Apple Computer Inc. absorbing TiVo Inc., Walt Disney Co. eating Electronic Arts Inc. and Google Inc. grabbing Gemstar-TV Guide International Group Inc.

Mr. Schadler concedes the odds of any one of those transactions happening soon are slim, and the companies won't discuss the speculation. But he argues that such giants will need to join forces to create offerings that could drive new demand -- such as phones that send caller ID information to TV screens, televised sporting events that allow viewers to pick camera angles, and new types of personalized online games. ..."

For us consumers, it could not be better.

Poverty and Mobility

The current issue of The Public Interest includes an exchange on "Low-Wage America: Two Views" (between Robert F. Ferguson and Marvin H. Kosters). I think the writers missed the big story.

Published in July of 2003, the Census Bureau's "Dynamics of Economic Well-Being: Poverty 1996-1999" is the follow-up to the July 1998 report with the same title (but subtitled "Trap Door? Revolving Door? Or Both?"). Both Census reports highlight income-mobility and dynamics.

The recent study notes that, " ... a majority of poor individuals do not remain poor for very long periods of time ... poverty is chronic for a small but significant proportion of the poverty population."

The average poverty rate in 1999 was 12.8%; 19.5% were poor for at least 2 months but 2% were poor all 48 months.

In 1996-99, the report shows that 7.6 million people entered poverty but 14.8 million left poverty. Immigrants, legal and otherwise, who entered the U.S. in this interval are, by definition, not counted.

But, how many immigrants were there in that period? Three-million "authorized" and more "unauthorized" (census labels).

Some points emerge. 1) Comparing poverty levels but not cohorts is practically meaningless; and 2) it would be wonderful if the SIPP mobility data were comparably available for recent immigrants as well as for non-immigrants; at least, flag these folks in the survey.

The U.S. poverty story is complex but is difficult to fathom unless these two points are addressed.

Fragile, Not Helpless

Dan Henninger cites a useful stat in his Friday WSJ column. "The Red Cross estimates that for the past ten years when a natural disaster occurred in a developing country, the number of people killed was 589; but in what the Red Cross calls a country of 'high human development' it was 51. That's 11 to 1. ... The answer is to compress this ratio."

Much of the commentary about the Indian Ocean tsunami notes how unkind nature can be, how fragile we are, etc. (David Brooks' "A Time to Mourn" in today's NY Times.) Of course. But we can compress the ratio.

Development is the only way. And it is dawning on more and more people that economic freedoms are the only way to development.

"Blame The New Yorker"

In last Sunday's NY Times Book Review, Walter Kirn wrote a review of The New Yorker's recently published collection of cartoons and titled it "Blame The New Yorker". He sought connections between high-brow attitudes, as revealed in "The Complete Cartoons of The New Yorker", and the post-election disconnect that some (some) of these folks now experience. Kirn made many good points but I doubt that they will impress his audience.

Right on schedule, this week's New Yorker contains a review of Jared Diamond's new book, "Collapse", a book that I have not yet read. Reviewer Malcolm Gladwell recounts Diamond's explanations for the decline of the Norse in Greenland, the Easter Islanders, and others. The common story appears to be that they managed "the land" poorly.

This brings Gladwell to a condemnation of Oregon voters for endorsing Measure 37. In Gladwell's view, enforcing property rights is no way to manage the land. Gladwell is a New Yorker staff writer.

Thank you, Walter Kirn.

It's Politics

Many discussions of governance enumerate the pros and cons of more centralization vs more decentralization. The devolution of power and authority became a popular idea worldwide in the 1990s but "sprawl"-obsessed writers in the U.S. developed the idea that "regional government" is the answer to their concerns.

This suggestion begs for an analysis of actual experience. The most auspicious U.S. case is New York City which annexed its outer boroughs in 1898. Whereas we all have a sense that this was a mixed blessing, E.J. McMahon and Fred Siegel ("Gotham's Fiscal Crisis: Lessons Unlearned" in the Winter 2005 Public Interest; no link to the article available) document how the inevitable politicization that goes with bigger government has led to disasterous results. "New York City can be seen as the first large-scale American outbreak of ... the economic sclerosis suffered by liberal democracies held hostage to the demands of politically powerful labor unions and social service providers." ... "[i]t's not the economy, stupid -- it's politics. ..." conclude the authors.

They point to the way in which Californians are now addressing their state budget problems and note that there are, indeed, lessons unlearned.

Tragedies and Trade-Offs

Earthquakes, tsunamis, terrorist attacks and other calamities are almost unpredictable. Yet, much recent commentary addresses how we must do better to predict, detect, inform in the future.

Of course. But in a world of scarcity, the trade-off between anticipation (harm prevention) and resilience (coping after the event) policies must be carefully evaluated. Lynn Scarlett examined the trade-offs re eathquakes recently.

We may be bad at both but if the odds of making better forecasts are low, then we should tilt towards more in the way of investments in coping mechanisms.

The New Gifting

We cannot time disasters but we can imagine that had the Indian Ocean Tsunami hit some days earlier, many Americans (and others) might have diverted their gifting towards worthy donations (in the name of the recipients) for the victims. Dyanmist.com points to The Command Post, a site that lists information on groups that are helping the victims and that can well use our support.

Marginalrevolution.com has recently included posts re updates and views of the "deadweight losses" that economists have pinned to traditional gifting. The researchers' results should surprise no one. There are plenty of exchanges, re-giftings, garage sales and storage space shortages that document the fact that much of America is now too materially wealthy for gifting to remain as always.

The internet can help. Families and groups of friends can post each member's favorite charities. We can then avoid the malls and the traffic and all of the other hassles that people love to complain about and make gifts that are much more significant than the stuff that we usually wrap and give. My own family has started on this path and I expect that many others have too.

The holiday sales news from Amazon and others confirms that the New Economy is, indeed, here. The New Gifting might be another idea whose time has come.

LA Disease

The Everyman is unlikely to have opinions on particle physics but in many areas that involve public policies, opining is widespread.

Urban planners have little resistance to this and are, unfortunately, as likely to go with the platitudes as with common sense, let alone well-crafted research.

Having, for the most part, eschewed rational road (or parking) pricing, planners will try anything else to "get people out of their cars", even signing on to the fool's errand of reshaping the built environment to impact auto use.

Auto uses are below average in Manhattan but it is unlikely that planners will ever design another one of these. Yet, serious people still espouse "downtown revitalization" and justify the costs with talk of less auto use.

This morning's LA Times reports: "Give Up the Suburb? Yes. Give Up the Car? No Way ... When urban planners first talked about the new residential boom in downtown LA, they conjured up idyllic streets where pedestrians -- their cars sold to ex-neighbors in the suburbs -- strolled happily to work along streets lined with cafes and bookstores ... People are moving downtown, all right. But this is LA. So they're bringing their cars with them."

Yes and no. Some people are moving downtown. They do so mainly because planners caused highly subsidized office space to be over-built and the lack of demand for all of the bare space (and more subsidies) induced some people to live downtown. These are mainly singles or young people without children.

And there is no way that people can get along in downtown, let alone Greater LA, without a car. And, outside of Manhattan, this is all standard operating procedure.

Nevertheless, the myths hang on and we are left with some sort of weird "LA disease" bottom-line to the Times' very belated discovery of the obvious.

Home Entertainment

I cannot do a top-ten list so here are my favorite thirty DVDs -- in no particular order. That would take hours. Home entertainment is hot and I like Netflix -- and you can control the volume!

Under the Sun (Swedish)
Cinema Paradiso (Italy)
Il Postino (Italy)
Solas (Spain)
L'Auberge Espagnole (France)
Chaos (France)
Burnt by the Sun (Russia)
Lawless Heart (U.K.)
Mostly Martha (Germany)
In the Bedroom (U.S.)
Spellbound (U.S.)
Nowhere in Africa (Germany)
The Crime of Padre Amaro (Mexico)
The Housekeeper (France)
Secretary (U.S.)
The Big Night (U.S.)
Shall We Dance? (Japan!!!)
Jew-Boy Levi (Germany)
The Mystery of Rampo (Japan)
Together (China)
Dirty Pretty Things (U.K.)
East-West (France)
Russian Ark (Russia)
Man on the Train (France)
The Thief (Russia)
Swimming Pool (France)
Indochine (France)
Sex and Lucia (Spain)
The Barbarian Invasions (French Canada)
My Wife is an Actress (French)

Back to the Future for Economists

"When economics cast its fate with equilibrium analysis, it made analysis of both entrepreneurship and institutions difficult." So writes Dan Johansson in "Economics without Entrepreneurship or Institutions: A Vocabulary Analysis of Graduate Textbooks" in the current issue of Econ Journal Watch.

It's an interesting theme. Economists (and others) have missed the big story for some years -- but should not have because Adam Smith made it so very clear so many years ago: economic freedom causes economic development. There is a growing literature that resurrects these ideas but, as Johansson makes clear from his inspection of leading economics textbooks, most still miss the big story.

"In the 19 books there are many references to Nash equilibrium, Bertrand equilibrium, Cournot equilibrium, Concave utility functions, Euler equations, etc.; concepts that on the other hand are not used at all, in e.g., Austrian, Institutional and Schumpeterian traditions. Instead, they emphasize actors that have disjoint knowledge (that is, not merely asymmetric information, but asymmetric interpretations), the economy is a dynamic open-ended process in continuous change, and the scope and motivation for discovery is conditioned by social rules."

Many very smart people are working very hard on the wrong problems. Very inefficient.

Scandal

We tend to be well served in those aspects of our lives where markets are allowed to function and we tend to be poorly served where supply is via the state, instead. Many view this statement as "ideological" but it is supported by a moutain of evidence.

An important addition to the body of evidence is a recently released study by Bahaa Seireg and Lisa Snell on "State and Local Obtsacles to Opening a New Private School". It is not simply that government-run schools are, on the whole, a disaster but governments also make it extremely difficult to open private schools.

The appeal of a school voucher scheme is that it would introduce consumer sovereignty to the supply side. Yet, vouchers or not, the whole policy environment is stacked against education. Looking at the California situation, Seirig and Snell identify "four goliaths" that stand in the way: the California Environmental Quality Act (CEQA), zoning laws, parking requirements and building codes are idententified as major obstacles.

Each of these are, of course, lauded by the high-minded (along with the ignorant and the corrupt) for their beneficial importance. Having arrogated the key functions of health and education to their own ambit, public sector players have completely botched their performance.

While they tend to be the shrillest about "equity", their ruinous management of health and education have resulted in stunning "inequities" -- as well as concurrent inefficiencies. They cheerfully care little about the latter but reveal their cynicism by how they choose to treat their charges' health and education.

Smart Growth is Very Hard Work

Today's LA Times front page includes "True Love of Country in England ... City dwellers are moving to villages in record numbers. Rural economies benefit, but some say at too high a cost to locals."

The accompanying story includes data on 1981-2002 population growth with "rural" increasing by 13.7% vs 2.9% for urban.

The Great Dispersion (David Brooks' term) can be expected to show up in all of the developed countries. Evidence to this effect has been accumulating.

Preferences trump policies. Europeans and Canadians have land use and planning policies that U.S. planners dream about (high-priced gasoline, tough land use regs, more elaborate transit, etc.). But it makes no difference.

I commented on "Micropolis" and associated population trends last week. U.S. private sector job growth in the 1990s was 1.3% per year in the largest metros (above 5 million pop.), above 2% in the mid-sized and smaller metros, 2% in the micropolitan (exurban) counties and just less than 2% in the rural counties beyond exurbia. Manufacturing jobs declined everywhere since 1970 except micropolitan and rural counties.

The most interesting data are from abroad -- where "Smart Growth" has been prescribed for many years.