Analogies gone wild

Today's LA Times carried this headline: "Economists see revival of an old fix ... Public works projects once disminssed as too slow, are on the table again. Obama backs the FDR-era idea."

Just days before the election, the Times business writer told readers to "Say no to traffic ...," advocating a "yes" vote for multi-billion dollar rail projects for LA county and the state. The county measure seems to have passed, raising the local sales tax at the worst possible time. State budget problems have prompted the Governor to propose higher sales taxes. And the state proposition to build mega-dollar high-speed rail, which requires a 2/3 majority, is also close to passage.

The wasteful nature of these projects is well known. It is strange but not surprising that a time of economic difficulty is seen as a time to pile on the economic blunders. Intellectual President-elect or not, the stars are aligned for pork dressed up as wise policy.

On the bright side, California voters have approved a redistricting measure which might (might) put the brakes on some of the mendacity. But the model of redistricting done by an impartial body (retired judges?) might be useful. Subject all of the infrastructure pork proposals to cost-benefit analysis by a similar impartial body (retired economists?).

There is the obvious (and disturbing) analogy between having politicians in charge of gerrymandering district boundaries, having public agencies do project evaluation of projects they would operate and having the bears guard the honey.

Falling in love

The economy, dysfunctional inner city schools, unfunded social security and medicare liabilities, and incoherent health care policies make my big-four-elephants-in-the-room list of domestic problems. Higher taxes, protectionism, industrial policy, and throwing more money at failed programs and institutions with powerful lobbies are not promising antidotes. Ringing speeches that evoke "hope" and "change" and a dozen other platitudes cannot overcome the stunning mismatch between the problems and the policies.

The Republicans occasionally talked a good game but made a mess. They deserve what they got. But what about the rest of us? Why does politics (let alone ever more of it) make some of us queasy? One of the reasons is the ringing speeches and the emotional responses.

Here is Hayek's very useful (perhaps most underlined and cited) insight on the matter:

Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed rules of the micro-cosmos (i.e., the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings of make us wish we do, we would destroy it. Yet, if we were to apply the rules of the extended order to our more intimate groupings, we would crush them. So we must learn to live in two sorts of world at once. To apply the name 'society' to both, or even to either, is hardly of any use, and can be misleading (The Fatal Conceit).

Only a skunk at a picnic (in Grant Park?) would cite this wisdom. It is much easier to just fall in love.

Warming

Benjamin Friedman (The Moral Consequnces of Economic Growth) tells us that prosperous people are nice to each other. Now, Lawrence E. Williamson and John A. Bargh, writing in the October 2008 Science explain that "Experiencing Physical Warmth Promotes Interpersonal Warmth."

"Warmth" is the most powerful personality trait in social judgment, and attachment theorists have stressed the importance of warm physical contact with caregivers during infancy for healthy relationships in adulthood. Intriguingly, recent research in humans points to the involvement of the insula in the processing of both physical temperature and interpersonal warmth (trust) information. Accordingly, we hypothesized that experiences of physical warmth (or coldness) would increase feelings of interpersonal warmth (or coldness), without the person's awareness of this influence. In study 1, participants who briefly held a cup of hot (versus iced) coffee judged a target person as having a "warmer" personality (generous, caring); in study 2, participants holding a hot (versus cold) therapeutic pad were more likely to choose a gift for a friend instead of for themselves.

Climate change is not exactly news. When climate stops changing, then something very strange is afoot. And there are even people who have looked at the benefits of warming. But the fact that it may make us more civil is good news. This benefit-cost stuff keeps getting tougher.

Pinball

"Stuff Happens" t-shirts are easy to find. Less popular are "Cycles Happen", "Price Swings Happen, "Bubbles Happen" or any such.

Robert Shiller writes "Challening the Crowd In Whispers, Not Shouts" in today's NY Times.

Yes, many smart people, (including of course Shiller) were alarmed by real estate price trajectories. And many used the B-word. In today's piece, the writer asks why economists do so less than others.

Why do professional economists always seem to find that concerns with bubbles are overblown or unsubstantiated? I have wondered about this for years, and still do not quite have an answer. It must have something to do with the tool kit given to economists (as opposed to psychologists) and perhaps even with the self-selection of those attracted to the technical, mathematical field of economics. Economists aren’t generally trained in psychology, and so want to divert the subject of discussion to things they understand well. They pride themselves on being rational. The notion that people are making huge errors in judgment is not appealing.

In addition, it seems that concerns about professional stature may blind us to the possibility that we are witnessing a market bubble. We all want to associate ourselves with dignified people and dignified ideas. Speculative bubbles, and those who study them, have been deemed undignified.

In short, [psychologist] Mr. Janis’s insights seem right on the mark. People compete for stature, and the ideas often just tag along. Presidential campaigns are no different. Candidates cannot try interesting and controversial new ideas during a campaign whose main purpose is to establish that the candidate has the stature to be president. Unless Mr. Greenspan was exceptionally insightful about social psychology, he may not have perceived that experts around him could have been subject to the same traps.

True enough. But the well known fact that cycles can (and often will) overshoot and undershoot does not equip anyone to know when enough is enough -- or what to do about it. Banning short-sales illustrates what not to do. Once we get into the fix-it mode, we can easily do more harm than good.

While it is easy to recount past warnings about price bubbles, it is much more difficult to identify early warnings about how housing price swings would interact with mortgage and credit markets. That is the much more interesting discussion. How the ball bounces in pinball is also tough to predict.

Know-Nothings Gone Wild

I used to chafe at the know-nothing sermonettes offered up at restaurants, hotels, Starbucks, Ben & Jerry's, Whole Foods and many others about how do the right thing with respect to "the environment". But it is no longer a charming eccentricity that goes with eating at Chez Panisse; it sprouts almost everywhere. Just about everyone seems to "know" which trade-offs are best. If, indeed, they even fathom that there is scarcity and myriad trade-offs to consider.

So it's refreshing to see that Pierre Desrochers and Hiroko Shimizu have just published Yes, We Have No Bananas: A Critique of the 'Food Miles' Perspective. There is much to critique and they do it very well.

How do we know that green fervor is part of a religious revival? It's easy. For one thing, I see more and more young people tear up when their themes are challenged.

Distribution and redistribution

The economics and measurement of who gets what and who has what (distribiution) is difficult and easily distorted. In election years, it is trampled on.

But Martin Feldstein's NBER WP 13953 ("Did Wages Reflect Growth in Productivity"?) is helpful. Productivity has been growing, as has labor's share. Labor's share is best (and most honestly) measured when the whole compensation package, including all perks, is considered. Much of the rhetoric about declining real wages is misleading. Is anyone surprised?

Greg Mankiw calculates how he would fare under the McCain and Obama income tax proposals.

No reason that the algorithm could not be placed in interactive format in each ballot booth next Tuesday. Just a thought.

UPDATE

Ironman points us to this. As he says: Why wait?

Mystery of the perfect storm

Michael Boskin describes the "perfect storm".

The current situation was created by a perfect storm of mutually reinforcing trends and policy mistakes: loose monetary policy (years of negative real interest rates in a growing economy); socially engineered housing policy (the Community Reinvestment Act, Fannie Mae and Freddie Mac, HUD's no-money-down mortgages); the rapid growth of leverage, opaque and technically deficient derivatives, and the shadow banking system; fragmented regulation, lax diligence, poor governance, fraud; and an oil price shock. The result: a housing bubble bursting into recession.

John Quigley suggests ways to better align inventives in mortgage lending. He also notes that how we got to where we are makes quite a mystery.

How, you may wonder, could contracts with
such poor incentives have evolved? To some
extent, that remains a mystery.

Perfect storms and mysteries command the attention of smart people. So fight the lows brought by financial losses and politicians' posturing with the high that there are huge and auspicious puzzles before us. How do you unscramble the mystery of a perfect storm?

Fairness

Differential tax rates (it was once feared) would set class against class. How could they not?

There are the additional problems that state-run efforts to fight poverty morph into efforts against inequality -- and that evidence of their success is spotty -- and that they can even be counter-productive.

And vote-buying is introduced, implicitly or explictly. Professor Adam Lerrick does the math in this morning's WSJ ("Obama and The Tax Tipping Point ... What happens when the majority of voters are net beneficiaries of government?").

What was so revealing about the Joe-the-plumber episode was Joe-the-Senator Biden's scoffing about a plumber worrying about a tax on those making over $250k. What business does he have dreaming? (And he did not even have the state's permission to be a plumber!)

Baptists and Bootleggers Gone Wild

Robert Barro famously said that once you start thinking about economic growth, you cannot think about anything else. A corollary must be that once you start thinking about institutions (and how they succeed or fail with respect to growth), you can think of little else. The fascinating question is addressed by Martin Ricketts, Oliver Williamson, Erik Furubotn, Rudolf Richter, Elinor Ostrom and Stephen Litlechild in the Sept 2008 Economic Affairs.

Listening to all of the policy fixes that are wheeled out day and night by politicians and many others makes one wonder. Have they never heard of public choice economics? Have they never heard of Baptists and Bootleggers?

The various "fixes" generated by the political process are, by definition, politicized.

UPDATE: I should have cited Robert Lucas instead of Robert Barro. HT to Gabriel Mihalache.

Hell to pay

The financial crunch is especially hard on all those who are overextended. Transit agencies too are subject to margin calls. This morning's LA Times includes "MTA may have to cut commuter service". Lease-back arrangements with AIG are beginning to bite.

Just two days ago, the Times reported how average daily September 2008 ridership compared to the year before. Applying LA County population numbers for the 2 years and the 3.9 trips per person per day that we found in the NPTS data the LAMTA's various fixed guideway lines served just over 0.8% of daily travel demand, up from just over 0.7% the year before. But less than 1% in either year. Much bigger, however, on the cost and debt side.

Appealing idea

In the Oct 27 Forbes, there is Prof. Luigi Zingales' "Cramdown ... How to fix the credit mess with a government bailout: quickie bankruptcy ...Banks would be allowed to convert debt to equity."

The idea is to create a special Chapter 11 process to allow banks to reorganize quickly. Read it. I like it a lot. Before we dive into unlimited ad hoccery, let's adapt something that we have a lot of experience with, the Chapter 11 process. We have a good bit of the learning already accomplished.

Adding to the wish list

In yesterday's WSJ, Judy Shelton ("A Capitalist Manifesto") dreams of a world of better post-election-post-crisis policy. Her thoughts are all sensible. Fewer real estate asset bubbles from fewer central bank errors is always a good idea. But missing from Shelton's wish list is fewer development bottlenecks from fewer local government regulations. Ed Glaeser's "The Economic Impact of Restricting Housing Supply" makes the point. Wendell Cox elaborates the local effects.

Interesting times

Arnold Kling notes the politicization of Fannie and Freddie.

Becker and Posner disagree somewhat in this week's post on the financial crisis. Becker notes that:

The second relevant development has been advances in financial instruments, such as derivatives, securitization, credit-backed swaps, and other even more esoteric instruments. These instruments seemed to work quite well in managing, spreading and even reducing the risk of the assets held by banks and other institutions. However, in the process they encouraged greater risk-taking ventures, as reflected by the large increase in the leverage-that is, in the ratio of assets to capital- of banks and financial institutions like Fannie Mae and Freddie Mac. What has been insufficiently understood is that the growing use of these instruments, and the growing leverage of financial institutions, created considerable aggregate risk for the system as a whole that could not be diversified away.

Some will call this a "market failuure".

The WSJ's Mark Gongloff writes how "Policy Blunders Have Created Crisis of Faith".

It all suggests back-to-the-drawing-boards when it comes to a broad range of policies. But is there any theory available to guide this project? Public choice economics is available, but unlikely to be considered. That theory suggests that there are no panels of wise men and women available to make new and improved policy. It does suggest that the next round of policy making will be as politicized and inept as the last. Even Nobel laureates who are recognized for their skills in economic theory ignore this economic theory when placing their faith in new and improved politicians.

And the beat goes on

In today's LA Times, colleague Jim Moore argues that LA's Metrolink should die. It has killed enough people and the economic justification for its existence has never been made. But the Governor wants a "yes" vote on another high-speed rail boondoggle. Shikha Dalmia elaborates in today's WSJ ("California is Headed for a Real Fiscal Train Wreck").

In today's WSJ, Peggy Noonan writes that both Presidential candidates are clueless on the market meltdown. Surprise!. Jonathan Macey writes that, "Letting markets work is messy and costly. Nevertheless, the only sensible way to deal with the current crisis is to force the companies who created the mess to bear at least some of the costs of their mistakes. Most of all, if the markets are to get back on track our regulators must an immediate stop of publicly demonizing the markets and work to restore confidence in the system."

Panic

There is all the talk of panic on Wall Street and panic on Main Street, but Lee Ohanian, writing in today's WSJ, reminds us of the problems caused by panic in Washington DC ("Good Policies Can Save the Economy ... Why we need lower tax rates and more skilled immigrants").

Amity Shlaes (The Forgotten Man: A New History of the Great Depression) and Bob Higgs ("Regime Uncertainty ... Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War") document how the hysterics in Washington turned a panic (of which we have had many) into the Great Depression.

This is a profound lesson for today's panic, but one which very few people (or candidates) even address.

Bad time for an election

Bob Higgs' summary (and critique) of journalists' and politicians' use of metaphors to describe the current economy is priceless. It's a shorthand; it communicates effortlessly; but it ain't deep. Higgs elaborates how it's lazy and obscures more than it illustrates.

Both presidential candidates have savvy economists on their teams. But it's clear that they often ignore good economic advice. Who do they listen to last? A nearby politco? (Most of these people are lawyers.) Their own inner voice? Whoever sounds most like the inner voice? Do Obama-McCain naturally revert to Lou Dobbs-Bill O'Reilly populism? Tuesday's televised debate could be ugly if they each try to hog this road.

Sorry. Metaphors.

All the wrong lessons

Today's NY Times includes "Pressured to Take More Risk, Fannie Reached Tipping Point ... Wall St.and Congress Fueled Fateful Choice." The longish article includes: "shortly after he became chief executive, Mr. Mudd traveled to the California offices of Angelo R. Mozilo, head of Countrywide Financial, then the nation's largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else."

The Times also includes "A Snarl of Regulation" along with a spaghetti diagram of who regulated what and whom. There is also "Goodbye To All That" which takes off from the sentiment of Steve Fraser, that "It's the beginning of the end of the era of infatuation with the free market."

We're going to hear a lot of this, in spite of evidence that we have anything but free markets in action. Extend the regulation and politicization that we have and extend that to trades that are currently unregulated? Why? Inept regulation and/or politicization will follow. More competition and fewer bailouts are out of vogue.

Market participants (even the specialists) in all fields are just people. They will do things right and they will make mistakes. Letting them reap rewards when right and letting them fail when wrong is the only known antidote. But that approach will surely recede as all of the wrong lessons are drawn on a daily basis.

Whopper

Today's NY Times op-ed page includes most of the standard sneers at Sarah Palin's debate performance -- and personna. I did see the whole debate on TV and (surprise) both sides got away with stuff. That is apparently the way of modern American politics.

But I thought that the true whopper of the evening was Joe Biden's story about Lebanon. In his patented style he informed the audience that when the U.S. and the French kicked Hezbollah out of Lebanon, he and Obama lobbied to put NATO forces into Lebanon to "fill the vacuum." Huh?

Neither moderator Ifill nor Palin nor the NY Times' writers (including Steven Pinker), nor any source that I had seen or heard, picked up on this one.

I now see that Michael Totten had the same reaction that I did ("Joe Biden's Alternate Universe").

But narratives are stubborn things. The wise and seasoned foreign policy "expert" vs. the unready hick from somewhere off the mental map is just too good and too comforting to let go -- even through 100 inches of NY Times op-ed column space.

Two glimpses inside the sausage factory

In light of where I live and what I do, I have followed LA Times coverage of local boondoggles for many years. There has been some movement. For many years, bad projects were strenuously made to look good. In recent years, however, some problems (like huge costs) have been acknowledged. But as true boosters, the editors still find their way to an endorsement. Today's lead editorial ("Yes on state bonds") endorses Prop 1a, to fund a "High-speed rail line". Read it to appreciate the logic.

There's something undeniably alluring about a bullet train -- the technology is so powerful, the speed so breathtaking, it makes quotidian trips seem exotic. Perhaps that's why proponents of Proposition 1a, which would authorize $9.95 billion in bonds for a high-speed rail line connecting Northern and Southern California, think it would be wildly successful. They predict the line could draw 117 million riders a year by 2030, compared with 3 million now taking the high-speed Amtrak train in the densely populated Boston-Washington corridor. And they say it will turn a billion-dollar profit by then even as it keeps ticket prices remarkably low.

The projections by the measure's opponents, led by the libertarian Reason Foundation in Los Angeles, are much less sanguine and more persuasive. If voters approve Proposition 1a, it seems close to a lead-pipe cinch that the California High-Speed Rail Authority will ask for many billions more in the coming decades, and the Legislature will have to scrape up many millions of dollars in operating subsidies.

And yet, we still think voters should give in to the measure's gleaming promise, because it's in their long-term interest. Weaning travelers from gas-powered, road-choking cars is critical to the state's health and competitiveness. A high-speed rail line would not only provide a cleaner and faster alternative to automobiles, it would encourage transit-friendly development.

The measure isn't as big a risk as it would be if the state were footing the entire bill. The "backbone" segment from Los Angeles to San Francisco is projected to cost $33 billion, with about 75% from federal and private sources. Until those funds are secured, the state won't issue most of its bonds. If the line never gets built, the state's losses will be well under $2 billion. That's not too much to wager on a visionary leap that would cement California's place as the nation's most forward-thinking state.

Speaking of pigs in pokes, Otto von Bismarck famously remarked that, "There are two things you don't want to see being made -- sausage and legislation." We now hear that the 3-page "bailout" bill has grown to a 450-page "package". Stuff happens from ingestion to egestion.

Shameless

Wilshire was once Los Angeles' main boulevard. Driving over its decrepit pavement these days is pure Third World. Try anything east of Beverly Hills, including its storied Miracle Mile. Deferred maintenance is the rule and it has long been policy to divert auto user fees to public transit.

Not content with the waste and the damage done, there will now be a vote in California to invest billions on high-speed rail. The Baptists and bootleggers (see Bruce Yandle) for this one are greens and politicians. Demographia.com elaborates the gory details.

Wall Street physics

Joseph Stiglitz contributed the "Information" entry to The Concise Encyclopedia of Economics. He wrote, "Since about 1970, an important strand of economic research, sometimes referred to as information economics, has explored the extent to which markets and other institutions process and convey information. Many of the problems of markets and other institutions result from costly information and many of their features are responses to costly information."

Later in the essay, he notes that "The standard theorems that underlie the presumption that markets are efficient are no longer valid once we take into account that information is costly and imperfect. To some, this has suggested a switch to the Austrian approach, most forcefully developed during the 1940s and later by Friedrich Hayek and his followers. They have not attempted to 'defend' the market by the use of theorems. Instead, they see markets as institutions that have evolved to solve information problems."

And (disagreeing with Hayek) "The fact that markets with imperfect information do not work perfectly provides a rationale for government actions."

Some of us would add that government actions are also imperfect. Many years ago, Harold Demsetz warned about "nirvana economics."

Last night, on 60 Minutes coverage of the bailout, former Treasury official Roger Altman mentioned AAA ratings given to novel credit instruments that no one really understood. The market vetting institutions had fallen behind the innovations.

At econtalk.org, Pete Beottke talks about the economics of disasters. He mentions that mainstream economics in the 20th century went the way of physics (theorems) when it should have gone the way of biology (evolution).

Now we hear that the credit instruments that no one adequately understood were designed by physicists that the investment banks had hired.

Wait till next time

Warren Buffett talks about how Fannie/Freddie were regulated and cannot decide whether to laugh or cry.

QUICK: If you imagine where things will go with Fannie and Freddie, and you
think about the regulators, where were the regulators for what was happening,
and can something like this be prevented from happening again?

Mr. BUFFETT: Well, it's really an incredible case study in regulation
because something called OFHEO was set up in 1992 by Congress, and the sole
job of OFHEO was to watch over Fannie and Freddie, someone to watch over them.
And they were there to evaluate the soundness and the accounting and all of
that. Two companies were all they had to regulate. OFHEO has over 200
employees now. They have a budget now that's $65 million a year, and all they
have to do is look at two companies. I mean, you know, I look at more than
two companies.

But read the whole interview because the popular wisdom these days is that we are paying the price for the orgy of deregulation that we have recently been through.

How and why will regulation be better the next time?

Peggy Noonan and Dan Klein reflect

This morning's WSJ includes an excerpt from Peggy Noonan's Patriotic Grace: What It Is and Why We Need It Now (which I have not yet read). In the excerpt she writes about the collection of people milling and waiting at "Gate 14" (at any major U.S. airport), going through the "costly and embarrassing kabuki" of getting through TSA security. She notes that "Gate 14 doesn't think any of the candidates is going to make their lives better. But Gate 14 will vote anyway, because they know they are the grown-ups of America and must play the role and do the job."

This reminded me of Dan Klein's "Resorting to Statism to Find Meaning: Conservatism and Leftism" Dan begins this way: "Man is a meaning seeking animal. Meaning is developed and sustained in beliefs, communities, customs, and institutions. It is represented by symbols and identifiers. These components work together as a subculture." In the paper, he thoughtfully explores differences and definitions. How do people find meaning in conservatism and leftism as we know it? Dan also explains why liberalism [traditional definition] appeals to him.

It is a bit simpler for me. Statism carried to the extreme, where it becomes a religion (Hitler, Stalin, Peron, Castro, Milosevic, Kim Jong-Il, etc., etc., etc.) is vicious and evil. There are no worse forms of social organization. But democracy as we know it leaves room for populism which on these shores has not quite stooped to the lows we have seen abroad. But it's practitioners sometimes look in that direction.

Unlike Noonan's Gate 14 people, many of us sniff around every four years to see if we can find any redeeming qualities among the candidates presented to us. I'll have to read Noonan's book to see what is expected of grown-ups in these circumstances.

Your tax dollars at work

Wendell Cox has published his tabulations of 2007 mode choice commuting data from the Census Bureau's American Community Survey data. The data are for the nation and the metropolitan areas. Subtract data for the outlier New York metro area from the U.S. data, and note that percent working at home exceeds percent using public transit, 4.1% vs. 3.2%. This includes the many transit "successes" that we read about as gas prices began their ascent in 2007.

Today's LA Times reports "Sales tax measure to go on ballot" which refers to a sales tax increase to pay for an addtional $40 billion of public transit for California.

Throwing money at public transit (since about the mid-1960s) "to get people out of their cars" and onto transit has not done the trick, but that is irrelevant to politicians and greens of all stripes and parties.

Wendell's 2000-2007 comparisons also show a decline in carpooling. This is, of course, why we should build still more HOV lanes.

Brand new chestnut

Two headlines from my morning reading belong together. From the WSJ: "Crisis Stirs Critics of Free Markets ... Around the World, Calls to Reconsider U.S.-Style Policies." And from the LA Times: "California Elections ... Prop. 10 would benefit key backer ... Billionaire T. Boone Pickens wants California to invest $5 billion to promote a plan with limited consumer benefits."

A favorite cliche among many groups is that U.S. economic problems illustrate unregulated capitalism running amok. That is how many continue to characterize the Great Depression and they now have a brand new chestnut.

The Regulators

Regulation can be an economic burden. The recent study by Rafael La Porta et al. is the latest of many interenational cross-sectional examinations that supports this view. Sam Peltzman is best known for his work on the dark side of regulation. And regulation in the U.S. has been rising during the G. W. Bush years.

In this morning's WSJ, Lanny J. Davis articulates the popular view that we have not had enough regulation. While L. Gordon Crovitz notes that Wall Street firms fell down because "For decades, the large Wall Street brokerages had armies of analysts who, when they did their jobs right, asked the hard questions and issued tough reports that often alerted both company executives and public investors to market moving issues. There are now half as many Wall Street Analyists as in 2000. Former NY Attorney General Eliot Spitzer eviscerated the profession with $1.4 billion in settlements and a new mandate for how the industry would be structured."

To be sure, Spitzer was a "regulator".

Greed indeed

Steve Horwitz points us to Division of Labour for this fine passage:

On greed, let me repeat: If unusually many airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual. And let me add: This isn’t a morality play. What we’re seeing are the consequences of monetary-policy distortions of interest rates and regulatory distortions of incentives, amplified in some degree by private imprudence, not the consequences of blackheartedness.

I have now heard the "greed" explanation too many times for comfort. Adam Smith and many thereafter have had some things to say about self-interest. At what point does this one of the seven deadly sins become toxic? When (as the quote mentions) a number of policies and regulations line up in a very bad formation.

Inept business people deserve bankruptcy. Those engaged in fraud deserve jail time. House of Representatives members who accept large checks from Fannie and Freddie while "supervising" them, at least deserve an end to the right to gerrymandered districts. Senators that accept such funds ought to be shamed into returning them. Lest they be seen as greedy.

Good news

Some environmentalists see markets as a problem, but others have grasped what economists have long been preaching, that markets offer the best hope for preservation.

For those who require convincing, this week's Economist includes "A rising tide ... Scientists find proof that privatising fish stocks can avert a disaster."

Read it and share it.

Help is on the way

It would take an elaborate scorecard to track all the help that is coming my way.

This morning's WSJ includes a fine analysis by Zachary Karabell ("Bad Accounting Rules Helped to Sink AIG"). He notes:

Let's get a few canards out of the way: First, yes, stupidity and cupidity and complacency and hubris are involved, and yes, there is gambling in Casablanca. Second, the idea that there is this thing called "the free market" that governments tame or muck up with regulation is a fiction. Governments create the legal conditions for markets; markets shape what governments can do or are willing to do. Regulation versus free-market is a false dichotomy. Maybe in some theoretical universe, if we could start with a blank slate and construct society anew, it wouldn't be. But we exist in a web of markets and regulations, and the challenge is to respond to problems in such a way so that we decrease the odds of future crises.

And that is where AIG becomes instructive. Even good regulations can't prevent all future crises, especially ones that are the result of new technologies and changes that result from them. The capital flows, derivatives contracts and nearly frictionless interlinking of global markets today are the direct result of the information technologies of the 1990s. The implications weren't known until very recently, so it would have been nearly impossible for regulations to have prevented what is happening. But if good regulation can't prevent crises, bad regulations can cause them.

The current meltdown isn't the result of too much regulation or too little. The root cause is bad regulation.

Call it the revenge of Enron. The collapse of Enron in 2002 triggered a wave of regulations, most notably Sarbanes-Oxley. Less noticed but ultimately more consequential for today were accounting rules that forced financial service companies to change the way they report the value of their assets (or liabilities). Enron valued future contracts in such a way as to vastly inflate its reported profits. In response, accounting standards were shifted by the Financial Accounting Standards Board and validated by the SEC. The new standards force companies to value or "mark" their assets according to a different set of standards and levels.

The rules are complicated and arcane; the result isn't. Beginning last year, financial companies exposed to the mortgage market began to mark down their assets, quickly and steeply. That created a chain reaction, as losses that were reported on balance sheets led to declining stock prices and lower credit ratings, forcing these companies to put aside ever larger reserves (also dictated by banking regulations) to cover those losses.

Meanwhile, many people in Sacramento have been hard at work and this morning's LA Times reports "State warms to green proposal." The story points to a California Air Resources Board plan that would clean the air, grow gross state product, create jobs, etc. The plan includes a variety of measures -- including high-speed rail.

New deal

The impact of the Internet is profound in so many ways, but the effect on politics and elections is still unfolding. What (if anything) will happen to voter turnout -- in terms of how many and who?

In the September 11, 2008 Forbes, Peter Huber writes "Cronkite vs. the Web ... The real genius of the Web is that it lets people disconnect. That's why it has obliterated the old media."

Huber cites the well known remark by LBJ at the time of the Tet Offensive during the Vietnam War: "If I've lost Cronkite, I've lost Middle America." There will never be another Cronkite because the one large communications net is gone and there are now many smaller ones.

Smashing the gatekeepers, as evoked by Apple 1984, is well known, but the new conception of networks and the effect on elections and politics is fascinating to contemplate.

David Remnick writes about Stalin's use of broadcast radio in the USSR days ("Letter from Moscow: Echo in the Dark ... A radio station strives to keep the airwaves free." in this week's New Yorker)and. He notes that when Hitler visited Ukraine during the German occupation, he envied what Stalin had accomplished in radio broadcasting. All (legal) USSR radios were locked to just one station. Guess which one.

Political economy

Arnold Kling described folk Marxism a couple of years ago. Burton Folsom has written about the Myth of the Robber Barons, showing us there is always a horse race between the romantics and those who make it their business to dig deeper. In any case, read both if you have not already done so.

We now have a serious economic situation in the middle of a heated presidential campaign. So both sides in the campaign will sink to populist explanations of (and fixes for) the downturn.

This morning's WSJ includes a very nice op-ed by Jeremy Siegel. He points to regulators that dropped the ball (many still employed) and Wall Street money managers who made bad bets (many now unemployed). He makes no mention of the "Bush tax cuts." Repealing these is probably the main economic plank of the Democrats' platform. And I expect that they will be extraordinarily creative linking these to the credit market problems. But I recall Doris Kearns Goodwin telling the Jim Lehrer News audience that the Great Depression was caused by the "inequities" spawned by the 1920s boom.

If she can do that 70+ years after the event, and get away with it, linking tax cuts to today's credit market woes should be child's play.

Mind sets

The Great Depression prompted a bit of finger-pointing and current events on Wall Street will do the same. Reading the WSJ editorial pages for some years, I got the plot long ago. GSEs are a very bad idea.

But the many friends of Fan and Fred always pointed to early successes in getting more people into their own homes. This included showing the way so that secondary mortgage market securitization could take off -- on Wall Street and around the world.

The WSJ editorialists had been suggesting for some years that, in light of the growth of private secondary market securitization, Fan and Fred could go -- before they ever got "too big to fail".

The Economist's graphic on loan origination shares over the years (above) shows that the growth of private securitization did follow the growth of Fan and Fred securitization.

Policy wonks, however, should get used to the fact that politicized enterprises, no matter how shaky, are never subject to rational retirement.

I would not be surprised if among the many Fan Fred fans, there are those who think that Social Security is not a Ponzi scheme and others who claim that Ponzi schemes are really OK if guaranteed by the U.S. government

Labor market discrimination

Skip Sauer and Russ Roberts discuss moneyball and baseball in this interesting podcast. Becker and Posner discussed competition, discrimination and law in their blog entry of a week ago. Linking the two is interesting. Labor market economics suggests that systematic discrimination against large minority groups can be costly to bigoted employers. Roberts and Sauer mention the fact that in baseball the National League integrated its rosters before the American League -- and beat them in inter-league play for many years until the AL owners threw in the towel. Why did it take them so long? Baseball owners enjoyed some "monopoly" status and the price of racial discrimination was comparatively small.

Financial regulation

There are two views of regulation. One, which I often hear these days, is that the regulators have failed, so let's get new and better regulators. This seems to be one view of OFHEO, the Fannie Freddie regulators. But that runs into the other view, that it's a fool's errand.

Public choice economics contributes to the latter view. In today's NY Times, Tyler Cowen writes "Too Few Regulations? No, Just Ineffective Ones ... the real issue is setting strong regulatory priorities to prevent outright fraud and to encourage market transparency, given that government scrutiny will never be universal or even close to it."

I cannot tell whether this is the proverbial third way. Legislators enact all kinds of things and worry about implementation and enforceability later, if at all. That's the nature of the beast. It is unclear that they'll ever get the regulatory part right. In the Fannie/Freddie case, it had to fail. Effectively regulating a highly politicized agency is not even in the cards.

So we are left with Job #1. Depoliticize these things. The jury is still out on whether after almost 100 years, we finally have a depoliticized Federal Reserve.

Oy vey. Dog bites man

Today's LA Times ran the AP story excerpted below. Washington DC-econ does not get futures markets. But the practitioners of DC-econ stand ready to regulate them.

Study links oil prices to investor speculation
Large investors are cited as a primary reason for volatility.

WASHINGTON — Speculation by large investors -- not supply and demand -- was a primary reason for the surge in oil prices during the first half of the year and for the more recent price declines, an independent study concluded Wednesday.

The report by Masters Capital Management said investors poured $60 billion into oil futures markets during the first five months of the year as oil prices soared from $95 a barrel in January to $145 by July.

Since then, those investors have withdrawn $39 billion from those markets as prices have retreated dramatically, the report said. Oil traded at about $102 a barrel Wednesday on the New York Mercantile Exchange. "We have clear evidence the fund flow pushed prices up and the fund flow pushed prices down," said Michael Masters of Masters Capital Management, calling the amount of money moving into oil futures markets by large institutional investors in the early part of the year "way off the scale."

Masters said its analysis showed that investors "began a massive stampede for the exits" July 15 and that this caused the price decline.

"These large financial players have become the primary source of the dramatic and damaging volatility seen in oil prices," the report concluded.

The report was released Wednesday by House and Senate sponsors of bills to put additional curbs on oil market speculation and comes in advance of a report on speculation that might be released this week by the Commodity Futures Trading Commission, which regulates commodity markets. ...

Upside of trade that even protectionist-leaning pols can get

I have the impression that protectionism has always been a dicey political strategy. Many Americans earn their living working in export industries. Today's WSJ includes some wonderful graphics that show which metro areas are now the "export powerhouses".

The graphics also remind us that not only is all politics local (Tip O'Neill) but much of economics is local too.

We do not want our weather reports in terms of national averages, but that is how we do most of our economics. Perhaps as economic data get better, we will wake up to the problem of spatial aggregation.

Falling in love

In today's LA Times, Diana Wagman writes "Once upon a time in politics ..." She concludes this way.

In 1984, I was a production assistant for a political media consultant. We had many Democratic clients, from a candidate for state Senate to Walter Mondale. We wrote campaign slogans and produced 30-second spots like mini-movies that spun the candidates' narratives precisely. We told their stories honestly, but we made them as dramatic as possible. As Alfred Hitchcock famously said, "What is drama, but life with the dull bits cut out?" It was after my year in politics that I moved to Hollywood. The kind of storytelling that happens here feels more honest.

Some years ago, Dan Klein wrote "The People's Romance: Why People Love Government (As Much as they Do)".

These past two weeks we have seen that some people also love politics and political conventions and candidates. Any kind of love (with the possible exception of the family dog) can be tricky. A follow-up to Klein's story is that falling in love with politicians can be very tricky. There are these clay feet

An old story

Technological change is here to stay and probably accelerating, as we speak. These are truisms. The Economist (Sep. 6, 2008) includes "The road ahead ... The world's carmakers have mapped out their route to a greener future."

Whether it is prompted by prices, regulators or popular sentiment, progess towards lower emissions is a sure bet. This is the reason to part company with the Gore-Kyoto climate change alarmists.

It's an old story, but it bears repeating. I have no idea how strongly Sarah Palin holds creationist ideas. If she does, I fault her for that. Assume that a creationist occupies the Oval Office (perhaps that's already happened). Think about the possible harm. Now think about all the sophisticates on the left who are protectionists and/or modern-day Luddites. They want to run the economy (perhaps into the ground) based on climate change fears that assume today's energy technology will persist into the indefinite future. How harmful is that?

Finally, ignorance of any flavor is unattractive. But the one that postures as elite sophistication is the least attractive.

Update

Re Calvin Beale's work on counties (see below), I see that some bloggers are stuck wondering whether "rural" American Sarah Palin can appeal to "non-rural" America. Beale showed us that those distinctions are relics. David Brooks makes the same point in humorous fashion.

Infrastructure

"Infrastructure" has a benign ring; "mega-projects" sounds a little scary and "pork" is, unfortunately, the four-letter word that is often the most accurate. Bent Flyvbjerg has made this point best in recent years. A very nice update appears in the current Miller-McCune. Hat tip to Barry Klein.

Calvin Beale

Today's NY Times includes an obit for demographer Calvin Beale. Over the years, he and USDA colleagues have mapped and categorized counties in ways that are indispensible these days that the urban-suburban-exurban-rural continuum is not what it used to be. Central city vs. suburbs distinctions are stale -- but still invoked by many who should know better. Beale was among the first to suggest a better way. He proved his point via the hard work that he did and inspired.

Net benefit

Teachers of economics explain consumer sovereignty, but are obliged to also explain the huge advertising industry without succumbing to the left's cliche about sinister consumer manipulation. John Wanamaker famously remarked that half of what he spends on advertising is wasted, but he could never figure out which half. But the promise of modern search and data collection techniques is supposed to make it possible to more accurately target ads. Chris Anderson writes about this.

This morning's WSJ includes "Drug Ads' Impact Questioned ... Targeting Consumers Didn't Lift Sales, According to Study ... Consumer advertising for prescription drugs had a negligible impact on sales products studied by Harvard Medical School researchers -- in a finding that may confound both advertisers and their opponents." The study apparently looked at TV ads, but modern marketing is supposed to be all about the discovery of niche sub-markets.

We can continue to hold to the idea that the web and better than ever data exchange are a net gain for consumer sovereignty.

The audacity of Volt

I blogged about the GM Volt (on Aug 23) after being puzzled by the TV ads shown during the Olympics. I know a bit more now, having listened to an interview with Jonathan Rauch on Econtalk.

The most fascinating part of the story is Rauch's conclusion that the big corporation has forced itself to go to a sort of Schelling self-command game. They set wildly optimistic deadlines to create and master new technology, going unusually public on a very risky fast track, pushing high-concept innovation in real time, in order to force itself not to drop the ball, as it has often done.

The story upends than the stale Nader-inspired Hollywood tale of cynical corporate scheming to stifle new technology. Capitalism is always a source of brisk change. Even Hollywood dullards should be able to grasp that.

Leavening talk with facts

There are competing claims as to whether Mark Twain or Will Rodgers had fun with all the things that many people "know" that are not true. That's life. But in the an internet world, there is hope.

I often try to link to the data that Wendell Cox gathers and posts. His new post is dear to my heart, because I hear all the time about the "fact" that most western Europeans cheerfully use public transit, making them better human beings and also showing that public transit is not 100 years out of date. All those who "know" this to be true might pause to look at these data.

So near yet so near

I am not sure how much NAFTA-bashing occurred in Denver this week. But trade-bashing has been a staple for all the Democrats through the campaign. This morning's LA Times includes "Opening the spigot for liquid natural gas imports ... With the help of Mexico President Felipe Calderon, San Diego-based Sempra Energy on Tuesday inaugurated its $1-billion Energia Costa Azul gas import terminal to serve fast-growing energy demands in the southwestern U.S. and Baja California." Yesterday's LA Times included "It's full speed ahead for Mexican seaport ... Calderon will open bidding for infrastructure deals today. The project may transform [Baja California] village of Punta Colonet. ..."

Politicians on both sides of the border may do some dumb things, but trade opportunities are powerful and, perhaps, strong enough to prevail.

The Times piece is wrong about "may" transform Punta Colonet. And the story includes a large photo of a guitar-strumming San Diego tourist who may lose her perch on a Mexican cliff with an ocean view.

Trade-offs everywhere, Dorothy. But markets do a better job of weighing these than campaigning politicians or newspaper writers.

"Poor Mexico. So far from God, so close to the U.S.," so goes the saying. So close to astonishing economic opportunities and so close to the disastrous U.S. War on Drugs, which may ruin Mexico before the benefits of trade can save it.

Creepy

What can you say about people who get teary-eyed at a political convention? The TV camera people found a few of these at the Democrats' convention and they will probably find some at the Republicans' convention next week.

Hayek had some things to say about dangerous confusions when we mix up the "micro-cosmos" (he referred to families, tribes, extended families, etc.) and the "macro-cosmos" (he referred to wider civilization). The rules and norms that work in one do not work in the other. The market works for us by harnessing and organizing the incentives of very large numbers of strangers. But this is not how allocations within families work. Likewise, it is futile and dangerous to think of the larger society as a family. At worst, we look for (and find) a pater familius. The history of these quests is ugly.

This week's Becker-Posner blog includes speculations on why most of the members of the entertainment industry are on the political left. One of Posner's points is that people with little depth are drawn to extremes and left-extreme views are more palatable than right-extreme views.

Perhaps. But this brings me back to the teary-eyed. It seems that they are confused in ways that Hayek recognized. This is why the political platforms ring with promises to help all of those who are (or feel they are) down and out. Creepy.

Reorganize the Federal Government

Here is the lead story in today's LA Times: "FBI saw threat of loan crisis ... A top official warned of widening mortage fraud in 2004, but the agency focused its resources elsewhere."

I recall that when Leslie Stahl interviewed Alan Greenspan on "60 Minutes", after he left office and was pushing his book, she asked him about the credit crunch and his answer was: "We didn't see it coming."

Many economists and others did write about the "housing bubble", but few if any linked the inevitable decline of housing prices to fallout into the wider credit markets. The WSJ had long been editorializing about Freddie/Fannie problems but most economists (and of course politicians) applauded the agency's efforts to expand howeownership.

Now we find that the FBI, which had hundreds of agents spend who-knows-how-many man-years on the anthrax investigation, only to have to pay millions of dollars in settlement because they had been hounding the wrong guy, and which drove another suspect to suicide (and we still do not know how strong that case is), was the one group that got the housing-credit mess right.

Reshuffle responsibilities? Give the FBI a stronger role in macro-economic analysis? Keep them from focusing too many resources on crime and terrorism? It's a thought.

Aha!

On July 2, the WSJ's Holman W. Jenkins, Jr., wrote "What is GM Thinking?" I have to admit that it took Jenkins' column to get me to see the light. GM's investment in its 2010 Chevy Volt is a political and not a market move.

Now we see that during NBC's Olympics coverage, GM runs a strange ad for its 2010 Chevy Volt. I cannot buy it for a while (and Holman suggests I would not want to anyway), so why are they not using valuable air time to push their 2009 models?

This morning's NY Times includes "Automakers to Seek More Money for Retooling Vehicle Plants". Aha! It's the politics, stupid. With politicians of both parties honing their "investing in energy alternatives" message, the ailing Detroit automakers can smell the pork.

Combine two sentiments du jour ("too big to fail", "end our addiction to oil") and, presto, a new boondoggle. I finally get it.

What could be better?

The Apple 1984 TV commercial is many people's all-time favorite. This week's Forbes includes "DIY Democracy". That's part of it's series on grass-roots innovation. Here is the former.

"The humblest citizen in all the land, when clad in the armor of a righteous cause, is stronger than all the hosts of error."

William Jennings Bryan thundered those words at the 1896 Democratic convention. Wouldn't he be thrilled with the digital revolution? It's snatching power from the establishment and handing it to the little guy.

Citizens with handheld cameras fight police brutality. Bloggers can unhorse a pompous news anchor. In the industrial counterpart to desktop publishing, amateurs are taking on Sony and even NASA.

Someday--maybe--John Q. Public may wrest power away from the political machine in the task of drawing legislative districts. You can see what the insiders come up with when left to their own devices. The public be damned; the objective is to create safe districts that guarantee lifetime jobs to incumbents. Gerrymandering has made congressional elections into a farce in which only one district in seven is competitive. Democracy? A politician from Zimbabwe would be embarrassed to call it that.

Until recently only political parties had the manpower and the tools to redraw boundaries while keeping districts equal in population. Now anybody can play this game, at least as a kibitzer. For as little as $3,500 the geographic analysis firm Caliper Corp. will let you have the software and census data you need to try out novel geometries on a PC screen. Harvard researcher Micah Altman and others have put together a program that draws compact districts. His software is free.

Democratic redistricting could work like this. After a census, a commission in each state entertains proposals from the political parties and any do-gooder group or individual willing to compete. The commission picks the most compact solution, according to some simple criterion. (Say, add up the miles of boundary lines, giving any segments that track municipal borders a 50% discount, and go for the shortest total.) The mathematical challenge might inspire some gifted amateurs to weigh in.

In most states redistricting is now in the hands of state legislators. It's a stretch, but not an absurdity, to think they might be shamed or forced into ceding the power. Iowa has a nonpartisan system to draw districts, and California will get one (albeit only for state legislative districts) if a ballot initiative passes this fall. In nonreferendum states the hacks might be willing to swear off gerrymandering as of a distant future date, like 2030.

Free people create very cool technology. And they use it to challenge an evil system; they unseat the enemies of democracy, aka the hacks and thieves. What could be better?

They're in session!

There are many old jokes about the dangers that lurk when the legislature is in session. This morning's LA Times includes "Legislature takes aim at urban sprawl ... A Senate bill calling for financial incentives to control greenhouse gases would be the first such law in the nation" and "A smart plan for smart growth".

Wendell Cox also blogs about all this.

I have blogged about this stuff often and (but) it won't go away. There are two questions to ask people of the green faith. 1) Can you define "urban sprawl"? 2) Have you seen any credible evidence that spread out development causes long commutes?

This morning's WSJ includes "Going the Distance to 'Save Gas' ... Extreme Runners Commute by Sneaker, Pushed by Pump Prices -- and a Bit of Fanaticism"

The extreme commute stories always make the news, so this qualifies. The accompanying map shows a commute from south San Francisco to a distant job in the Palo Alto area. That's a "reverse" commute for those who are stuck thinking about cities as they were 100 years ago.

Unintended and unplanned consequences

University of Paris Professors Pierre Kopp and Remy Prudhomme made few friends in France when they showed that reallcoating road space from cars to public transit in central Paris did more harm that good. (Ch 13 in this volume but available in French from various sources). Too few Parisians behaved in ways that planners dreamed of and would not switch from autos to buses and trams, even though many more of these were put in service. And we all know what Parisians pay for gasoline.

This morning's WSJ includes "San Francisco Ponders: Could Bike Lanes Cause Pollution?" Well, yes. San Franciscans, like Parisians, do not behave the way planners want them to. Even with new bike lanes, many stick to their cars, but make do with less road space and ebdure slower traffic. So they foul the air all the more.

In Paris as well as San Francisco, central plannning is very hard work, especialy the "green" sort. "Fatal Conceit" or "Law of Unintended Consequences"?

Worse than doom

There are always reasonable people who differ over whether the glass is half-full or half-empty. Yesterday's NY Times Magazine ran a respectful feature on Nouriel Roubini ("Dr. Doom").

Doomsayers are a-dime-a-dozen, but what to do when smart people get into it? The article is slightly more nuanced than its title and the interview may have been even more nuanced. But the ending is odd. Roubini is quoted this way: "Once you run current-account deficits, you depend on the kindness of strangers. This might be the beginning of the end of the American empire."

But these strangers are unlikely to see themselves as charities. And Roubini thinks they are all dummies because they are buying the paper of a fading empire. Dummies on both sides of the deal might augur worse than just plain old doom.

Silly us

Some of us placed an op-ed in yesterday's LA Daily News questioning the wisdom and the merits of raising the sales tax by one-half cent (possibly to be voted on in LA County in November)to pay for new transit and transportation infrastructure, mainly more rail transit. It was the old story, looking at ridership and costs and benefits.

Silly us. That's the exact phrase ("Silly you.") that LA Times columnist Tim Rutten uses in his column of August 13, ("Transit held hostage"). He does not address us (ours ran a couple of days later) directly, but he notes (and worries) that the measure may not reach the ballot because of a dispute between two local county supervisor about whose district would get the most pork.

Of course. These are jobs programs that happen to appeal to "greens" and those who expect everyone else to use transit. Silly us. But for the time being, we'll gladly take the political gridlock.

How crazy is that?

Are they statists because they are pessimists, or are they pessimists because they are statists? Don Boudreaux argues that it is the latter. That's creepy.

But it does resolve a paradox because we are, for the most part, talking about fairly smart and cosmopolitan people -- including people who embrace climate doomsday predictions predicated on hundred-year climate change projections that presume today's energy technology options are the ones that will persist for all those years.

Housing's Holy Grail?

Here is HUD's new version of a housing affordability index. But it's actually a housing+transportation affordability index. Urban economics is all about the trade-offs between rents paid for housing and accessibility savings. The authors note that,

While housing costs are well-understood, transportation costs are often dramatically underestimated or ignored, creating an urban information gap.

To investigate this, KnowledgePlex and the Urban Markets Initiative of the Brookings Institution present an online discussion about a new way to measure true affordability of housing: the Housing and Transportation Affordability Index. Incorporating housing costs with the costs associated with that location, this analytic tool enables developers, transportation planners, and individuals to uncover the hidden price of transportation that dramatically shapes household budgets.

Last Friday, the NY Times cited models of home prices that assess over- or under-valuation of homes for major metro areas. Can the HUD-Brookings index be used to do same at a more local level? The safe answer is: probably not. It goes back to the idea that forecasting is tough and we are still looking for economics-based forecasting that helps.

Good forecasting of actual home values is the Holy Grail for many Americans. Perhaps the HUD-Brookings approach is a place to start.

No reports of widespread fainting spells

The legislative and policy-making process has been likened to a sausage factory, so no one knows how this will come out. But in light of the discussion of applying economic principles to public policy problems (exotic and even sinister for some, but not for others), here is today's WSJ editorializing on peak-load pricing at airports. No reports of widespread fainting spells yet.

Fixing the Unfriendly Skies

Here's your political puzzle for the day: Whose side would you be on in a tussle that features the Federal Aviation Administration and New York City Mayor Mike Bloomberg squaring off against Texas GOP Senator Kay Bailey Hutchison, Democratic Senator Chuck Schumer and the Port Authority of New York and New Jersey?

That's a tough one for people who like to think the mere presence of one of these players means little good could happen. Hint: What's on the table is a proposal to auction takeoff and landing slots at the nation's most congested airports.

This is a good idea, and we have to admit the real ringer in that lineup is the FAA, not normally associated with anything rational. In fact, the FAA is suggesting that market forces be allowed to untangle the ungodly mess of "traveling" through LaGuardia, JFK or Newark airports. Alleviating this nightmare with the FAA's proposal "seems to me to make a lot of sense," Mayor Bloomberg remarked. "You encourage big planes that carry more people." But from the Port Authority and Senators Schumer and Hutchison has come a simple response: Never!

Yesterday, the Air Transport Association -- the airline lobby -- challenged the auction in court, calling the government "intellectually dishonest." The Port Authority has promised to ban any airliner that uses an auctioned slot. Senator Schumer says the DOT is "hell-bent on jamming" the plan down New Yorkers' throats. Senator Hutchison is the top Republican on the Commerce Committee, and bonus points to readers who've already figured out a Texan's interest in faraway New York City.

Many airlines have admirably invested in airport infrastructure. Theoretically deregulated, the industry still has had the federal government allocating slots. Since 1969 when the High Density Rule put a limit on LaGuardia's flights, all three airports have been subject to limited operations each hour, causing constant delays.

Now comes the FAA with a strategy to, of all things, get the government out of the business of determining supply. Opening a market system where airlines would be free to bid on the slots they value most would increase capacity and lower ticket prices. Today some slots are consistently overbooked, with others left nearly empty. Even if a slot is underperforming, the airlines hold onto it. Why sell when there is no market? The entry barriers to entrepreneurs remain formidable.

The FAA has a fair proposal on the table. The auctions would occur over five year periods and enable carriers to lease their slots to other carriers, giving them the opportunity to buy back into the market.

The Port Authority replies the FAA has no right to "confiscate" the slots, which they claim as their own. But this property is derived from the FAA. The Port Authority also says auctions might raise marginal costs. But when new entrants join the market, fares likely will drop. Southwest Airlines expanded into Philadelphia International Airport in 2004 and fares dropped considerably.

There's no doubt the fuel-price spike has made life uncomfortable for the likes of American Airlines and Continental Airlines, both based, by the way, in faraway Texas. We suspect that most regular travelers have opinions of their own about the comfort level at these three chronically delayed airports. The FAA's auction idea deserves a chance to untangle one of travel's worst problems.

Ideology and economics

The Economist of August 9 cites the petition by 100 or so U. of Chicago faculty opposing the the naming of a campus instititute after Milton Friedman ("One great brain v. many small ones ... The trouble with Friedman").

The signers were concerned over the "ideological and disciplinary preference" that the naming carried with it. One's opponents are always the ones weighed with the ideological baggage. But what I find much more interesting goes to Friedman's remark in the old Newsweek jousts between Paul Samuelson and Friedman. In an interview, Friedman mentioned that they all practice the same economics, but what separated them was that only one of them thought to apply it to public policy (or something like that; I cannot find the actual reference).

Both men wrote about public policy on a regular basis, but Friedman's apparent innovation was to suggest that considerations of incentives, marginal analysis, property rights, etc. bear profoundly on policy discussions.

I still think that he was on to something. One can be labeled an "ideologue" by one's opponents if one seriously suggests that price controls, legalized barriers to commerce, industrial policy-type programs, etc. have a serious downside -- because that is where economic theory points us.

This also explains why Paul Krugman's columns in the NY Times are not "ideological."

Inexplicable

Much has been said and written on the passing of Alexander Solzhenitsyn.

Today's WSJ reprints his speech at Harvard in 1978:

Very well-known representatives of your society, such as
George Kennan, say: We cannot apply moral criteria to politics. Thus we mix good
and evil, right and wrong and make space for the absolute triumph of absolute
Evil in the world. On the contrary, only moral criteria can help the West
against communism's well-planned world strategy. There are no other criteria. .
. .

In spite of the abundance of information, or maybe because of
it, the West has difficulties in understanding reality such as it is. There have
been naive predictions by some American experts who believed that Angola would
become the Soviet Union's Vietnam or that Cuban expeditions in Africa would best
be stopped by special U.S. courtesy to Cuba. Kennan's advice to his own country
-- to begin unilateral disarmament -- belongs to the same category. If you only
knew how the youngest of the Moscow Old Square officials laugh at your political
wizards! As to Fidel Castro, he frankly scorns the United States, sending his
troops to distant adventures from his country right next to
yours.

However, the most cruel mistake occurred with the failure to
understand the Vietnam war. Some people sincerely wanted all wars to stop just
as soon as possible; others believed that there should be room for national, or
communist, self-determination in Vietnam, or in Cambodia, as we see today with
particular clarity. But members of the U.S. antiwar movement wound up being
involved in the betrayal of Far Eastern nations, in a genocide and in the
suffering today imposed on 30 million people there. Do those convinced pacifists
hear the moans coming from there? Do they understand their responsibility today?
Or do they prefer not to hear? The American Intelligentsia lost its [nerve] and
as a consequence thereof danger has come much closer to the United States. But
there is no awareness of this. Your shortsighted politicians who signed the
hasty Vietnam capitulation seemingly gave America a carefree breathing pause;
however, a hundredfold Vietnam now looms over you. That small Vietnam had been a
warning and an occasion to mobilize the nation's courage. But if a full-fledged
America suffered a real defeat from a small communist half-country, how can the
West hope to stand firm in the future?

I am reading Tony Judt's wonderful Reappraisals: Reflections on the Forgotten Twentieth Century. It's all quite stunning, especially the author's recollections of the century's intellectual giants who could not and would not face up to Communism's horrors. Even after they had all become common knowledge.

Here is Judt's final judgment on one of many of the greats that he covers.

"Eric Hobsbawn is the most naturally gifted historian of our time; but rested and untroubled, he has somehow slept through the terror and shame of the age."

That's why they call them cliches

Jobs-housing "balance" is often invoked by urban planners and others as if it had meaning. It is presumed that commuting can be minimized if the balance is somehow achieved. But the idea has problems. First, at what geographic scale? Second, there is more to life that commuting, which is traded off against many other priorities. Third, a certain amount of balancing will occur naturally because employees and employers tend to srike balances (better use of the term) that work for them. So JHB is another one of those top-down fools' errands.

Wendell Cox manages to get to the data before some of us slow pokes and he manages to present and share them in very useful ways. Here is his latest on commuting in the New York area. Again, most of the cliches about New York and commuting in New York are shown to be wrong.

New York

I have several times cited to Bumsoo Lee's findings re employment in U.S. metros. In 2000, the New York metro area included about 9.42 million jobs and about 10 percent were located in the two CBDs of Manhattan. Thanks, to Martin Kaplinsky, I just came across a gem of a report (not online) titled Residence and Employment in the New York Metropolitan Area, 1950 (State of New York, Department of Labor, Division of Employment, Bureau of Research and Statistics). It shows 3.6 million jobs in (what was then) the NY metro area with 50 percent in the two Manhattan CBDs.

Good to know

Commons problems are everywhere, often right before our noses. This week's Economist includes "Commons Sense ... Why it still pays to study medieval English landholding and Sahelian nomadism". The piece cites Elinor Ostrom's work and the many examples of spontaneous cooperation to resolve commons abuse. (My own favorite is Robert Ellickson's Order without Law: How Neighbors Settle Disputes.)

And who knew that "[b]efore he died, Hardin admitted that he should have called his article 'The Tragedy of Unmanaged Commons'"?

Elite futures

Candidate Barak Obama is the one with the fancy resume and the devotion of "elites" here and abroad.

He now states that the effects of any new drilling for oil will not be felt for about 20 years. But just a couple of weeks ago, he and many other elites were all over "the speculators" for pushing up prices at the pump via their nefarious actions on oil futures markets.

Elites ought to be held to a higher standard.

But can they fix potholes?

Becker-Posner do their usually thorough job discussing the arguments for and against government involvement in fast food choices. They include discussions of possible external costs.

But, thorough as they are, their discussion does not quite touch the logic of the LA City Council. This morning's LA Times includes "Council bans new fast-food outlets ... Officials want to bring eateries with healthier fare to South L.A. ... Councilwoamn Jan Perry, who as pushed for a moratorium for six years, said the initiative would give the city time to craft measures to lure sit-down restaurants serving healthier food to a part of the city that desparately wants more of them."

No externalities here. When and where people "desparately want more" of something (and less of something else), that's a job for local government.

Dueling forecasts

Here is a climate change report from a respected source: "A 50% rise in global greenhouse gas emissions by 2050, higher temperatures, with more droughts and storms harming people, crops and buildings, more animal and plant species becoming extinct under expanding farmland and urban sprawl, dwindling natural resources; a billion more people living in water stressed areas by 2030, with more pollution, disease and premature deaths ahead. This 'worst-case' scenario set out by he OECD Environmental Outlook, should be enough to grab everyone's attention." How could it not?

The current Forbes includes "Sun Worshippers" and includes industry forecasts of total solar power costs per watt for 2015, suggesting that it will be drop by more than 50%.

Most of us are not in the forecasting business, but we still have to decide which of the two 50% scenarios to bet on. The latter is probably the safer bet. The joker, of course, is the prospect of ever more energy policy and the like.

You too can live like Al Gore

Google "democratization of luxury" and you get 4330 hits. This morning's LA Times mentions a new private aircraft that will sell for $139,000 ("Built for just plane fun ... Icon's A5 is meant to be flown more places by more people").

Today's WSJ has a section on cities, including an interview with Ed Glaeser. Responding to a question on higher gasoline prices, he says, "I would be very surprised to see a wholesale change in the nature of American urban development."

Heard this song before

Last Thursday, the LA Times ran an op-ed by LA Mayor Antonio Villaraigosa, "Why you want this tax hike" (italics in original) to pay for transportation projects, mostly transit, specifically mostly rail transit.

It's an old story, "it would pump $32.1 billion in construction funding alone into our economy and create more than 210,000 jobs." But we have heard this song before and what is left unsaid is the awful performance that similar measures have resulted in. Similar half-penny sales taxes were passed by LA county voters in 1980 and 1990.

Transit in LA hit a high-water mark in 1985 because the 1980 half-penny sales tax hike was used to drop bus fares and transit ridership in the county shot up, to 497-million annual boardings, from a low of 354-million in 1982. But bus fares were raised in 1985 to bank money for rail. Since then, we have kicked more people off the buses than new rail has served. In fact, transit use declined steadily, to 364-million annual boardings in 1996, climbing back since then to reach near-1985 levels (496-million boardings) in2007. When 2008 is over, we will have surpassed 1985.

But in 22 years, the county's population grew by 21 percent, mostly at the low-income immigrant end, transit's natural audience. Had we just stayed at 1985 transit use levels, we would have served 1.6 billion more transit users over the 26-year period. Had we been fortunate enough to have transit use grow at the same rate that the county's population, we would have served 3.3 billion more transit riders.

And had official ridership promises been realized ... had pigs ever mastered flying ...

Predictable failure

Socialism had a hold on the imagination of perhaps most thinking people a hundred years ago. Those days are gone and markets are now taken seriously -- even though as many as 100 U. of Chicago faculty think of Milton Friedman as just an ideologue.

Interestingly, cities are still the exception where faith in central planning/industrial policy is as strong as ever. This cannot work. Carl Close shows as much in his examination of San Francisco's Fillmore District.

Ready for prime time?

Interesting debate between the candidates' economists.

Semi-legalization in California

While much has been written about the drug culture, the gray area created by California's pot legalization has (to my knowledge) received little attention in the popular press. This week's New Yorker includes the excellent "Dr. Kush: How medical marijuana is transforming the pot industry."

Legalization is an appealing idea and when opponents dissatisfied with the "theory" ask for examples, there are few available. The Dr. Kush story is helpful. Some readers may not find the (depicted) characters that populate the transformed pot industry appealing, but that's not relevant. There are many subcultures that we may or may not have a passing acquaintance with, but we can seemingly all get along if and when there is decriminalization.

Besides the people described in the story are more sympathetic than the ones we see when we tune in Cops.

Who knew?

Sunday's LA Times includes "Uncle Sam's speciality loan program worth a look". The piece mentions that "Two little-known federal lending programs may hold the answer for cash-strapped home buyers. For financing which you don't have to put up cash of your own, even for closing costs, consider the U.S. Department of Agriculuture's Rural Development Program. Or if you're buying a fixer upper, the Federal Housing Administration has a loan form you. ... And don't let the term 'rural' fool you."

Many small cities with populations 10,000-25,000 are in metro areas and qualify. The piece points readers to this site to test their eligibility.

Fannie and Freddie may live or die. But there will always be ways for politicians to spread the moral hazard. And when chickens come home to roost, they will connect all the wrong dots and blame everyone but themselves.

Ratchet in California

Twenty years ago, Robert Higgs spelled out a government size-and-scope ratchet effect.

Today's LA Times and WSJ include discussions (here and here) of the latest realizations of the effect in California government. Both pieces are worth looking at. Markets may be positive sum, but policial economy is not. And when the chickens do come home to roost, new programs are proposed to solve old program-created problems.

Imagine

When Greg Mankiw, rather than John Lennon does it ("What if the Candidates Pandered to Economists?", in today's NY Times), he mentions these: support free trade, oppose farm subsidies, leave oil companies and speculators alone, tax the use of energy, raise the retirement age, invite more skilled immigrants, legalize drug policy, raise funds for economic research. Mankiw imagines that these are the ones that economists agree on.

But I can also imagine that most economists agree on the merits of openness and competition. Government monopolies should not be the rule or the law. Government provision, for example in education, communications, space exploration, mail delivery, infrastructure, (and many others) should never preempt private provision. Rather, it should compete with private options. If government can do it better, that can be discovered in the marketplace.

Ideas matter

In terms of stimulating ideas per page, few papers that I know come close to "The Economic Consequences of Legal Origins" by Rafael La Porta, Florencio Lopez-de-Salines and Andrei Schleifer, in the June, 2008, Journal of Economic Literature.

As the title suggests, legal origins matter a lot. Common law traditions beat civil law traditions when it comes to explaining institutions that beget prosperity. Teasing a result of such profundity from a complex historical record is a real achievement. What Hayek wrote about in 1960 (and Smith in 1776) can now be tested and corroborated with modern data and methods.

Economics and history enrich each other. And the the law-and-economics approach along with new data run through modern statistical rules of evidence make a compelling story.

More dense than smart

More on my June 18th blog. The Census Bureau's Demographic Trends in the 20th Century (page 33, Figure 1-15) shows that the share of Americans living in the suburbs grew in every decade. Central cities' share was 31.4% in 1970, 30% in 1980, 31.3% in 1990 and 30.3% in 2000. Over these years, the central cities were expanding by annexing and the census bureau was steadily enlarging the set of places called "central cities". One cannot look at this trend and spot the gas price hikes of the late 1970s and early 1980s (see page 374 of Blackman and Baumol in Henderson, 2008).

But as in the morning's WSJ ("With Gas Over $4, Cities Explore Whether It's Smart to Be Dense"), there is always a chorus predicting that this time people will move back to the central cities.

Public intellectual

Robert Reich is a public intellectual, interviewed in today's NY Times by Deborah Solomon. Among his responses is this: "... public transit has been the poor child of infrastructure spending in America."

This is beyond silly and easy to check. The quickest check is at Demographia, where Reich and others can find that in 2006 road and highway subsidies per passenger mile were $0.010 while transit subsidies per passenger-mile were $0.686. These are averages. At the margin, we build rail transit that gets much bigger subsidies.

Outsized and ineffectual transit subsidies have been in effect for over 40 years. Most politicians and reporters don't care and neither do many public intellectuals.

American red meats on the 4th

Not only is red wine consumption healthy, but it should be taken with red meat to mitigate some of meat's toxic effects. This from The Economist (July 5) "Of sommeliers and stomachs ... Red wine exercises benefits before it enters the bloodstream."



What little red meat I cosnsume these days is bison meat. It's as easy to get online as the beef.

Brad Hill points me to PERC research on bison ranching ("Bisonomics"). It seems that Ted Turner does it better than the native Americans ever did. European settlers replaced the bison herds that had long been roaming North America with cattle. In hindsight, that may have not been necessary. It seems that we have finally learned bison ranching. And bison steak is less toxic than the steaks and hamburgers we had grown up with.

And which red wines go best with bison burgers? Not surprisingly, Malbecs and a few others do very well.

Lucky or good?

I like to define wisdom as the acceptance of coincidence. We are disposed to make snap judgements rather than to follow the statistical rules of evidence. We have a problem with randomness in that it is not in our second nature. Indeed, Nassim Nicholas Taleb has written Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (which I blogged about some months back).

Going over much the same ground is Leonard Mlodinow in The Drunkard's Walk: How Randomness Rules Our Lives. I liked the latter much better. Towards the end, the author writes that nothing beats being lucky and good. Even better:

I wrote this book in the belief that we can reorganize
our thinking in the face of uncertainty. We can improve our skill at
decision making and tame some of the biases that lead us to make poor
judgments and poor choices. We can seek to understand people's
qualities or the qualities of a situation quite apart from the results they
attain, and we can learn to judge decisions by the spectrum of potential
outcomes they might have produced rather than by the particular result that actually occurred.