National land use planning

I am at the American Dream Coalition conference in Seattle. Many interesting papers, among them Ron Utt's "President Obama's New Plan to Decide Where Americans Live and How They Travel." Utt sees an end to recent administrations' "benign neglect" of local land use questions. In the name of carbon footprints, Utt reports, the new administration has created a partnership between the U.S. Departments of Transportation and Housing and Urban Development. Involving these in a new national land use planning effort would be unprecedented.

There are several problems. Any evidence that higher density transit-oriented living is "energy efficient" is very shaky. And most Americans do not want to live that lifestyle. But growth controls and stunningly expensive rail transit (including high-speed rail for California; the rest of the U.S. may get medium-speed rail) have an irresistable appeal to the green left.

Re benign neglect, Richard Epstein writes that the courts have allowed eminent domain abuse by, local governments with respect to land use issues.

Is there a pattern here?

What would they do all day?

Poor President Obama. He proudly announces that a part of the "stimulus" came in under budget and he is quickly reprimanded by Paul Krugman. Under-budget is a bad thing when Keynesian stimulus is the plan.

And all of this is unfolding as large numbers of dummies are holding tax ("tea parties") protest rallies. (I have not yet found a Keynes for Dummies guide in print.)

Today's WSJ, includes this by Tom Herman:

Nearly 40 years ago, as a recent college graduate, I made a painful discovery: I couldn't figure out how to do my own federal income-tax return.

That was embarrassing, and it made me wonder what other Americans do. So I wrote my first major tax story: I asked five different tax-preparation services in the Atlanta area to prepare returns for a family of four with fairly typical finances. The results: At one extreme, a tax expert said the family was entitled to a federal income-tax refund of $652.04. But another said the family owed $141 -- a difference of $793.04.

That experience made me feel somewhat less dumb, but the article didn't have much impact: Since then, our tax system has evolved from a mess to a nightmare. The pace of change has accelerated in recent decades as lawmakers increasingly have tried to use tax laws to reward or punish conduct. The number of pages in the CCH Standard Federal Tax Reporter, which records tax law, regulations and related material, has soared to 70,320 from 26,300 in 1984.

More than 60% of all individual returns are signed by professional preparers, up from 46% in the mid-1980s. Joel Slemrod, an economics professor at the University of Michigan, estimates that the time and money individuals spend on tax compliance now comes to about $90 billion a year.

Tax simplification has not yet arrived. It may never happen. It is as arcane as why getting projects completed under budget is a bad thing. Besides, if the tax code were to be kept simple and transparent, what would politicians do all day?

Don't know much about history

I have never taught macro-economics, but I can dream. I would start with MV=PY. One can spend the rest of the semester discussing all of its implications. Which M do we use? Can we measure it? What is V all about? But, most of all, the expression evokes an ideal world in which wealth and credit are determined concurrently. And then we can discuss the many cases where this does not occur. And before you know it, it's the credit-induced downturn we are now in.

According to a piece in today's NY Times by Eric Zencey ("Mr. Soddy's Ecological Economy"), a chemist named Frederick Soddy had once figured this all out. I had never heard about Soddy or this work (and Mr. Zencey does not mention MV=PY or Irving Fisher, but he does allude to Georgescu-Roegen's work), but it appears that Soddy and Fisher were contemporaries. The plot thickens.

Zencey's discussion of Soddy would be another way to introduce the problems of the macro-economy. One can never learn enough history -- or chemistry, it seems.

"Job Sprawl"

Some readers may have noticed that I have repeatedly visited these themes: (1) cities always have and always will decentralize; (2) doing something about it is neither desirable nor feasible; and (3) the whole discussion requires analysis at levels of spatial detail for which we do not have a lot of data.

In this light, have a look at Brookings' recent "Job Sprawl Revisited: The Changing Geography of Metropolitan Employment" This link links to the PDF for the full study. (HT to Ken Orski). The work updates earlier work by Glaeser, Kahn and Chu which pioneered the use of zip code data on job location. Even zip codes can be too large to capture what is going on, but let's not quibble.

The new study reports (gasp!) lots of "job sprawl" in America. Years of industrial policy ("smart growth") have only had measurable impacts on the cost side -- witness the effects on reduced housing affordability.

But what is odd about the report is that the author seems not to like her findings. Before the findings are introduced, the author does the obligatory tour of all of the (alleged) problems that "job sprawl" brings. Skip that and go straight to the findings.

European outcomes vs European policies

A touching (or creepy) faith in the power and efficacy top-down regulation is now in vogue. Wendell Cox just posted this summary of urban settlement trends in some of the major European cities. This is not the way it was supposed to turn out. Commanding the tides is hard work and so is ignoring people's preferences.

So the worst of both worlds is that the rosy dreams of the regulators are never realized, but the costs that they impose are borne nevertheless.

Perspective

Some people are in love with love and some are in love with revolution. The incoherent G-20 protestors (I saw some carrying a banner with "ABOLISH MONEY") may want to channel 1905 in St. Petersburg, 1965 in Selma or 1968 in Prague, but they do provide contrasts with the G-20 leaders. They want the western European heads of state to implement more economic regulation. The western Eurpoean heads, in turn, are badgering Barack Obama to become more of a regulator. But the U.S. President is trying to regulate as fast as he can.

For some perspective, the WSJ's Simon Nixon reports:

Anticapitalist protesters gathering in London for two days of demonstrations are missing the point. If there is one myth the credit crunch has surely exploded, it is that the financial system is a free market. The world is in a mess because the financial system wasn't capitalist enough.

True, there were some terrible regulatory failures, and politicians lacked the stomach to stop excess as bubbles formed. But successive bailouts over many years also distorted the banking system to the point where real price signals were swamped. Nothing in the current global recovery proposals suggests this lesson has been learned.

In a capitalist system, prices are set in the free market and providers of capital bear responsibility for their losses. Neither of these characteristics hold true of the banking system. The price of credit, the basic commodity of the financial system, was distorted first by implicit government guarantees to depositors and other providers of capital, and second by the tendency of governments to cut interest rates at the first sign of financial trouble.

Financial theory says the cost of capital to an enterprise should rise in line with risk. But banks during the boom were able to leverage themselves more than 50 times yet see their cost of funding fall.

That is hardly the sign of a well-functioning free market. Those who provided funding to banks correctly gambled that governments would ride to their rescue. Since the crisis began, implicit guarantees have become explicit and thresholds have been raised. The U.K. is even proposing to raise depositor protection in certain circumstances to £500,000 ($717,360), further undermining the principle of personal responsibility.

This government protection effectively extends to wholesale funding, too. With a few exceptions, including Lehman Brothers, bondholders have been spared losses as a result of bank failures.

Indeed, it has been axiomatic of the policy-maker response that bondholders should be kept whole to avoid the threat that the banking system would seize up completely or that the insurance industry, with large bond portfolios, would become the next domino to fall. Most Western bank bonds are now issued with an explicit government guarantee. The result is a distorted global financial system in which the true cost of capital is obscured.

In a fully capitalist system, there would be no guarantees. The market would ensure banks didn't become too big or too leveraged.

At least the current crisis is sure to lead to higher common-equity buffers for all. But since removing the guarantees and breaking up the banks is outside the realm of political reality, an alternative solution is to charge banks explicitly and upfront for all guarantees. The charges would rise in line with leverage. That at least would raise the cost of funding, helping to generate a price signal to the market.
Instead, global governments are taking the opposite tack. Unable to remove the guarantees and unwilling to properly charge for them because the banks remain too weak, they will try to limit the risks through more intrusive regulation.

The results, if that goes too far, should be clear enough: lower bank profits, less capital generated, less credit created, lower economic growth and more bureaucratic control over the banks and the wider economy.

The protesters should be careful what they wish for.

Dueling volumes

The March 2009 Journal of Economic Literature, includes Andrei Shleifer's review essay "The Age of Milton Friedman". Here is the abstract. Shleifer reviews two books that compare world economic performance from 1980 to 2005. One is an anthology edited by Leszak Balcerowicz and Stanley Fischer (Living Standards and the Wealth of Nations: Successes and Failures in Real Convergence) and the other is by Joseph Stiglitz and his co-authors (Stability with Growth: Macroeconomic, Liberalization, and Development).

These are dueling volumes and I have not yet read either one, but the title of the essay does reveal where Shleifer comes out. No suspense, but his analysis is worth reading.

Nostalgianomics

I am a great fan of Brink Lindsey's work (I had previously blogged on his recent book, which is discussed in a new podcast), but I had not seen his essay, Nostalgianomics.

Lindsey has, in my view, a much better understanding of recent economic and cultural history than those he takes on (Paul Krugman and soul mates). Nostalgia is a human weakness, but the 1950s? Think Joe McCarthy. Think polio. Think Jim Crow. For starters.

Depicting changing inequality by comparing distribution snapshots is disingenuous. But would those in the lowest decile today prefer to be in the lowest decile of 50-60years ago? Never mind. Listen to or read Lindsey.

Visions

In today's NY Times, Nicolai Ourousoff writes "Reinventing America's Cities: the Time is Now". One can only say: Baptists and bootleggers, anyone? With so much stimulus money around, visionaries feel inspired. God help us.

Writing about Los Angeles, Ourousoff notes:

Wilshire Boulevard is another favorite cause for the architects and city planners of Los Angeles. In the early 1990s Frank Gehry and I took a drive down the city’s once-great commercial spine, which stretches 16 miles from downtown Los Angeles to Santa Monica.

Mr. Gehry guided me through the range of communities that the boulevard intersects, from the Latino neighborhoods near MacArthur Park to Koreatown to the many cultural institutions that include the Wiltern Theater, the Los Angeles County Museum of Art and the Hammer Museum. The philanthropist Eli Broad is currently planning yet another museum at the corner of Wilshire and Santa Monica Boulevards in Beverly Hills.

Mr. Gehry suggested that by concentrating more public transportation and cultural institutions along this thoroughfare, Los Angeles might finally find its center, both geographically and socially.

He is not alone in this fantasy. Los Angeles has the most talented cluster of architects practicing anywhere in the United States, and at one point or another most of them have invested significant brain power in figuring out how to remake Wilshire Boulevard. Michael Maltzan has looked at how new public school construction could be connected to the public transportation network along Wilshire, a plan that not only would be cost effective but also could begin healing some of the city’s deep class divisions.

There was an ideal moment, about a decade ago, when this vision might have taken hold; the county’s Metropolitan Transit Authority was just then in the midst of constructing a federally financed multibillion-dollar metro system, including a line that would have run the length of Wilshire Boulevard. The Los Angeles Unified School District was building scores of new schools. And the city’s rapid growth had led to a boom in new development.

Work on the metro ground to a halt several years ago after costs spiraled out of control, and when it was discovered that the district’s flagship school had been built on a toxic waste site, the agency quickly scaled back its goals.

Now a new mayor, Antonio Villaraigosa, is trying to revive the idea of expanding the metro. Without an overhaul of the city’s transportation network it is only a matter of time before the city breaks down, a victim of pollution and overcongestion. A citywide plan that anchored Los Angeles along two major axes — the green river and the asphalt boulevard — could save it from becoming a third world city.

Our problem is not too little funding for transit, but too much (see my blog of two weeks ago). And architects' and urban designers' fretting about where Los Angeles' real "center" can or should be is positively weird. The area has many "centers" that were not put in place by any committee of wise men and women. There is no such thing as a vision or a science that can make such choices. But those architects who decide to think outside the box (in this case, beyond designing a building) have the mistaken idea that they can design whole cities. Politicians with a spending agenda can see these guys coming from a mile away.

Voting with feet

Yesterday's WSJ included A Radical Takes the Stand, about the pathetic Ward Churchill. Much more pathetic is the fact that people like this have standing (and tenure) in otherwise respectable universities.

This week's Economist includes a graphic that summarizes where the world's asylum seekers want to go. The U.S. is tops, followed by Canada, France, Italy, Britain, Sweden, Germany, etc. Poland and the Czech Republic are on the list, having graduated from places that people want to leave to places that people want to enter.

Comparing countries and cultures is difficult but we keep trying, with GDP/capita and Human Development Index and happiness and other rankings. But the one to pay the most attention to is the one that involves looking at how people vote with their feet.

This is all simple stuff, but we have all encountered people as confused as Prof. Churchill -- as well as the students that have passed through their classrooms.

Be careful

Aggregation causes huge problems of analysis and interpretation. The few and the proud who try to work with spatial data are routinely vexed by the problem. We all know that there are huge differences often just a city block or two away from where we live and work, but we are all the time generalizing about whole metro areas. Urban economists are fond of touting the benefits of "density" when they compare, say, New York to Kansas. But density variations within these places are huge.

Wendell Cox reports recent settlement trends using the Census' latest county and metro data. Notice that he adds his definitions of "historic core counties" because the census bureau's designations of central cities are ideosynchratic.

Look at his Table 4. The suburban counties have been growing steadily at the expense of these historic core areas. Yawn? The conventional wisdom (including from some editors and referees who return my papers) is that long-term suburbanization trends have stalled or reversed. Yes, Manhattan today is not the same as it was in the 1960s-1970s. And a few other downtowns do look better today than then. But let's be careful about jumping to conclusions re historic reversals.

The problems with policy

Growth controls raise housing prices. Supply and demand cannot be fooled. And New Urbanists (and "Smart Growth" planners) like policies that compel builders to increase densities and supply open space (and ironically "affordable housing"). These also push up costs -- and evenutually housing prices. And Ed Mills notes that many jurisdictions (like William Fischel's Homevoter Cities) restrict densities, keeping them too low for their own economic reasons.

Any controls that push suppliers away from the product mix they would prefer to market have the potential to push up costs -- which have the effect of reducing profitablity and/or pushing up prices.

Mills suggests that the demand for subprime mortgages (and the crisis that they prompted) were a natural result of local governments pushing low densities and increasing house prices via that channel.

He notes that all levels of government have had a hand in the problem, not just the federal. Mills concludes that neither federal, state, nor local will mend their ways. "I conclude this pessmistic evaluation with the advice that housing is, even at best, a risky investment. Let the buyer beware."

It's all about incentives

The idea of "market failures" to be corrected by wise and selfless politicians and bureaucrats is standard fare in economics textbooks and courses and standard discourse among deep thinkers (thanks, again, Tom Sowell). One would think that the insights of public choice economics had demolished this fairy tale, but it is too good a chestnut to ever let go.

In the Spring 2009 Independent Review, Steven Horowitz writes about "Wal-Mart to the Rescue: Private Enterprise's Response to Hurricane Katrina." The public sector failed miserably, but alert private action was available to alleviate some of the suffering. Horwitz documents the case and also explains how and why it all occurred.

Groupthink and smugness

Dan Klein and Charlotta Stern theorize about Groupthink in Academia.

But why not? Academics are not terribly different from the rest of humanity. And a knack for moderately fancy footwork has its perils.

Everyone in Lake Wobegone is above average and everyone in academia (and journalism and entertainment, etc.) is "in the mainstream." And anyone too dim to get it is an "idiologue".

Deep thinkers (thank you, Tom Sowell) go on and on about "social justice" as though it had a clear meaning. But the presumption of shared assumptions is the ultimate smugness.

UPDATE

Russ Roberts and Robin Hanson discuss how often any of us actually examine and reject our priors.

Not promising

California's roads are in worse shape than ever. I have blogged about this before and called attention to Jon Sonstelie's analysis which shows that the policy decision to divert highway money to transit (social engineering) is the problem.

Transit use is still low and planners are still excited by the idea that Level of Service (LOS, standard grades used by highway engineers) can be made awful enough so that competing modes can succeed. Unfortunately, as long as this crackpot idea is taken seriously, we will have worsening road congestion along with low levels of transit use. The learning curve on this issue has been flat for many years.

Ed Stevens calls my attention to this conference where participants were invited to think motre broadly about LOS - and the trade-offs that are missed when a simple service measure is used.

Proper pricing would make the consideration of relevant trade-offs routine and automatic. But that is off the table in California at the moment. So trade-off analysis (according to the presentations at the cited conference) is to be top-down. That is not promising. And that is how we got into the mess we are in.

Credit

The famous poster of "The New Yorker's View of the World" is a classic and a much appreciated piece of self-parody. Whether the New Yorker's view of the economy achieves similar renown is hard to tell. The March 16 Style Issue has several articles on the economy that have me wondering. See John Cassidy's column on Obama's economics and Patricia Marx's "Made in U.S.A."

James Surowiecki's "House of Cards" describes how credit card companies are now "trying to get rid of customers." They were once optimistic that customers will make purchases, make payments and (best of all) run balances and pay interest. These chargers were politely labeled "revolvers". In bad times, the credit card companies reverse course and actually pay some customers to go away.

Surowiecki calls it the "paradox of deleveraging: it's good for borrowers to reduce their debt, and good for lenders to be more rigorous in their standards, but when everyone deleverages at once it does damage."

When I see new business models discovered, I see good news. Much of our prosperity (even in 2009) comes from entrepreneurial discovery of better mouse traps and better business models. Todd Zywicki reminds us that credit card and revolving credit are a good thing: the middleman function of credit institutions extended to areas where it had been largely absent. Some of us are old enough to recall purchases of major items on the lay-away plan.

Zywicki reminds us that GM surpassed Ford in the early 20th century because they were first to catch on to the idea that people like to drive their cars while they are paying for them, rather than after.

Winner's curse

Many of us enjoy college sports but recoil at the economics. The NCAA is a legally sanctioned exploitative cartel. Many young black males play for below-market salaries, do not make it into the pros, do not graduate (nor get an education) and are rewarded with serious and lifelong injuries for their troubles.

Andrew Zimbalist, writing in today's WSJ ("March Madness It Is, Economically") spells out how most colleges also lose, investing far more that they recoup. Read the whole thing. Here is an excerpt.

There are a few winners. The National Collegiate Athletic Association, for instance, makes out quite well. Last year, Madness brought in $548 million from TV rights and an additional $40 million from ticket sales and sponsorships, together representing an eye-popping 96% of all NCAA revenue.

Amid this cornucopia, the schools themselves are usually the losers. According to the NCAA's latest Revenues and Expenses report, in 2005-06 the median Division I men's basketball team generated revenue of $480,000 and had operating costs of $1.33 million, yielding a net operating loss of $850,000. If capital expenses and full university overhead were included, these results would be even more dismal.

The most successful programs, of course, will do better (the top 10 basketball teams had revenues of more than $11 million), but even these programs frequently lose money when the accounting is done properly. Why?

Most of the 300-plus Division I schools aspire to make it to the March tournament. To do so, they have to spend big. Since they can't go to a free-agent market to hire the best high-school players, they attempt to attract them in other ways. First, they spend lavishly to court the players during the recruitment process.

Next, they attempt to provide state-of-the-art arenas and training facilities, complete with luxury suites, Jumbotron scoreboards and spacious locker rooms. They invest in academic tutoring facilities, costing as much as $15 million, to help the athletes stay eligible for competition. Then they hire well-known coaches with a reputation for sending an occasional player to the NBA.

And the coaches don't fare too shabbily either. In 2005-06, the head coaches of the 65 Division I teams in Madness had an average maximum compensation of $959,486, with the top paid coach earning a guaranteed salary of $2.1 million and a maximum salary of $3.4 million. These figures exclude extensive perquisites, including free use of cars, housing subsidies, country-club memberships, access to private jets, exceptionally generous severance packages, handsome opportunities for outside income, and more.

These guys are making almost as much as NBA coaches, even though their teams' revenues generally are below one-tenth those in the senior circuit. The trick, of course, is that the players aren't allowed to be paid, so the coaches, in essence, get the value produced by their recruits. It doesn't hurt that college sports benefit from state subsidies and federal tax exemptions, and that they have no stockholders looking for quarterly profits.

More unintended self-parody

The PBS Evening News just showed an "in-depth" feature on "Transit in Trouble". If you see the whole feature, you see nothing but half-or-less empty trains, buses stations and stops. But in standard hand-wringing fashion, the story was all about these systems "needing" much more public funding. Unintended self-parody?

New Urbanists who campaign for "higher densities" of development can never answer the "how high?" question. In the same vein, the advocates of spending "stimulus" only know that we "need" even more. More USP?

Transit by other means

In various parts of Europe, there is click-and-drive. In the U.S., renting a car is now more streamlined, especially if you are enrolled in a rental car company program. In both cases, modern electronics have been deployed in clever ways to reduce transactions costs and improve and expand service.

In today's New York Times Magazine, there is a nice piece on Zipcar ("Share My Ride ... You may need a car, but do you need to own one -- or even lease one? Zipcar and a fleet of new competitors are betting that your budget and your green conscience are ready to cooperate"). The story mentions that Hertz has noticed and is working to implement its own version, Connect by Hertz.

Telecommuting will soon surpass commuting by public transit (in some places it already has.) Zipcar-type arrangements will probably surpass public transit for other kinds of trip making.

To be sure, public transit's political patronage usefulness will survive. Call it stimulus.

At the table and on the menu

Opportunistic politicians and gullible voters rally around free lunch ideas. The one that seems to captivate both groups these days is clean energy "investments" that will "create jobs" and clean the air. It is the two-fer that Barack Obama, Arnold Schwarzenegger and Antonio Villaraigosa (among many others) all enthusiastically support.

It now seems that the latter has come up short. Even the LA Times editorialized "Vote no on Charter Amendment B ... The proposed charter amendment and ordinance proposition is less about solar energy than it is a grab for political power." The Mayor and his friends had overreached and could not win this one (counting not yet over) in a low-turnout local election.

In this morning's WSJ, Kimberley Strassel writes that "The Climate Change Lobby Has Regrets." She quotes the Duke Energy CEO saying that: "If you don't have a seat at the table, you'll wind up on the menu." It seems that the poor guy overlooked the possibility that he could be both.

Not easy being green

Happiness research by social scientists has its problems. City rankings are also fashionable but problematic. Now we have rankings of the unhappiest cities. This ranking says that Portland is the worst. But Portland also shows up on most lists of most-progressive-and-most-green. I guess all these fields require more work.

More footprints

Those not satisfied that price signals prompt efficient actions (and who do not expect policy makers to modify selected prices accurately or soon) evoke footprints. Trouble is that there are many plausible footprints (water footprints, carbon, footprints, air pollution footprints, etc.).

We are back to the calculation debates. Can the giant calculation machine that markets serve as be replaced by mere mortals (let alone polticians)?

The Real Estate Research Corporation famously published its "Costs of Sprawl" in 1974, calculating what could be saved via compact urban development. Critics quickly found the flaws in this approach.

Today's LA Times includes Ed Glaeser's "Growing greener ... California should build more, not less to help the environment." The least carbon footprint-demanding development is in the most benign climates.

Along the same lines, The Economist (Feb 28-March 6) reports information on water footprints ("Excess liquidity"). It requires 140 liters of water to brew one cup of coffee -- includes growing the coffee beans.

Who knew? And that's the point.

The theory predicts

The new (Feb. 2009) American Economic Journal: Microeconomics includes an interesting investigation by Ginger Zhe Jin and Phillip Leslie on "Reputational Incentives for Restaurant Hygiene". LA County food inspectors have been placing letter grades (A or B or C) in restaurant windows since 1998. I see mainly As, a few Bs and never any Cs. Given the high frequency of As and Bs, I would never enter a C-rated establishment. In light of all this, the authors test for pre-1998 reputational effects. They find that "... chain restaurants tend to have significantly better hygiene than independent restaurants because of the reputational effects from chain affiliation."

Economists expect this, but (the authors note) there have been few serious tests. This paper should, therefore, find its way into various collections of papers.

"Trickle up"?

I have never liked label "trickle down" for two reasons. It suggests that policy must take sides in class warfare skirmishes -- that should not even be. In a second-best world, is overlooks the idea that some are more promising than others in terms of their entreperenurial discovery contributions.

This morning's WSJ labels the Obama budget proposal as "trickle up". If such a label were ever to be warranted, the budget and the policy would come down forcefully on the idea that it is immoral and counter-productive to force the poorest among us to attend the worst schools from monopoly school districts.

How can the smart people that are all about "change" and "equity" sleep at night as long as they maintain this status quo? How can they moan about increasing inequality when they are foursquare aligned with a policy that denies the worst off a chance to learn?

These are old stories, but they bear repeating every time that we repeat this charade.

My favorite policy

Because doing nothing is not an option, my favorite policy idea for our economic troubles is "buy a house, get a visa" which has been touted at marginal revolution (read the comments too) and other places.

The Economist (Feb 14) has just noted that there are "Two billion more bourgeois" in the world. The Financial Times' David Pilling (Feb 19), writing about India, reports "The concept of social mobility is starting to challenge a previously fatalistic attitude to class and cast."

We see again the upside of growth. And some of us see (more) open borders as good for growth. Our H1B visa policy is a disaster. Housing is you-know-where. And the stream of policy ideas that we see on a daily basis is all about replacing one industrial policy with another.

It would be lovely to have more discussion of buy-a-house-get-a-visa. It would be even better if that policy could replace (or at least ratchet down) the long-standing politicization of housing.

Half full?

I am late to the party, just having greatly enjoyed Dan Ariely's Predictably Irrational. Behavioural economics is not new anymore. And the examples and experiments that Ariely writes about are familiar and/or easily recognizable from personal experiences and foibles.

It's all news to those who were weaned on equilibrium/rationality economics. Relax! It's only a model!

Disequilibrium is where people real people get a life -- and make a contribution and make some money.

I had never seen this closing quote from Murray Gell-Mann. "Think how hard physics would be if particles could think." Ariely does not come out and say it, but he does a lot more than hint that physics is an impossible model for the thinking particles.

Humans have done some awful things and some great things. The fact that The Economist can write about the growth of the world's middle classes in terms analogous to Moore's Law, says something profound about what beings with limited intelligence, limited rationality and plenty of failings can do.

UPDATE

I found this in an old exam question -- which I based on an old Jonathan Clements WSJ column which started like this: "Your neighbors save pathetically little, trade stocks like crazy, dabble in overpriced initial public stock offerings and dump hard-hit mutual funds that are ripe for rebound. And you, of course, should cheer them on. Your neighbors may not realize it, but they are performing an enormously valuable service. Without their fear and greed, it would be extraordinarily difficult for the rest of us to make a good deal of money. So go ahead: Give your neighbors a little encouragement."

But what would a 2009 politician do with this insight?

Census politics

Most social scientists depend on data from government agencies. That requires some suspension of disbelief; we want to believe that the reports are not politicized. But Wendell Cox has just posted this chilling discussion of the drift at the Census Bureau and how recent moves by the Obama administration suggest more politicization.

The second (and related) problem that many of us are stuck with is that there are fewer data as one moves down along the geographic aggregation scale. The best data are for the nation, less for the states, less for counties and metros and cities, and much less for sub-city spatial units. Data for census tracts and census blocks are useful, but we only get these reports every ten years.

And cities are the "engines of growth" if and only if they achieve spatial arrangements that allow many potential positive externalities (including information spillovers) to be realized while leaving a bunch of potential negative externalities unrealized. So what happens at the sub-city level is critical, but we have a tough time understanding it. Dearth of data is a big problem.

Adding to the cloud of uncertainty over the precious decennial disaggregated data is among the last things we want. All politics may be local. And much of the important economic questions are also local.

I used to wonder why pollsters are always identified by their political affiliation. Until I thought about it. Do we now have to consider the political affiliation of census takers?

I keep telling students that no one looks for national mean weather report. Why then be satisfied with national economy readings?

UPDATE

Here is an interesting piece by Richard Florida on cities and the economic crisis. Note his reliance on "density". But the average population or employment density of a large metropolitan area tells us nothing. The nature of spatial arrangements is much more complex and requires sub-metro area measures.

Stimulate what?

In the March 2009, Reason, Sam Staley and Adrian Moore write about "A Better New New Deal ... How can we get the most bang for our transportation buck? Here are six ideas for the new president and cash-strapped governors." (not yet online). The six ideas include congestion pricing and are all perfectly reasonable.

But there is now a stimulus. Who says that governors or mayors want the most bang for the buck? This is not an idle question.

In today's LA Times, columnist Patrick Goldstein writes: "It's no secret that the L.A. public school system is pretty much a disaster -- mismanaged, overcrowded, underfunded, crippled by a bloated bureaucracy ..."

Huh? There are many at the LA Times and beyond who do not see a contradiction. And that says something about government stimulus and where it will go and what it will do.

In today's WSJ, Robert Barro does note that "This is probably the worst bill that has been put forward since the 1930s ..."

Fat chance

From Kindelberger and Alber's Manias, Panics and Crashes: "The monetary history of the last 400 years has been replete with financial crises. The pattern was that investor optimism increased as economies expanded, the rate of growth of credit increased and economic growth accelerated, and an increasing number of individuals began to invest in short-term capital gains rather than for returns associated with the productivity of the assets thet were acquiring." (p. 275).

Four-hundred years of this. This morning's WSJ includes John Taylor's "How Government Created the Financial Crisis." Nothing has changed since the K and A history was last published (in 2005).

Money and credit, you can't live with it and you cannot live without it. Or so it seems. Great Moderation optimism is gone. What's left? I particularly liked K and A's description of the "neo-Austrian" idea of de-control and private money. "Any bank, company, or person would be allowed to issue 'money' ... market forces will determine which firms issue good money. The different firms that issue money will compete to ensure that their own good money is accepted, and so good money will drive out the bad." (p. 86).

I know. Fat chance of that. I do read the newspapers.

UPDATE

I just caught this podcast with Daron Acemoglu. It includes a wonderful summary of why the Great Moderation turned so unexpectedly.

Ponzi

Of all the things written I have seen on the current economic panic-meltdown, I especially enjoyed George Packer's "The Ponzi State: Florida's foreclosure disaster" in the Feb 9 and 16 New Yorker. If Packer extends his material to a book, I want to read it.

But why does he have to give credence to Tampa Mayor Pam Iorio's plea for a Tampa light-rail? "We'd have our own long-term economic-stimulus package right here, right now, if we had this in place."

Not really. I was involved in one of many attempts to stop this silliness about ten years ago. Talk about low residential densities, some of the proposed routes were through cow pastures. I am not kidding. The Mayor gives economic-stimulus a bad name. Call it Ponzi.

Roundup

Today's WSJ includes Alan Blinder's "My Economic Wish List". The Journal also has about a dozen pieces that argue against any optimism that polticians can do more good than harm -- notably "Stimulus Brings Out City Wish Lists: Neon for Vegas, Harleys for Shreveport". Yet many smart people continue to to be optimistic about this hash. Go figure.

I have just read Orlando Figes' The Whisperers: Private Life in Stalin's Russia. Just when we think that we have grasped at least the idea of the horrors of the totalitarians in the 20th century, another book or film or revelation comes along to bowl us over. Figes has assembled previously concealed correspondences and diaries from Stalin's USSR. These personal accounts of how people's lives were destroyed are stunning, to say the least. And these are the recollections of those who were not (yet) abducted and shot.

It was not simply the guns and the corruption that put a huge population into the penitentiary society, it also required the power of crackpot utopian ideas. Timur Kuran has described the phenomenon of Preference Falsficiation, and so it was. But getting up close as via Figes' chronicles (as close as I ever care to get) reminds us that evil, political power and utopian ideas have a way of coalescing and bonding.

How do you keep the daily news from becoming a depressant? Read all about other people's problems and tragedies. Works every time. I think.

Help is on the way -- not

As the stimulus package comes into focus, we see the inevitable pork fattening. How could it be otherwise? The WSJ has cited the realization of a "40-Year Wish List".

Wendell Cox has focussed on more money for public transit. He notes:

The economic stimulus bill that recently passed the House included $12 billion in spending on public transit. When Republican Rep. Jeff Flake attempted to cut nearly a billion going to Amtrak and intercity-rail service, House Democrats quashed the effort and condemned opponents of transit spending. According to the Wall Street Journal, “They have been urging a big boost in spending after the number of riders on Amtrak and many mass-transit lines surged to record levels last year. They have argued that bolstering rail and bus service helps create ‘green’ jobs and gives consumers environmentally friendly transportation choices.”

Transit is enjoying a resurgence of popularity, or more accurately hype. We have been reminded, most recently by Democrats in the House, that as gas prices were rising and driving declining, that transit ridership was growing strongly. Yet, the reality is that transit captured no more than 3 percent of the decline in urban driving. Strong growth rates on an insignificant base produce insignificant increases (barely 1.5 percent of urban travel in the United States is on transit) and outside New York, the number is below 1.0 percent. Record ridership of this kind shouldn’t be rewarded with new spending, nor should we fall for the canard that it’s an effective way to have an environmental impact.

There are some very smart people who claim that desperate measures are called for. But desperate measures can also make matters worse. Printing money to finance questionable projects that enrich lobbyists, empower bureaucrats and entrench politicians is surely not a promising signal to investors here or abroad.

Makes you think

We are in the age of mass higher education. It is not exactly an oxymoron, but it does create a variety of tensions and problems. I bristle when "years of education" or "graduation rates" (high school or any other) are casually used as meaningful indicators. When the variances become huge, the simple stats fail.

These are among the ideas discussed by Arnold Kling and John Merrifield in their respectful but critical review of Claudia Goldin and Lawrence Katz'z The Race Between Education and Technology. The review is in the latest EconJournalWatch. Makes you think.

Minor irony

Results for the 2007 American Housing Survey have just been released. For those who like commuting data, the AHS reports medians rather than means (which the Census reports), although commuting modes are not separated.

Compare national data for 1997 and 2007. The median commute for those residing in central cities rose from 20 to 21 minutes. For those residing in the suburbs, the increase was from 21 to 23 minutes. Central city population (actually measured as housing units by the AHS) grew by 2.5% in the ten years; suburban units grew by 6.8%.

Not bad. I usually part company with the many traffic doomsters. Yes, our unwillingness to price makes congestion the default rationing device. To get commuting times this good in that light is phenomenal. Traffic doomsday is invited by policy makers who reject pricing. But they are bailed out by land use adjustments that explain the benign results for median minutes commuting. Enough employees and employers are seemingly able to chose locations that permit a decent commute.

Much better than decent by world standards.

Pretty good for second-best market results. Also a minor irony that markets are bailing out policy makers.

Keeping score

A colleague called my attention to Expenditure patterns of young single adults: two recent generations compared... "Differences in spending patterns for young, never-married adults in 2004-05 and their counterparts in 1984-85 may reflect differences in demographics; however, whether these changes indicate an increase or decrease in economic status remains unclear."

Whew!

Author Geoffrey Paulin is careful about the difficulties involved in making comparisons. And he focuses on expenditures rather than income. But yesterday was the 25th anniversary of the introduction of the Mac. And some people have pretty good recollections of that one -- and how it compares to its latest counterpart.

But computers (or iPhones, or iPods, or HDTVs, or ATMs or 10,000 related items) are not mentioned in the report, but new job oppoertunities in computer tech are. In fact, electronics are not mentioned. The internet is not mentioned -- expect in several footnotes with links to citations and sources.

Medical care is only mentioned insofar as there are apparently no statistically significant differences in expenditures between the two cohorts. I know that young folks can avoid most medical procedures, but for the few that do not, would any of them settle for what was available 20 years ago?

My points are obvious and have been made many times before. But just when we get a steady diet of pietistic hand wringing from all around, we must be sure not to lose sight of the many good things that we are fortunate enough to have access to.

Animal spirits

Michael Boskin wrote that "Investors Want Clarity Before Taking Risks". Tyler Cowen refers to the proposed "stimulus" as a "Hail Mary".

"Animal spirits", Keynes' view of capitalists, reeks of detachment and some condescencion. Trouble is no one really knows how to incite the barnyard or rattle the cage. The past six months of ad hoccery have not helped and I am pessimistic about the next chapter, guessing that whatever comes out of the Washington sausage factory will do more harm than good. Bad times do breed bad policy. And there is now very little sympathy for getting the taxman (and the politician) out of the way.

Richard Little and I recently wrote about "Building Walls Against Bad Infrastructure Policy in New Orleans." We argue for open-endedness as people grope for ways to settle in areas with natural hazard risk. We'd like to enlist rather than panic the "animal spirits".

Perspective

Voter turnout in the U.S. Presidential election of 2008 was the highest in 40 years. In the recent presidential elections it had on occasion slipped below one-half of those eligible. In most other elections it is well below 50 percent.

I have mixed feelings about this. I know about opportunity costs and the idea that many people have bigger fish to fry is attractive.

One also has to be careful about romanticizing democracy and, by extension, the state.

But I greatly appreciate voting with feet. Accidents of birth are profound and many people find the stength and the opportunity to do something about it. This is why maps of the world ought to color countries by whether people are struggling to get in or to get out.

The U.S. leads the pack as the place to get into. It has done so for many years and will probably continue in that role for a while. Of all of America's positives, my favorite is the (relatively) low place of tribalism. Around the world, people slaughter and maim each other (and always have) for reasons of historic tribalism. Modern man is worthy of the label if and when he finally moves away from this pre-historic legacy.

Come to America and you may get to marry someone from a different tribe. You may also strive for any high office, no matter your roots.

This is why I disagree with the discussants on last evening's Jim Lehrer News (and many other venues) who inevitably want "a conversation about race".

No. Communist-style re-education camps are a horrible idea. Much better to ride the wave and leave race and tribalism behind us. We should always learn from history, but we should not wallow in it to make political points.

On the way to the Super Bowl/Super Trough

Many have noted that three of the four NFL play-off teams have logos that involve birds. But, writing in today's WSJ, Jerry Bowyer ("Sports Mania Is a Poor Substitute for Economic Success ... There's a reason so many Steeler fans have left Pittsburgh.") notes that three of the four (not the same three) have benefited from taxpayer financed stadia, strategically placed in those cities' downtowns. And whereas the teams are doing well, the downtowns are not.

"Maybe America should take a look at Baltimore, Philadelphia and Pittsburgh before getting behind Mr. Obama's plan to use public-works projects to lead us out of economic morass."

Revitalization, renewal, regeneration are all euphemisms for industrial policy. And when it comes to industrial policy, there is no science. There is only politics.

Stimuli

The latest version of the stimulus proprosal includes $30 billion for transportation. Of that, about 30 percent is for transit, mostly the expensive rail stuff that very few use.

The 2007 American Housing Survey results just arrived. As usual, journey-to-work data are included. Only 4.5% used public transit to get to work. But 3.4% reported working at home.

But huge subsidies to transit over many years have not done much to increase the share of transit users. There is no need to prolong that experiment.

But if we are going to play industrial policy, we can embark on a new experiment. Why not see if massive subsidies to home workers swell their ranks? If that worked, we would get much more in the way of less congested roads, cleaner air, less fossil fuel imports, less greenhouse gases, etc.

But that's only the half of it. We still have to find a way to "create jobs" --easily unionized jobs, being best.

Better to leave well enough alone. Perhaps the stimulus package as is has all the angles covered.

Not funny

A Year Without "Made in China" One Family's True Life Adventure in the Global Economy even includes a chapter titled "A Modest Proposal". And I thought that this was Jonathan Swift brought up to date. But I was wrong. I was fooled.

Author Sara Bongiorni is apparently serious. She is a mercantilist-protectionist, not some clever writer who is able to present David Ricardo in modern and Swiftian terms. Yes, she really wants to protect Chinese workers from those awful manufacturing jobs -- and send them where she does not say or know.

Her family goes through great pains to avoid Chinese goods (OK to buy Taiwanese, German, etc.). And this is all presented with some humor. And I thought that this was the point. But silly me. The author kind of comes clean towards the end.

But is a lifelong boycott what I really want? I'm not at all sure that it is. On the one hand, it's been satisfying to know learn firsthand that China really hasn't taken over the planet, or our lives, at least not entirely, although sometimes it looked that way, especially in the toy and electronics aisles and in the shoe store. Of course, we're not out of the woods yet. I have a feeling China is just getting started when it comes to world domination.

Francisco Rodriguez's review in the Dec 2008 Journal of Economic Literature had me hoping that this book could be a neat teching device. But I kept looking for wink-wink-nod-nod and it's not there.

Round up

I could not resist reading The Panic of 1907: Lessons Learned from the Market's Perfect Storm.

The authors begin with this quote attributed to Mark Twain: "History may not repeat iself, but it rhymes." They go on to write,

To fully understand the panic of 1907, one must consider its context. A Republican moralist was in the White House. War was fresh in mind. Immigration was fueling dramatic changes in society. New technologies were changing people's everyday lives. Business consolidators and their Wall Street advisers were creating large, new cominations through mergers and acquisitions, while the government was investigating and prosecuting prominent exceutives -- led by an aggressive young prosecutor from New York. The public's attitude toward business leaders, fueled by a muckraking press, was largely negative. The government itself was becoming increasingly interventionist in society and, in some ways, more intrusive in individual life. Much of this was stimulated by postwar economic expansion that, with brief interruptions, had lasted about 50 years. ...

This morning's LA Times included "Southern California officials draw up wish lists for federal stimulus money." I have a hunch that similar activities are in full swing across the country.

But today's WSJ includes Philip Levy's "An 8.3% Deficit [today's] Is Plenty of Stimulus".

Fredric Bastiat is always helpful. He noted that "When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it."

And, in this interview, Pete Boettke cites the race between the 3 S's: Adam Smith's prosperity from specialization, Joseph Schumpeter's prosperity from entrepreneurial discovery, and stupidity from the sausage factory.

UPDATE

And there is the Secretary of the Treasury-designate who "forgot" to pay his taxes. He'll be running the IRS?

More on Kiva

I blogged about Kiva.org a few days ago. This video just came to my attention. It is for all those who are as new to this organization as I am.

Many of us suspect that person-to-person beats politician-to-politician every time. If only Peter Bauer were around to see this.

Three questions

Just as there is near-breathless anticipation of the Obama stimulus, there is also some skepticism from Greg Mankiw in today's NY Times. Mankiw writes that "If the stimulus package takes the form of bridges to nowhere, a result could be economic expansion as measured by standard statistics, but little to increase economic well being." Well, yes.

And "The way to avoid this problem is a rigorous cost-benefit analysis of each governement project."

Let me see. Who will be doing all this? And how many government projects pass such a screen? Can we have that conversation?

Listen, learn, enjoy, vote

I am a big fan of EconTalk with Russ Roberts. The weekly podcast interviews (old ones archived) are wonderful.

If you are already a fan, go to this site and give them your vote.

Party, party, party

The front page of today's LA Times includes "State Closer to Tax Refund IOUs". The front page of today's WSJ includes "When It Comes to Cash, a Thai Village Says, 'Baht, Humbug!' ... To Beat Credit Crisis, Santi Suk Supplements National Currency With One of Its Own Making."

If central bankers around the world can throw a party, so can others. Yes, we all know how this ends. But how many times have I heard serious people intone that the Fed is watching and will step in to sop up liquidity once things get out of hand? These sentiments come from people who are thrashing the Greenspan Fed from the other side of their mouths.

It is the same as fretting over the actions or inactions of the previous SEC but pronouncing that the next cadre of regulators will do a better job. Why? The next group will be staffed by people from the same gene pool, facing the same constraints and similar temptations.

Asking a lot

California's roads are awful. Driving on many of them is painful and/or dangerous. It is not that there are not enough funds, but that the funds that are available have been wasted on public transit. The cliches (transit is "starved", autos and highways are favored) are way off.

A recent report from the Public Policy Institute of California includes a chapter on transportation by Jon Sonstelie that is must reading. "California stands out ... in the way it allocates total transportation expenditures between highways and mass transit. In 2002, highway spending per capita was lower in California than in the rest of the country. ... At the same time, spending per capita on mass transit was higher in California than in the rest of the country" (p. 128).

Starving highways to get people into transit was the acknowledged policy and it was never promising. Industrial policy is that way. And we are now in the situation where one reads and hears nothing but how politicians are about to "create jobs" by making wise investments in infrastructure, "green" this and that, and all sorts of other silliness.

Asking the believers to connect the dots may be asking a lot. They really ought to drive around California's roads and also check where and how the money has been spent. Do these first and spout about policy directions later.

The experts can make airplanes stay in the air, but ...

In today's WSJ, columnist Jason Zweig writes "Investing Experts Urge 'Do as I Say, Not as I do' ...

I once asked Harry Markowitz, who shared the Nobel Prize in economics in 1990 for his mathematical explorations of the relationship between risk and return, how he diversified his portfolio.

Dr. Markowitz first got to choose how to divide his assets between a stock fund and a bond fund not long after publishing his pioneering article "Portfolio Selection" in the prestigious Journal of Finance. Following his own breakthroughs, he should have made intricate calculations, based on historical averages, to find the optimal trade-off between risk and return. But, Dr. Markowitz told me, that isn't what he did: "Instead, I visualized my grief if the stock market went way up and I wasn't in it -- or if it went way down and I was completely in it. My intention was to minimize my future regret."

Dr. Markowitz paused, then added wryly: "So I split my contributions 50/50 between bonds and equities."

He is just the tip of the iceberg.

I love this story because many (many) years ago when I signed up for my university's 403b plan (and had no clue), I filled out the standard forms and when it came to the boxes on allocating monthly contributions, the woman behind the desk casually mentioned that most people just choose 50/50.

Pyongyang did not make the cut

This Forbes piece cites research by Jeff Kenworthy on the cities with the World's 10 Best Commutes. They are (in David Letterman order, with the last being best): Berlin, Krakow, Mumbai, Beijing, London, Osaka, Dakar, Chennai, Tokyo, Hong Kong. I have only been to six of these cities, but I do not buy it.

Economics professors like to warn their students that measuring inputs is not a good substitute for measuring outputs. The Kenworthy study looks at the percent of people using bicycles and public transit, estimated energy costs, etc.

As we embark on programs of infrastructure/stimulus spending, our leaders will be looking everywhere for "good" ideas. That's the problem.

For those looking for a new year's resolution

I'm probably late to the party, but I just discovered kiva.org via a gift from someone dear to me. To those not yet into it, go to the site and see that you too can fund microfinance. You pick an amount (as little as $25) and then choose where it goes from among the listed applicants and their projects.

You can sort through the world's applicants in a variety of ways. Default rates are shown; they are very low.

And as your loans are repaid, you can lend again. You can help build a better world, one small loan at a time. How wonderful. Happy 2009!

Not the worst of times

Good news is obvious to some, but undervalued by most. What's different between now and the 1930s? A thousand things -- for starters. How about longevity?

Because the the obvious is missing from so many discussions, it's good to have formal studies that link pharmaceutical innovation to human well being.

Yes, I know that it's human nature to dwell on the bad news -- of which there is plenty. But it's very good to be alive now as opposed to 75 years ago -- or any other past year.

Not exactly

Prof.Paul Krugman likes the proposed fiscal stimulus because it would fund "public goods." Well, not exactly.

Almost all of the highways and bridges that might be funded are public by edict only. Most could be profitably operated by private owners. No non-rivalry and no non-excludability. Tolling belies both.

As for the various "green" projects that would be funded, most will be much closer to boondoggles than to public goods.

Pushing a string -- not

It's easy to find Baptists and Bootleggers who are hot to get the Keynesian stimulus going. There are an uncountable number of infrastructure projects that are "shovel ready" and probably an equal number of "green" projects ready to take a flyer on other people's money. And it is all in the name of "creating" jobs.

The final nudge comes from economists and others who claim that monetary policy has run its coures because the Fed funds rate is near zero. But writing in today's WSJ, Robert Lucas reminds his fellow economists and others that:

There are thousands of different interest rates out there and the yield differences among them have grown dramatically in recent months. The yield on short-term governments is now about the same as the yield on cash: zero. But the spreads between governments and privately-issued bonds are large at all maturities. The flight to quality means exactly that many are eager to trade private paper for non-interest bearing (or low-interest bearing) reserves and with the Fed's help they are doing so every day.

Could the $600 billion in new reserves be called a bailout? In a sense, yes: The Fed is lending on terms that private banks are not willing to offer. They are not searching for underpriced "bargains" on behalf of the public, nor is it their mission to do so. Their mission is to provide liquidity to the system by acting as lender-of-last-resort. We don't care about the quality of the assets the Fed acquires in doing this. We care about the quantity of its liabilities.

There are many ways to stimulate spending, and many of these methods are now under serious consideration. How could it be otherwise? But monetary policy as Mr. Bernanke implements it has been the most helpful counter-recession action taken to date, in my opinion, and it will continue to have many advantages in future months. It is fast and flexible. There is no other way that so much cash could have been put into the system as fast as this $600 billion was, and if necessary it can be taken out just as quickly. The cash comes in the form of loans. It entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities. These seem to me important virtues.

Another opportunity

Greg Mankiw points readers to this site if they want to make donations that would make nets available in areas of African threatened with malaria and HIV/AIDs. It's worth repeating here.

The wrong direction

Many people talked about a housing "bubble" before it "popped", but none (to my knowledge) warned about the credit and economic contraction that would follow. Nevertheless, no one is shy about being wise enough to offer radical policy prescriptions now that the downturn is here.

In Crisis and Leviathan: Critical Episodes in the Growth of American Government, Robert Higgs document how crises always expand the scope and size of government. And enlarged scope and size remain after the crisis has passed. He called attention to ratchet effects.

Bob has also written about the regime uncertainty that came with the New Deal. Radical rule changes that threatened property rights caused investors to withdraw. This is why there never was a recovery through the 1930s. The Keynsian promise never materialized. In fact, New Deal policies were the poison.

Neither was there a Keynsian recovery during WW II. War time unemployment may have been down but there was conscription. As Higgs puts it, putting people in prison would have had the same effect on the stats. War time GDP data are also suspect. There were no market prices!

Prosperity did not return until the post-war years. By this time the radicals that had surrounded FDR in the late 1930s were long gone; they had been replaced by business people who were brought into government as part of the war effort. Confidence and prosperity returned after the war.

Bob Higgs explains all this on econtalk. Unlike the conventional wisdom, his model explains the 1930s as well as the 1940s.

Where are we now? Gearing up to do all the wrong things -- including embracing massive Keynsian stimulus plus massive regime uncertainty. Polticians from both parties have been signaling ad hoccery for months.

There have always been business cycles. They usually end via workout when assets are re-priced and entreprneurial confidence returns and discovery efforts are again incited. Policy makers with only a clear commitment to printing boatloads of dollars push in exactly the wrong direction. Why would anyone bid on any distressed asset when there is a TARP (and perhaps son of TARP) in the wings?

Useful idiots

The rich are different; they have more money. The intellectuals are also different; they are more articulate. It is surely possible to be intelligent without being an intellectual. And vice-versa.

These thoughts come to mind after reading Paul Hollander's Political Pilgrims: Western Intellectuas in Search of the Good Society. I know it's old stuff but it is mind numbing how blind and (yes) how stupid some very smart people have been in their embrace of utopian insanity.

Many of us who were around in the 1970s recall very comfortable colleagues doing pilgrimages to Nicaragua to visit their Sandanista brothers and sisters -- and coming back to campus in ther fatigues.

Yes, Lenin did rcognize "useful idiots". Reason.tv updates all this with its Killer Chic: Hollywood's Sick Love Affair with Che Guevara.

Very smart

The folks at Cafe Hayek remind us that it is the 50th anniversary of the publication of I,Pencil.

I cite it in all my classes. Few essays make the point about markets as well as this one. The NY Times recently included a piece on Rubik's Cube and pointed out that to solve it requires picking one of five-quintillion options.

A large metro area can include a million or more parcels of land. How many uses can each one go to? Ten? A hundred? The possibilities are now way beyond five-quintillion. Those peddling 'smart growth' plans for metropolitan areas should ponder I, Pencil. That would be very smart.

Timely case study

You have to hand it to the editors of The Independent Review. The Fall, 2009, issue includes "Does Regulation Prevent Fraud? The Case of Manhattan Hedge Fund" by Chidem Kurdas.

The SEC was inept in regulating Manhattan Capital, just as today's news highlights the agency's inability to keep Bernard Madoff from stealing from his clients.

The knee-jerk reaction that "we need more regulation" comes more from ideology than knowledge. The Kurdas case study is revealing.

"Federal and state laws against fraud have been on the books for centuries, and at this stage are so voluminous that it would take a long time simply to read all of them. Deceiving one's clients is illegal, regardless of the exact regulatory regime in place. Public agencies do not lack the authority to tackle the problem wherever it occurs. The SEC can demand access to any hedge fund if it suspects fraud and ask a court to take action against the manager ... Mental blind spots are common to all of humanity, whether in the market or government."

No new policies needed

Happiness research has its critics. But so does inequality research. I am always stunned that most findings from the latter do not bother to look at inter-temporal mobility between strata -- especially in a country with substantial in-migration of very poor people.

What then to do with happiness inequality research? This NBER report (by Stevenson and Wolfers) is interesting because the authors report that the black-white happiness gap has shrunk while the male-female happiness gap has disappeared.

I guess that the case for happiness redistribution policies has subsided. Good thing. The incoming administration has its hands full.

Each year, I ask the standard question in class: If we could (magically) double income, thereby eliminating almost all poverty but increasing inequality, would you favor the magic? Year after year, most say "no".


UPDATE

Perhaps, I spoke too soon. The possibilities are endless. There is also consumption, happiness and climate change.

Great Moderation -- NOT

I have to admit having been a fan of Great Moderation discussions. Milton Friedman even explained the GM in a couple of WSJ op-eds, published just before he died.

Timing is everything and the Fall 2008 Journal of Economic Perspectives contains a more formal and persuasive explanation of the GM, by Steven J. Davis and James A. Kahn. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels"


Here is the abstract:

Most advanced economies have experienced a striking decline in the volatility of aggregate economic activity since the early 1980s. Volatility reductions are evident for output and employment at the aggregate level and across most industrial sectors and expenditure categories. Inflation and inflation volatility have also declined dramatically. Previous studies offer several potential explanations for this "Great Moderation." We review evidence on the Great Moderation in conjunction with evidence about volatility trends at the micro level. We combine the two types of evidence to develop a tentative story for important components of the aggregate volatility decline and its consequences. The key ingredients are declines in firm-level volatility and aggregate volatility—most dramatically in the durable goods sector. Surprisingly, this has occurred without a decline in household consumption volatility and individual earnings uncertainty. Our explanation for the aggregate volatility decline stresses improved supply-chain management, particularly in the durable goods sector, and, less important, a shift in production and employment from goods to services. We provide evidence that better inventory control made a substantial contribution to declines in firm-level and aggregate volatility. Consistent with this view, if we look past the turbulent 1970s and early 1980s much of the moderation reflects a decline in high frequency (short-term) fluctuations. While these developments represent efficiency gains, they do not imply (nor is there evidence for) a reduction in economic uncertainty faced by individuals and households.

But notice their last sentence.

Who knew?

And speaking of politicized cash, FEMA "help" apparently does more harm than good. Who knew?

Dark side

It has always been amazing that intelligent people speak of "infrastructure" spending (especially these days when the federal spigots are on full-throttle) and "needs" with great seriousness. The obvious dark side is that these funds are spent by politicians who have their own "needs". Bob Poole elaborates.

Who's left?

Branding matters in politics, as anywhere else. The American left seems to like the label Progressive these days, but had been content with Liberal since at least New Deal days. But the irony was that statists are anything but Liberal in the traditional sense. Dan Klein elaborates.

Who you gonna believe?

Today's Washington Post reports that transit use is up. According to some, this declining industry is always looking good.

Wendell Cox reports that the reporter only looked at data that covers the period of high gas prices.

Free lunch?

Economist Robert H. Frank likes Keynesian multipliers. And why not push the pedal? In "Why Wait to Repeal Tax Cuts for the Rich?" he seeks more revenues to feed the multiplicand. In multiplier-land, it is ceteris paribus all the way.

Collegues and I have often used multipliers to estimate economic impacts -- but only to estimate short-term downside business interruption shocks. That is the only way to do it with a straight face. Where was the multiplier when rebate checks were sent out earlier in 2008? Where was that free lunch?

Envy

I somehow have to fit watching three college football games into the rest of the day's activities. Enjoying college sports is worse than a guilty pleasure. The players are exploited, the pious rhetoric of college administrators ("student atheletes") is embarrassing, the existence of a legalized cartel with legally sanctioned police powers (the NCAA) more than embarrasing.

Nevertheless, I will not be starting my boycott today.

Today's WSJ has a nice piece about coaches' salaries ("Who Pays the College Coach"). Even though professors complain that coaches make more than they do -- for doing something not nearly as worthy as their work -- the article reminds readers that supply and demand are involved ("With all due respect to many great teachers, it's easier to replace them than [Alabama's] Mr. Saban, Ohio State's Jim Tressel or Penn State's Joe Paternon"). And zero-sum is not the right model. The coaches' salaries do not come out of a fixed university budget; successful athletic programs bring in boatloads of new revenues.

Envy is never a good thing. It incites enough trouble.

Who's next?

Some of the gloomiest economists are the biggest fans of FDR and the New Deal. But FDR famously said "The only thing we have to fear is fear itself." Go figure.

This morning's WSJ includes "How to Combat a Banking Crisis: First, Round Up the Pessimists ... Latvian Agents Detain a Gloomy Economist; 'It Is a Form of Deterrence.'"

One has to wonder if they'll go after the short-sellers next.

Creative destruction meets Baptists and bootleggers

America's outside-the-rustbelt auto industry is too big to ignore. So we may not get the standard Baptists and Bootleggers outcome.

Today's LA Times includes "Knights in white SUVs ... In Georgia, a Kia plant promises 2,500 jobs. Grateful residents wonder why Detroit deserves a bailout."

I am old enough to remember that auto imports (first from Europe and then from Japan) began making serious inroads in the U.S. market in the 1960s. The Big Three have been in decline for about 40 years.

Yes, they have made changes. But not by enough. Any U.S. comparative advantage in this business is found on the map (of six southern states) and accompanying chart (listing 7 auto plants now operating and 3 underway) of the LA Times piece.

Two simple points

In today's WSJ, John Taylor writes "Why Permanent Tax Cuts Are the Best Stimulus." It's fairly simple. The permanent income hypothesis has been a staple of economic analysis for many years; stimulus checks may not deliver what's been promised

Bev Dahlby has recently published The Marginal Cost of Public Funds. It's a very serious topic and the lauded "need" for infrastructure spending is not the slam dunk that that we read about in the NY Times.

Two very simple points that must be apparent to the brain trust that President-elect Obama has assembled. I think.

Redemption and romance

I have not yet read the Sunday papers (honest), but it's a safe bet that there will be more stuff comparing President-elect Obama with FDR. Perilous economic times incite thoughts of redemption-through-politics. Yesterday's stock market rally was attributed to the announcement of the name of the prospective Secretary of the Treasury.

Nobelist James Buchanan articulated public choice economics some years ago and famously introduced it as "politics without romance."

It's always good to know that the people appointed to high office are not crazies. But the hope that a crew of wise men and women will do magic is silly. We see shadow boxing by Fed chiefs and Treasury officials on an almost daily basis. The contributions by various elected officials adds nothing that might be a cause for optimism.

A low profile by the whole bunch of them might inspire market participants. ("Animal spirits" according to Keynes.) But how romantic is that?

Too much fun

When adults take industrial policy seriously then anything goes. Rahm Emmanuel's "You don't ever want a crisis to go to waste. It's an opportunity to do important things you would otherwise avoid." is too revealing to let pass. It showed up in WSJ coverage of health care policy (thanks, Brad) and also in a whacky piece in the NY Times by Prof. Robert Goodman ("Have You Driven a Bus or a Train Lately"?) If taxpayers are going to subsidize GM to build green autos, why not subsidize them even more lavishly to build high-speed trains -- or whatever else greens and statists dream up.

The fact that resources are scarce, and therefore should be channeled to uses that large numbers of people actually desire, easily gets lost. There's too much fun to be had.

Some good news

These are not the best of times, but perspective is always a good thing. I just heard a radio interview with Nicholas Eberstadt on his book, The Poverty of the Poverty Rate: Measure and Mismearure of Material Deprivation in Modern America. There are various accounts of this nature (see, for example, Cox and Alam), but the message bears repeating. It is amazing how ill-informed the complainers are.

I can remember when Europeans scoffed at American coffee, wine, food, etc., with some justification. Much of that has changed and high-end bourbon, tequila, scotch and vodka are even found in super market liquor departments.

But what about beer? The local stuff was always an embarrassment and the Europeans were right. But apparently no more. The current New Yorker includes "A Better Brew: The rise of extreme beer." And it's manufactured in the U.S. (and without the benefit of the Washington protectionists.)

Get this. "In 1965, the U.S. had a single craft brewey: Anchor Steam in San Francisco. Today there are nearly 1,500."

It was bound to happen. Declinists, take note.

Go figure

The montary base is heading straight up. (HT Bart Kosko and Jim Moore).

Prof. John Cochrane asks "Is Now the Time to Buy Stocks? ... Here is what the historical evidence suggests" (in the Nov 12 WSJ).

Conchrane's story is interesting and he includes a compelling graphic, but the St. Louis Fed's graphic is stomach-churning.

Audacity

I just listened to the Arnold Kling interview at Econtalk.org. Interviewer Russ Roberts and Kling describe how Wall Street hubris got us into a mess (and all the necessary regulatory tools were there, but not adequately utilized) and how Washington hubris is likely to keep us there. We just got more Paulson ad hoccery this morning.

This morning's WSJ includes "Good-Bye to All That... A cheap cynicism has brought us to disaster. Let's try a little audacity." Audacity sounds much better than Washington hubris.

On the same page, there is "Obama's Car Puzzle ... You have in GM's Volt a perfect car of the Age of Obama -- or at least the Honeymoon of Obama, before the reality principle kicks in. Even as GM teeters toward bankruptcy and wheedles for billions in public aid, its forthcoming plug-in hybrid continues to absorb a chunk of the company's development budget. This is the car that, by GM's own admission, won't make money. It's a car that can't possibly provide a buyer with value commensurate with the resources and labor needed to build it. It's a car that will be unsalable without multiple handouts from government."

Audacity indeed.

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.