Increasing returns revolution requires land markets

The June, 2009, American Economic Review includes Paul Krugman's "The Increasing Returns Revolution in Trade and Geography". He recalls the jibe that (without the explicit modeling of increasing returns) "economists believed that agglomeration takes place because of agglomeration economies."

Once increasing returns can be modeled, all pecuniary externalities can be included. But urban land markets also internalize what we used to call "technological externalities", those that ocurred without any transacting.

But these too are internalized via the land market (if there is one). There are no unrealized externalities inside a shopping mall because the owner maximizes rents by arranging (and leasing) spaces such that externalities are realized in ways that maximize total rents. Well functioning land markets can realize the same outcome.

In other words, the "new" geography only works in the presence of well functioning land markets.

Uh-oh, bad news for stimulus optimists

Yestreday's WSJ included "Only the Employed Need Apply ... With unemployment at 9.4% and rising, it's a buyer's market for employers that are hiring. But many employers are bypassing the jobless to target those who are still working, reasoning that these survivors are the top performers."

Near the top of the disingenuous sweepstakes have been the stimulus advocates who live in a world where only the unemployed are hired when new government programs and projects swing into action. In other words, opportunity costs are zero -- as are any wage inflation effects.

Just as it costs government more than a dollar to spend a dollar, many of those dollars have less than a dollar's worth of impact on the demand side.

Bulletins from the gender wars

"Parents Won't Say if Tot is a Boy or a Girl ... because they believe gender is a social construction. ... A Swedish couple's decision to keep their toddler's gender a secret is stirring debate, especially now that the parents are expecting a second child...'Pop' is 2 ½ years old, but so far only those who change the child's diapers know whether the youngster is a boy or a girl."

The kindest thought that comes to mind is that we have all heard of perfectly mainstream parents who have also messed up their kids. And I am still convinced that procreating should not be subject to licensing or other state sanction.

In the June, 2009 Journal of Economic Literature, there is Rachel Croson and Uri Gneezy's "Gender Differences in Preferences". The authors survey the evidence from a large number of controlled economic experiments and report "robust differences in risk preferences, social (other-regarding) preferences and competitive preferences."

Many of us had thought all along that men and women are different. Croson and Gneezy cite nature and nurture influences.

Perfect storm means many weatherfronts

I have now seen a few timelines that recap the history of current economic downturn. These are always useful, but all miss the important role that local conditions play. Local supply and demand differ drastically from place to place. In the U.S., coastal and sunbelt places are where the demand is and (often) where permitting is toughest and supply most constrained. Home price "bubble" effects differed hugely from place to place.

This morning's LA Times includes "Hard times? Depends on where you live ..." Of course. Here is an early warning.

There is already reason to worry that the histories that are (or have been) written will miss the role of the local regulations weatherfront in the perfect storm.

Strange competition

The President has promoted the idea of a new "Public Company" health insurance provider option as "a little competition" that all those market crazies should embrace.

All I recall is that the audience did not laugh. Medicare is a public company with an unfunded liability that runs into the trillions of dollars.

But those on the left like to dismiss trillion-dollar unfunded liability talk as politicized hysteria. Don't the worry warts realize that the power to tax and the power to inflate are available to rescue the public companies that we already have?

Competition? But not on a level playing field.

Give me land, lots of land

Wendell Cox reports that recent census data show continued population exurbanization -- for the period 2000-2007. That's where the land is, where permitting is (mostly) simpler, and where most people want to be. It's an old story.

Our research (with colleagues Harry Richarsdon and Soojung Kim) considered employment decentralization for the years 1969-2004 (using the BEA's REIS data file). We examine county-level data aggregated into broad categories that include the relatively recent metro-micro area designations. We look at differences, local less U.S. growth, filtering national cycles. Figure A (below) shows job growth (five-year moving averages, dark line) trends for the "large" (over one-million pop.) metro areas; the other figures show the concurrent trends for "small" (less than one-million) metro areas, micropolitan areas adjacent to large and small metros as well as non-adjacent micropolitan counties and finally adjacent as well as non-adjacent non-core (not metro, not micro) counties. Very roughly, these represent the urban-rural hierarchy.

What do we see? First, there are cycles but no discernible trends. The rise of the Internet, for example, is not observable. Second, for private employment growth, the cycles become more pronounced as we move down the urban hierarchy. Third, the larger areas consistently do better in terms or proprietor employment growth. Fourth, the two types of micropolitan areas display very similar growth paths, but with the one exception that the ones adjacent to the large metros have stronger proprietor employment growth in the late 1990s, perhaps reflecting the beginnings of the boom in tech start-up firms. Fifth, the remaining three areas show similar growth patterns with the most remote ones (non-core nonadjacent) experiencing slightly sharper fluctuations.

The pulses are the reverse mirror image of the large metros -- and they extend ever more sharply down the urban hierarchy.

REIS_FIGS.doc

Foxes watching over chicken coops

In today's WSJ, Abraham Verghese writes about "The Myth of Prevention". With respect to Medicare (and the President's chiding of his AMA audience last week), the writer notes that:

Cut, poke, sew, burn, insert, inject, dilate, stent, remove and you get very well paid; if you learn how to do this efficiently, maybe set up your own outpatient center so you can do it to more people in a shorter time (which is what happened when this payment system was put in place in 1989) and you are paid even more. If, however, you are a primary care physician, and if, just like the young doctor who saw my parents yesterday, you spend time getting to know your patients, and are willing to play quarterback when your patient enters the hospital, so that you can herd the consultants and guide the family through a bewildering experience that gets surreal if you are in the intensive care unit, then you may have great personal satisfaction but you will make five to tenfold less than your colleagues in the doing-to disciplines.

In the same newspaper, Jason Zweig writes approvingly of the proposed financial sector regulations.

Over at The Austrian Economists, Peter Boettke sums up the insights of James Buchanan as "Don't let the fox guard the chicken coop."

That's the problem. In the old dueling-economists days at Newsweek, when Milton Friedman and Paul Samuelson went at it, I recall one of them writing that they agreed on the lessons of economics, except that one of them applied them to public policy questions. That was a clarifying moment.

Suspend disbelief, ignore public choice, and you enlist foxes to watch over chicken coops. How could it turn out any other way?

Curses

There really is a "curse of oil." And I am a great admirer of William Easterly's writings. Combine oil with aid and you get the likes of Omar Bongo. "Mr. Bongo made no distinction between Gabon and his private property. He had ruled for so long, 42 years, that they had become one."

I was in Mexico in (I think) 1976 when Pres. Lopez Portillo was sworn in. I recall his address to the nation and he boasted that there are two kinds of countries, those that have oil and those that do not. He paused and then said: "And we have it." And there were wild cheers.

Must read

We have an emotional and a rational side (they are not left-right) and this has been understood and written about for centuries. But now we have neuroscience and many clever people who dream up and conduct very clever experiments. And we have writers like Jonah Lehrer who put it all together in readable prose. His How We Decide is light reading for smart people. That is very high praise.

There are now many books that cover similar territory, but this one is (in my view) the best. The author covers decision making by airline pilots, athletes, singers, voters, shoppers, investors, generals, gamblers and others. He knows enough about the current science to clearly explain the successes and the failures in each field.

The emotions and the intellect can work wonders if they interact properly. And that's a big "if". Read the book (Spock!) to get the full story.

I am also reminded of Vernon Smith's criticism (this econtalk interview) of the many experiments that find us so irrational. The experiements have us make decisions and choices solo that we actually always make after some deliberation and consultation with friends and family. That part never gets into the laboratory and it undermines some of the findings.

It's been a long time coming

I used to react to LA Times editorial and op-eds on land use and transportation issues. But the almost-Pavlovian response has waned. So I managed put aside Tim Rutten's "Congestion pricing: A slippery slope to toll roads." But just when I thought I had kicked the habit, an editor asked for my response. And here it is.

But the real story is that the Times editorial board has finally come around --sort of. They also see a flow of funds to pay for more public transit. I guess that it depends on what you mean by "public transit."

Not connecting dots

In 2002, the NY Times Magazine included John Tierney's "Amtrak Must Die". The writer had actually stepped on-board for a first-hand look. Today's NY Mag includes Jon Gernter's "Getting up to speed .. Last fall, Californians voted to approve the most expensive infrastructure project in the country's history. But how do you actually build a high-speed train that will take you from LA to SF in 2 hours and 40 minutes?"

Again, the writer actually rides the rails (LA-Sacramento) and again experiences a ridiculously (almost comically) inadequate ride. The TransSiberian could not be worse. LA to Sacramento "costs" $5 more than auto (the writer confuses price with cost), takes twice as long, and is completely inadequate.

But undaunted, the writer interviews bureaucrats, from the Governor on down, and buys into the idea that a ton of money can make a difference. How to fix a failing program? Spend (much) more. Heard that before. And the project "will instantly create thousands of jobs." The writer does not connect any dots, but ends on the politically correct upbeat note.

Call it turtle soup

So they wheeled out Larry Summers to assure the world that his boss is a "Defender of Free Markets". In the speech, Summers detailed the President's economic goals, including "energy independence." Huh?

Bill Clinton famously parsed the meaning of "is", but he was a registered of serial politician. I thought that Summers was selected to sell the "Obama-hearts-free- markets" message because he is who he is. I guess in much of the beltway-media world, "energy independence" and "free markets" mean whatever you want them to mean. You could call them turtle soup.

Seasteading

I first learned about Patri Friedman's Seasteading ideas and the work he has been doing on this via the Russ Roberts econtalk interview. There is now an article with more in the July 2009 Reason.

Seasteading will happen, but we do not know when.

We do know three things. Liberty is a powerful draw, and technology is progressing faster than ever (on the side of seasteading feasibility), and politicians will keep doing what comes naturally, pushing ever more people into the "exit" option (as in Albert Hirschman's Exit, Voice Loyalty).

I do not see any of these three phenomena receding. So seasteading will happen.

White is the new green

Wendell Cox compares Secretary Chu's idea to "Paint the world white" with the other less worthy proposals to keep us cool.

And compare this to another doomsday report from a group that Kofi Annan is affiliated with (described in today's WSJ).

"In the blood"

The Economist ("In the blood") points us to "Culture, Context and the Taste for Redistribution" by Erzo Luttmer and Monica Singhal. They look at the preferences of recent immigrants and find that national background explains a significant amount of varying tastes for redistribution policies. The authors conclude:

By studying immigrants, we are able to credibly disentangle cultural determinants of
preferences for redistribution from economic and institutional determinants. We find that individuals’ preferences for redistribution are strongly affected by preferences in their countries of birth: the average preference for income redistribution in the culture where an immigrant is raised continues to have an effect once they emigrate. This effect is highly statistically significant and robust to rich controls for economic factors and to the choice of sample and
specification. Our results show that these cultural influences also affect real behaviors, such as voting. Cultural determinants of preferences for redistribution appear to be strongly persistent across generations. At a fundamental level, this paper provides evidence on the nature of preferences for
redistribution.

But is it that the surveyed immigrants like or dislike government efforts to redistribute? Or is it that the immigrants happen to be sanguine about politicians' rhetoric? Is it that immigrants are less skeptical that programs will deliver what backers promise? The paper does not raise the possibility.

A debate over the ethics of top-down redistribution is one thing. A debate about how culture shapes one's attitudes is another. But what does the analysis of immigrants' stated preferences reveal?

In any case, it's a interesting paper that made my day.

Truth-telling?

Almost to the day that the President came out strongly for "truth-telling", his Secretary of Transportation launched this, which falls far short of the goal. (HT John Niles).

Take this howler:

In fact, each 1% of regional travel shifted from automobile to public transit increases regional income about $2.9 million, resulting in 226 additional regional jobs. Other economic benefits include increased productivity, employment, business activity, investment and redevelopment.

The Secretary is talking about an industry that serves many fewer riders now than it did before hundreds of billions of dollars of public subsidies were sent it's way. That's a decline in the absolute number of passenger miles in spite of population growth and huge subsidies.

It's negative NPV all the way.

Way beyond

This NBER study shows that CAFE standards have been a disaster. HT to Ed Stevens.

Holman Jenkins notes that this is all pretty obvious, but that the apostle of "change" has gone along with the same old political nonsense. Trouble is that it is now way beyond nonsense as taxpayers own the companies that politicians are undermining.

Let's face it: CAFE has done nothing to reduce gasoline usage or oil imports (car owners just end up driving more miles). In 34 years, not a whisper of testimony has come from any quarter that the policy actually works. It only causes U.S. manufacturers to make small cars and dump them at a loss on the public, subsidized with the profits of pickups and SUVs.

Detroit doesn't have to match the transplants in wages and benefits, but CAFE distorted what would have been the Big Three's natural path of adaptation to the natural fact of growing diversity in the marketplace with the arrival of foreign manufacturers. Detroit would have focused on market segments where it could compete profitably even with its higher labor cost -- on bigger, pricier vehicles where labor cost is a lower share of value added.

Unfortunately, Mr. Obama, that freethinker, took to the CAFE fraud like a bat to a belfry. He signaled his arrival on the presidential stage by sternly demanding higher mileage standards early in his campaign. The "change" candidate who might have broken with a generation of political cant about CAFE instead appropriated the fraud for his own careerist purposes.

That tangled web now catches him in a fatal contradiction as he pours tens of billions of taxpayer dollars into the failed business model that CAFE foisted on Detroit.

Horses, nationalizations and czars

I have just finished reading The Horse in the City (by Clay McShane and Joel Tarr), which does a fine job documenting what went on (in American cities) between the years of the "pedestrian city" and the "automotive city". The book is a fascinating bit of research on modern urban history.

We learn, for example, that “In 1890, 9,163 establishments manufactured carriages and wagons or their parts, employing more than 90,000 workers to make over one million vehicles worth over $32 million.” (p. 31).

But GM sold just over 2-million vehicles in 2005. The Detroit Big-3 sold 5.33 million. The U.S. population in 2005 was about 4.7times that in 1890. The ratio of vehicles then and now is 1:5.33. So we are in the ballpark. But McShane and Tarr make no mention of demands for bail-outs or nationalization because the industry of its day was "too big to fail."

The folks that gave us the Cimarron, Chevy II and the Nova (and many other duds) should have failed many years ago. The only way that progress happens is when market forces punish inefficient firms (and models) and competition brings forth better ones.

Arguments to throw good money after bad come easily (AMTRAK, Postal Service and many more). The big change at GM is that explicit politicization has replaced implicit politicization (a la Fannie Mae and Freddie Mac).

Much has been written about all this, but I did enjoy yesterday's WSJ which included the testimony of a real Car Czar, Ion Mihai Pacepa who was given the job in Romania in the 1960s by Nicolae Ceausescu.

The current Administration does to see the irony and talks openly about appointing various "czars" to run various industries.

Voluntary collective action

Voluntary collective action is a wonderful thing. We find it in various places and some of this has been documented in The Voluntary City, a project that I co-edited.

In yesterday's NY Times, Robert Frank wrote about "Carbon Offsets: A Small Price to Pay for Effciiency". This morning's LA Times has a story that provides some examples ("Forests as good as carbon in the bank"). People get to put their money where their mouth this.

These have been described as a complement to cap-and-trade. Trouble is that they may be seen as substitutes instead. We do not want cap-and-trade that crowds out voluntary collective action. Much better to let the people that gave us open-source software to innovate in this area.

Something for the true believers on Washington to think about.

Is it the best of times or the worst of times?

In the Spring 2009 Journal of Economic Literature, Christian Broda, Ephraim Leibtag and David E. Weinstein report on "The Role of Prices in Measuring the Poor's Living Standards". They find that the poor pay less, not more. And once this is properly accounted for, poverty rates in America are much lower than we hear via the daily drumbeat -- and real wages higher. Read it.

Multiplier sprung a leak

Today's WSJ reports "Europe Listens for U.S. Train Whistle ... Europe's engineering and rail companies are lining up fo some potentially lucrative U.S. contracts for high-speed rail."

I have been told numerous times that its the multiplier effect that matters. Forget about negative NPVs.

But what if we get neither? Multipliers do spring leakages when the spending is abroad.

The special world of politics

PERC has just published 7 Myths About Green Jobs. Read it. I thought that there was just one: There are no trade-offs.

Nevertheless, wherever I go, I see smart people (from the President on down) espouse the no-trade-offs religion. And they do this with impunity. To be sure, they are careful to be on guard for anyone espousing flat-earth theories or creationism.

Bond markets are reflecting another unpleasant trade-off. When government debt explodes so that politicians can promise everyone that they will "solve" every problem, bond traders get nervous and push up interest rates. And what will that do to the recovery that the President announced in Beverly Hills just last night?

Empathy

"Empathy" is much in the news these days. Trouble is that it only embellishes the sanctimony of politicians bearing gifts.

The June 8 Forbes includes "Wal-Mart's Weight Effect. Surprisingly, discount retailers make people healthier." The piece cites research that highlights how the income effect of low prices can trump the substitition effect. Lower prices have the effect of higher income and encourage the purchase of fewer junk food items.

The piece by Art Carden concludes, "Do you want to make the poor healthier? Then restricting the growth of discount chains is the last thing you should do. Instead repeal programs that distort incentives -- like agricultural subsidies that make junk food made from corn and soybean derivatives artificially cheap. Next, cut payroll taxes. With more take-home pay in their pockets, lower-income workers can afford to buy foods that are better for their health."

But do any of these policies lend themselves to empathy posturing?

Where are those Greens?

The June, 2009, Reason features "It's Alive! Alternative energy subsidies make their biggest comeback since Jimmy Carter". Science has advanced, but politics has not.

Not included in the online version is Lynne Kiesling's excellent companion piece "Electric Intelligence ... Establishing smart grid requires regulatory reform not subsidies ... President Barack Obama included $4.5 billion in smart grid subsidies in the stimulus package Congress enacted in February. But absent substantial regulatory reform, mostly at the state level, such federal spending may simply reinforce a century-old model that is all but obsolete."

The technology has advanced, but the textbook clunker rationalization of "natural monopolies" has been seized by the utilities and their politician allies to assure that the money will be spent, but that the grid status quo endures. It could have been the other way around.

Where is the Green lobby when it could do some good?

Renewed emphasis

Greg Mankiw has a sensible piece in today's NY Times ("The Freshman Course Won't Be Quite the Same ... The financial crisis will require subtle changes in teaching"). Keep the basics, but elaborate re the financial sector, leverage and monteray policy.

Behavioral economics gets a lot of press because everyone gets to feel virtuous about thrashing the rational (straw) man. But it's just a model! And all sensible people point that out.

What Mankiw's piece does not address is the role of hubris. Being a part of the human condition, it afflicts those in the private as well as the public sectors. So we want checks on these human tendencies. Competition and the possibility of bankruptcy (where these are not pre-empted by you-know-who) play this role in the private sector. But electoral competition and a vigilant electorate are not up to the job in the public sector.

These are simple thoughts, but they bear emphasis in light of Mankiw's discussion.

Cap and Trade = Baptists and Bootleggers

How could it not?

Bjorn Lomborg calls if "The Climate-Industrial Complex" in yesterday's WSJ.

David Theroux comments further.

History and art

The carnage in eastern Europe unleashed by the Nazis has been described many times. Richard J. Evans' The Third Reich at War is nevertheless especially haunting because he cites the everyday diaries and letters sent home by German soldiers. These were not just the SS. Most of them eagerly engaged in unfathomable barbarity, routinely and sadistically dispensed against the Jewish populations they conquered. Before there were death camps, there were nooses, kerosene and matches, pistols and automatic weapons, nail-studded clubs, truncheons and attack dogs -- not to speak of cold, starvation and disease.

The author probes the combinations of racist, nationalist and religious impulses that drove the murderers. The enthusiasm of the Nazis' many eager helpers among the Polish, Latvian, Lithuanian and Romanian(and other) populations is documented.

Reading these materials makes one ache for demonstrations of acts of humanity, courage and heroism. I had never seen Hiding and Seeking, which my wife and I viewed last night. It is about Jewish survivors, some of whom were sheltered by courageous Poles, and the pilgrimage that three generations of the Jewish family make to rural Poland to seek and thank their saviours. Both the Jews and the Poles are conflicted and the movie shows this masterfully. See it.

New world symphony

Megan McArdle asks whether California is to big to let fail and what sort of moral hazard would be involved in this sort of bail out. And is this the end of federalism? The U.S. Treasury's (actually the Fed's) printing presses may soon be available to state legislators as well as local officials.

Just before California's legislators agreed to the package that was soundly defeated at the polls yesterday, I attended an event at which California House speaker Karen Bass lamented that the rest of the world could move forward if just one or two Republicans would "get it" and get over their narrowly partisan hang-ups. Just a few days later, she got her few Republican votes. And yesterday it all went up in flames. I have no idea whether the speaker was being disingenuous or whether she had spent too much time in the Sacramento echo chamber. Perhaps some of each.

If Bastiat wondered whether government is the illusion that everyone can live at the expense of everyone else, what would he say and do in a world of unfunded liabilities and the power of the printing presses extended to bail outs that may soon extend to local politicians??!

The male animal

Most people are overconfident -- even though not everyone is above average. Given the choice beyond systemic underconfidence and overconfidence, I can see arguments for the latter. Animal Spirits will probably do more to end the present recession than all of the industrial policy coming from the political establishment. Indeed, we hope that the former is not defeated by the latter.

This study reported in the May/June 2009 Federal Reserve Bank of St. Louis Review presents findings from a study that corroborates that overconfidence is international. And, other things equal, less of it is shown by males.

The survey says

Evoking American Exceptionalism is always a good conversation starter. And post-2008election, I encounter many who express relief because the world should now think better of us. Putting aside much of the civilized world, I have had trouble embracing the idea that getting the continent that gave us Hitler, Stalin, Franco, Moussolini, Petain (to name a very few) not so long ago is by any stretch morally superior.

This morning's WSJ includes "Getting to Know You" by Naomi Schaefer Riley. I liked this passage:

Political scientists Robert Putnam of Harvard and David Campbell of Notre Dame are trying to find out. Their book, "American Grace: The Changing Role of Religion in American Civic Life," won't come out until next year, but the two scholars shared some of their findings at a recent gathering sponsored by the Pew Forum on Religion and Public Life.

The authors said that they had conducted a survey of 3,100 people in the summer of 2006 and reinterviewed the same people a year later. They found that Americans have remarkable rates of "religious bridging," a phrase they use to describe relationships between people of different faiths. Such bridging -- at least in part -- accounts for Americans' warm feelings toward people of other faiths.

If you ask Americans about their five closest friends -- the sociological equivalent of T-Mobile's "fave five" -- it turns out that, on average, between two and three of them are of other faiths. And more than half of Americans are actually married to someone of a different faith from the one in which they were raised. Just to be clear: For two people to be counted by Messrs. Campbell and Putnam as of different faiths, they must be from significantly different traditions; if they are both Protestants, one must be evangelical and the other mainline.

These are remarkable findings. While the authors have not broken down data from other countries yet, one need not spend a lot of time in France or Saudi Arabia to realize that these kinds of interfaith friendships and marriages are the exception, not the norm, there.

War stories

Stories on and about the financial crisis (even what to call it) come at us almost daily. Some of the best ones are in the New Yorker, including the recent one by Nick Paumgarten. The bon mots flow.

And speaking of stories and story telling, I am reading Ed Leamer's new Macroeconomic Patterns and Stories: We are Pattern-Seeking, Story Telling Animals.

Our best data and best econometrics actually tell us very little until we have good stories. It's an old point, but Leamer tells it best. In terms of aha-moments per page, very few authors that I have read can touch what Leamer has accomplished.

Up from tribalism

I, for one, am happy to see the Pope in Jerusalem. James Carroll's Constantine's Sword: The Church and the Jews keeps coming to mind. Tribalism was once universal, and Europe's rabble was mired in tribalism for far too long. But it also took its elites (in Rome, Berlin, Paris, etc.) a very long time to rise above it. One can say that it took the Holocaust.

Breaking news

From today's LA Times, this speaks for itself.

White House calls for $17 billion in budget savings
The administration, which is proposing record deficits in its $3.55-trillion budget, calls its list of suggested cuts a worthy start.

Reporting from Washington — The Obama administration plans to deliver to Congress today a guide for saving about $17 billion in federal spending next year -- as part of the $3.55-trillion budget for 2010 that the president has proposed.

Acknowledging that the savings would be a fraction of what President Obama is asking Congress to spend in the record federal budget, the White House called it a worthy start.

"Seventeen billion, to anyone's accounting, is a significant amount of money -- that's in one year alone," a senior administration official said, requesting anonymity when discussing administration planning. "This is an important first step," the official said, "but it is not the end of the process."

About half of the proposed savings come from the Defense Department -- largely cuts that Secretary Robert M. Gates has recommended, such as curtailing purchases of F-22 fighter jets and development of a new Marine One presidential helicopter fleet.

The White House is proposing cuts in 121 areas, including about 80 the administration had not previously disclosed.

Among the proposed cuts:

* A Long Range Radio Navigation System that has been rendered obsolete by Global Positioning System satellites, yet costs $35 million a year -- "perpetuated by inertia," the official said.

* Abandoned mine land payments, with the federal government continuing to pay states for mine cleanups after they are finished, at a cost of $142 million a year.

* Even Start, an early-childhood education program that costs $66 million a year. Though supporting Head Start and other early childhood programs, the White House called this one inefficient.

* An attache for the Department of Education in Paris, France, who costs the agency $632,000 a year.

"We are trying to cut back on the things that don't work and spend more on the things that do," the official said.

While promoting possible savings, the Obama administration also is proposing record budget deficits, with a promise of cutting the annual deficit in half by the end of the president's term. The deficit is expected to exceed $1.2 trillion in the 2010 budget year.

"We inherited . . . a large budget deficit. . . . We necessarily had to add to it," another senior administration official said Wednesday. But "our long-term growth requires that we tame these deficits. . . . So the president ordered a line-by-line review of the federal budget . . . so that we could make room for the things that we truly do need."

Very very nice

Via Private Sector Development Blog, have a look at this. The exponential growth of cell phone networks and use in rural and poor areas of the world means that wonderful applications follow.

Follow the twins

Studies of twins are among social scientists' most powerful tools. And everyone knows that North and South Korea differ dramatically in just about every way. Twenty-five years ago, the same could be said about East vs. West Germany, and Taiwan-Singapore-Hong Kong vs. mainland China. Culture was held constant, so performance differences could be pinned to policies. The simple conclusion was always that socialism does not work.

In "A Tale of Two Islands", the authors compare the performance of Barbados and Jamaica. Similar history and background, but different outcomes and contrasting policies. Statism, again, comes up way short.

No shame

This is an old theme, but it cannot be ignored. Those who make a career of bleeding for "inequity" in America are culpable (and hypocritical) via their support of the education establishment. At least Arlen Specter was up-front on what it's all about.

Last Sunday's LA Times included this story about the impossibility of firing incomptent (and worse) LA public school teachers. The details of the story are chilling. Today's Times follow-up editorial mentions that, "Striking a balance between students' rights and legitimate job protection can be tricky, but it is also achievable." Huh? And who will do all this?

Today's WSJ calls attention to who in Washington DC opt to send their own kids to private (or suburban) schools, but work hard to take a few meager vouchers away from poor families. (Here is another take from today's WSJ)

I know the story. The much preferred way to "help" the riff-raff is to funnel more public money to corrupt and incompetent big-city school districts. Politicians do know how to count votes.

Cases and lessons

If you are in business or in business school, cases studies are oxygen. The studies that find their way into the curriculum are just the sampling; you want to spend your whole career learning about the poignant episodes as they unfold. Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years is of a genre and a mostly a good read. The stories are worth knowing, but the authors spend too much time and space reiterating the obvious.

Yesterday's NY Times included "Encyclopedic Knowledge, Then vs. Now ... Ultimately Encarta couldn't match a search engine." Most of us are now big fans of Wikipedia and naturally smile at the big Microsoft misstep. Well, I never predicted Wikipedia and I do not know who did. The nature of progress is that there will be many misses before the market selects a hit.

Being open to new approaches and letting the other models fail is all we have. Sounds simple, but it's not. A substantial part of what politicians do all day is to try to stop or police new approaches while they do what they can to prop up the failures.

Free advice

What's a blog for if not to advise the President of the U.S.? Barak Obama will now make his first appointment to the U.S. Supreme Court. Why not go with the smartest man in the land? That would be Richard Epstein. Anyone who does not believe me should read Epstein, in particular his latest book, Supreme Neglect: How to Revive Constitutional Protection for Private Property.

I agree, it's a longshot.

Rising star

City life breeds the ideas that are essential to economic success. Economists are late to the party, but now working hard to incorporate the insights of Jane Jacobs. Here and here are some of the examples of recent progress by urban economists.

Some very smart people are making progress towards a better understanding of how economic growth, human capital, innovation, agglomeration, location and urban structure interact.

Richard Florida has also taken a crack at the problem. But his critics (notably Joel Kotkin) chide him for his focus on a "creative class" that is seemingly defined in terms of just the "hip, cool, single, culture-oriented". Some of my best friends are pretty creative, but not at all hip, cool, single, etc.

Now comes this via Pierre Desrochers. There are predictable criticisms and there are less predictable criticisms. But who among us is so skilled (or so lucky) that he is attacked from, both, the right and the left? Florida's star is still rising.

California Dreams

Here is Supertrain via Cafe Hayek.

But here is what train stations through California's heartland (Bakersfield, Stockton, Modesto, Fresno, Lodi) will be like when we have high-speed rail.

Worth reading

Phillip Blom's The Vertigo Years: Europe 1900-1914 is a delight. Here is how he sums up:

The revolt of unreason was a revolt against modernity itself. It held the idea of an ancient and immutable essence of man against the unstable identities of city folk, it articulated itself in the male backlash against early feminism, in violence and the cult of manliness, in reactionary politics. But it was not backward-looking in all its aspects: it also played an important role in Futurism, avant-garde art, and 'scientific' racial theories, in mysticism, and in the careers of men as different as W.B. Yeats, James Joyce, Adolf Hitler and Mark Rothko. The cult of unreason was important to movements as seemingly incompatbible as abstract modernism and fascism.

The years leading up to the Great War were (of course) much more than a belle epoque, after which the lights went out all over Europe -- once again.

The Big Lie

Few things in public discourse bug me as much as The Big Lie: We can get economic growth and energy/environment benefits in one stroke (or one free lunch).

Many politicians (including President Obama and Gov Schwarznegger and Mayor Villaraigosa, the ones to whom I send most of my tax dollars) cannot live with the hard (inconvenient) truth that if we want expensive technologies, there are sacrifices involved. The fantasy is routinely embraced by clueless journalists.

All of this is (and more) explained brilliantly in this paper.

Go figure

From The Economist (April 25, 2009), here is something that I do not get. Just as the SEC gets ready to relax an oligopolistic arrangement that was poison, the FRB wants to maintain it.

The wages of sin ... The Fed is perpetuating a discredited oligopoly

BY MISREADING the risk in mortgage-backed securities and other “structured” products, the rating agencies Standard & Poor’s, Moody’s and Fitch played starring roles in the failure of finance. Their punishment? Oddly, the further entrenchment of their dominance, thanks to the Federal Reserve.

The Fed’s lending programmes, such as its commercial-paper facility and the Term Asset-Backed Securities Loan Facility (TALF), accept only collateral that has been appraised by a “major” rating agency, ie, one of the big three. This marks a setback for the seven rating firms that have been recognised by the Securities and Exchange Commission (SEC) more recently, including DBRS and Egan-Jones. It also sets the Fed in conflict with the SEC, which introduced reforms in 2006 to promote competition by speeding up the approval process for rating agencies.

The Fed has promised to consider expanding the list of eligible raters, but Ben Bernanke, its chairman, recently said he was “comfortable” with the big three’s revamped ratings models. Their rewards could be handsome: up to $400m in TALF-related fees alone, reckons Richard Blumenthal, Connecticut’s attorney-general. He has launched an antitrust probe and accuses the Fed of “rewarding the same companies that helped burn down the house”. Keen to restore securitisation’s credibility, Wall Street’s main trade groups, too, want the TALF opened up to smaller rating agencies.
Dan Curry, head of DBRS’s American business, notes that the Resolution Trust Corporation, which cleaned up the savings-and-loan mess in the 1990s, insisted on using firms of all sizes to rate the mortgage securities it issued. That gave a lift to upstarts, including Fitch. “Public agencies have tremendous power to influence the industry’s structure in times of crisis,” he argues.

The inspector-general for the government’s financial-rescue efforts this week urged the Treasury to scrap the use of credit ratings for TALF securities altogether and do the screening itself. That may seem far-fetched because investors still find comfort in ratings (a proposal to reduce money-market funds’ reliance on ratings was shelved last year after the largest funds voiced opposition). But better no ratings at all, perhaps, than those of a discredited oligopoly supported by a short-sighted central bank.

Turnips

High-speed rail for the U.S. is crackpot. Here is a report that spells out why. With apologies to Bruce Yandle, HSR is all about "Baptists and bootleggers", but with an assist from "deep thinkers" (Tom Sowell).

Supporters skip over boring considerations of cost-effectiveness and switch to the polar bears and rising sea levels. But any plausible accounting of HSR's external benefits does not improve HSR's sorry scorecard. One would hope that the Copenhagen Consensus put that idea to rest.

What can be done? Julian Simon succeeded in getting one of his antagonists to put up or shut up -- with his own money. (The latter may be pretty exotic for some of that crowd.) So HSR is a betting opportunity for many of us.

Trouble is we have to live long enough. These projects take a while to get going. And proponents are big on "the long view". One of my old professors once reminded us that at a zero discount rate, one can argue for filling in the Gulf of Mexico to grow turnips.

Too big to fail

Joseph Schumpeter's Creative Destruction is a powerful two-word summation of the dynamics of capitalism. It explains much, including the four-word counterforce that it elicits: Too big to fail. A wonderful summary of how these two phenomena square off is in this week's New Yorker, Peter Boyer's "The Road Ahead: Smyrna, Tennessee, vs. Detroit." Actually, the plot involves Detroit, Smyrna and Washington. We had all heard the rough outlines of this story before, but consider this gem from Boyer's coverage:

G.M's most urgent problem was a crushing debt burden, much of it from its obligations to worker-benefit programs. The union workers had been promised lifetime pensions and full health coverage, and, after a 1970 strike they were also granted the option of retiring after 30 years. That meant that a worker who joined the company at eighteen ... could retire at forty-eight and collect benefits for more years than he'd spent as an active employee...

Part of the explanation comes via this quote from the perplexed former auto worker/union leader who cannot grasp how and why the party ended. "George Washington would roll over in his grave and call it treason for letting foreigners [Nissan in Smyrna and the rest of the 'Auto belt' that radiates out across the South from Smyrna] come in here and take away what we had built."

Normalcy

Porsches in China. Prostitution (and other illicit stuff) in Baghdad. I place both in the good news file. The first story would have seemed insane for most of the latter 20th century. The latter would have surprised those who had written off Iraq.

"Success" is overused and hard to define. But the idea of normalcy should include Porsches and vices. Getting to a semblance of normalcy is not bad.

The trouble with the data

Ezra Klein posts this from CBO and one can hear the appropriate class warfare background music.

But because the data cover a time span of significant immigration from poor countries, who seriously believes that the comparison has any meaning? The people in these two snapshots of quintiles taken more than a quarter century apart are not the same people. Take the lowest quintile, where were the people counted in 2006 twenty-seven years ago? If they were already born, many were in central America. Are they better off now? Offer them free passage home if they step forward to admit their stupid mistake?

Why not estimate their pre-immigration dollar income equivalents and use that in the comparison?

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.