SOCIAL ENGINEERING IS HARD WORK -- AND SO IS ECONOMIC ENGINEERING

Writing about the Law of One Price in the Fall, 2003, Journal of Economic Perspectives, Owen A. Lamont and Richard H. Thaler remind their readers that it’s all about arbitrage. They cite Steve Ross’ quip, “to make a parrot into a learned financial economist, he only needs to learn the single word ‘arbitrage.’” The LT piece qualifies all this; they also want the parrot to learn “short-sale constraints,” among other things.

The Economist (Feb 28) reports that the current U.S. economy is going through A phoney recovery because consumer spending is driven by asset price growth rather than by real income growth --and that asset prices reflect a cheap-money-induced bubble – and that the FRB should prick the bubble by tightening credit. The Economist articled cited a recent WSJ op-ed by European Central Bank chief economist Otmar Issing where the writer warned Alan Greenspan not to ignore asset prices. I remember the piece and recall that Issing was remarkably unclear about exactly what AG should actually do about asset prices, besides keeping an eye on them.

Bubbles are defined as price rises that reverse sharply (pop) rather than deflate smoothly -- those cases where short-sellers “lose their nerve” too soon.

Just another hindsight-guided fudge? Wherever asset price appreciation continued unabated, it was because market foresight worked as expected. Where it reversed sharply, short-sale constraints kicked in because (among other things) short-sellers lost their nerve. Is this a thin reed to rest on when making predictions and forming policies? Short-selling is one of those hazardous speculative activities that people in a market economy self-select into, when they choose it as an endeavor. Only the best survive to do it again. As with all speculation, those of us on the sidelines benefit when the players get it right. Sometimes, they will fail. That’s life.

Social engineering is hard work and, therefore, to be avoided. The same applies to economic engineering. Yet, Milton Friedman, of all people, recently wrote that the FRB under AG is finally getting it right. If so, can he please bottle it?

When the six-year cycle of the federal transportation bill's re-authorization coincides with the four-year election cycle, bad things are bound to happen. The bidding war between House and Senate versions of the bill was covered on last evening's Jim Lehrer news. Pious pronouncements about all of the jobs that would be created were even countered by an interviewee who reminded the audience that higher gas taxes divert spending and destroy at least as many jobs as the bill's advocates claim.

Over 200 years ago, Frederic Bastiat ridiculed the porkmeisters of his day by proposing a "negative railroad." When they proposed adding stops to the proposed Paris-Madrid train to "create jobs", he suggested many more stops to augment the effect. In fact, make it nothing but stops; the train would never get anywhere but think of all the jobs.

Ready to deflect piercing jokes about how politicians can create jobs ("outlaw all farm machinery", "break more car windows", etc.) are all sorts of specious stories and stats provided by some of the biggest lobbies in Washington. A way to really "get the money out of politics" would be to get politics out of transportation.

Perhaps another relevant dynamic involves selective memory and what people remember from their economics classes way back when. Wasn't there talk about public spending being a good thing that "brought us out of the depression?" Many people who would smile at Bastiat's joke can always reach for this chestnut.

All economies have inevitable ups and downs. Investors are just human and predict the future imperfectly. Robert Higgs has demonstrated that the depression of the 1930s was lengthened and deepened by New Deal policies.

Californians will soon go to the polls to consider a number of State budget-balancing measures that could only have been written by Sacramento politicians. Real budget reform proposals have been around for some time but are not an option on election day. RPPI's Citizen's Budget is just one example of opportunities avoided. Asset sales and privatization are also off the table.

Yet, even the ballot propositions do not satisfy those who hanker for "modest" tax increases on "the rich" to would avoid "draconian" cuts. That, of course, evokes the class-warfare rhetoric on which many politicians thrive.

The newest Statistical Abstract of the U.S., Table 19, shows State Resident Population -- Components of Change: 2000-2003. California is only topped by New York in terms of internal migration losses (made up by international immigration here but not in New York); Texas experienced gains from both sources.

Tax increases and other policy failures in a federal system run the risk that capital and labor relocate. Listening to the Democratic candidates' views on outsourcing, one gets the impression that the relocation option would also be dealt with were they elected. They would have about as much success curbing out-migrations as they have had curbing illegal in-migrations.

It is discussions of this caliber that leave us with the budget proposals that we have. Vote "no" and hope that the next round of proposals will be better?

The U.S. Census Bureau has just released city-level survey results for 2002 commute times. Metros and cities are large areas and it is hard to generalize. Ask people which U.S. city has the worst commute and most would probably answer L.A. Yet, L.A. is at the bottom of the worst top-ten list, placing at #9 in 2002 (it placed #5 in the same survey in 2001 and #10 in 2000). What was consistent over the last three surveys was #1, New York city. In fact, NYC was the outlier in all three years -- 38.4 minutes one-way vs 28.5 minutes in L.A. vs the median 23.3 minutes (Las Vegas and St Louis), in the latest survey.

NYC has too much transit use and downtowns that are too densely packed -- if we care about time spent commuting.

It has long been a mantra that the "solution" to traffic congestion and long commutes is to "get people out of their cars" and promote higher densities. This prescription is even called "Smart Growth" by many smart people. The real problem is that Smart Growth garners huge subsidies across the country. Spending other people's money on good causes is inevitably politicized and survives with the skimpiest of covers.

The economic and social mobility story is perhaps America's most significant one. Thomas Sowell, again, is clearest about what the data reveal about it. Yet, election year rhetoric nourishes the much bleaker class-warfare story. One of my favorite catch-phrases about modern times is "the democratization of luxury." The political candidates and most of the voters must know that most of us have changed our consumption to what used to be considered high-end or luxury goods. The "family car" is no longer a standard reference because it is no longer relevant for most people. There are more cars per household in America than drivers per household (and also children per household). Likewise, a second home was once associated with great wealth but is becoming a standard in the upper reaches of the middle class. Because of the power of the trend, the second-home market may be the most important one for real estate investors and developers to be thinking about.

Can it be that people's every day experiences and the rhetoric that they abide in politics do not jibe? Is there a political cognitive dissonance? Does the "rational ignorance" insight from public choice theory say as much about the level of interest and due diligence by voters (and non-voters) than simply their odds of bothering to vote?

Thomas Sowell notes, in this morning's WSJ, that the public discourse on topics that touch on Econ 1 (trade, tax cuts, price controls, etc.) is abysmal. Citing the incentive structures facing academic economists, he concludes that they are not doing enough to get the word out. There is certainly some truth in this. As one who has been teaching economic principles (Economic Thinking, using Paul Heyne's much better label) for many years, I want to add that there are other problems. Among the cultural baggage that many people carry around is a deep faith that the world is basically zero-sum -- and a suspicion of (or discomfort with) positive-sum outcomes. This presumption is endorsed in many other messages that young people get -- in and outside the classroom.

Another aspect is the fact that not all economists actually agree with Econ 1. Many have considerable intellectual capital invested in market-failure theory and theorems. There are many more of these than there are policy-failure theorems. Why is it so? There has been some discussion on the public choice listserv that public choice theory does not yet have a canonical model. Perhaps. Yet, good ideas do eventually drive out the bad ideas. It often takes a long time.

The latest Cato Journal includes several papers that continue the exploration of the statistical links between economic freedom and prosperity. Some are careful to distinguish between economic and political freedom and find that the former is the most potent. These results augment what FreeTheWorld.com has been showcasing for some years. As the international data and the statistical methods improve, the evidence accumulates. This literature is perhaps Adam Smith's most interesting legacy -- moreso than welfare theorems from general equilibrium economics.

Sunday throw-away Parade magazine yesterday updated their Ten-Worst-Dictators list. Curiosity got me to open it. Yes, the ten-worst differs from last year's because Saddam is off, as is Charles Taylor; Qaddafi no longer makes the cut. Interestingly no mention of trampled property rights. (Mugabe's land grab is simple referred to as playing the race card.) Yes, no elections, torture, lack of due process are horrid but property rights are a key human right. The international agencies that the Parade reporter sourced apparently do not think so.

Economist and CEA head Greg Mankiw was recently batted about for noting the obvious, that the international outsourcing of jobs is a good thing. He had to quickly recant, claiming that what he really meant was that trade "creates jobs".

In an election year, employment and unemployment are perhaps the most fathomable of economic indicators. Yet, for about as long as there have been national income statistics, there have been discussions about their limits. Lawrence W. Reed recently offered a nice discussion of some of the problems.

Today's NY Times (p. BU 6) includes a summary of reasons why the two BLS surveys (of households and of businesses) differ. There are many reasons, including the hard-to-estimate growth of off-the-books work.

An interesting elaboration is by Virginia Postrel in today's NY Times Magazine ("Sure, the country is losing manufacturing jobs, but who's counting all the ones it's gaining among manicurists and spa workers and graphic designers?").

It is likely that even Alan Grenspan and the Fed's Board of Governors and their large and able staff only have a hazy idea of economic conditions. How, then, can they manage the money supply and economc growth? They probably cannot. The real question is whether their actions do more to dampen than to deepen economic ups and downs.

Interestingly, Milton Friedman (of all people!) recently wrote in a WSJ op-ed that the Fed is now doing a pretty good job.

I was once asked about widespread boosterism for big-city downtowns, where fewer us go anymore but where there are continuous and pricey efforts to revitalize. I think that I mentioned that many people confuse the downtown with the hometown. This sentiment is, of course, often hijacked by those with lots to gain from the large-scale transfer of resources involved in most redevelopment projects.

Likewise, in the recent Los Angeles neighborhood secession votes, many smart people worried about the demise of the LA idea -- if its government was split. This sentiment confused the government with the place; it also confused the government with the idea of the place. The sentiment was, of course, eminently prone to hijack -- as it was by those who had an economic stake in the status quo.

Thoughts like this are elaborated and probed in The People's Romance by Dan Klein. Klein's many insights are auspicious for anyone prone to head-shaking when, against all the evidence, smart people continue to embrace the idea of a benevolent state and go on to support state programs and their political champions.

Everyone complains about highway congestion but no one does anything about it. Well, not quite. Lots is done but mostly the wrong things. Anyone with a passing acquaintance with economics knows that if price does not ration, something else will. In this case, it is crowding which results in substantial dead-weight losses.

Not long ago, time-of-day highway access pricing was dismissed as making sense only to economists . Yet, the feasibility of the approach is now clear because, not only have there been a mountain of studies but, there have also been numerous trials around the world that demonstrate that Econ 1 really works. Singapore since 1975 is an auspicious case as is London since last year. Now, even the socialist Mayor of London gets it.

Not here. The latest U.S. study of the problem, by the Highway Users Alliance, finds 233 crossings and interchanges in the U.S. that, together, account for one-half of all the congestion. Right on schedule, there is a multi-billion transportation bill pending in Congress that promises relief via highway construction and more public transit projects

Pricing is usually fended off as "inequitable" -- and it would undermine the porkfest, the perennial political favorite. We all know how "equitable" pork spending tends to be.

Milton Friedman has demonstrated that the costs of government are not simply measured by the taxes we pay (or by what they spend), but must include the costs of mandates that they routinely impose on the private sector. In this case, not only are wasteful highway and transit projects added as a putative solution but an uncountable number of land use regulations and construction barriers have been put in place to create settlement patterns that are supposed to limit auto traffic. As mentioned in yesterday's blog entry, these are expensive and ineffectual.

The costs of avoiding the road pricing option are, then, staggering. Most textbooks refer to congestion as an example of a market failure. It is really much more a policy failure.

Reformers gravitate towards seemingly simple "solutions". Too much crime? Ban guns. Too much smog? Many would, of course, love to ban cars but that may be even more tricky than trying to ban guns. So what can be done "to get people out of their cars?" Get them to live at higher densities. Easy. Well, no. Most Americans like their cars and their spacious living. Alas, many years of "smart growth" plans have had almost no impact.

The most interesting evidence is from abroad where policies are different and where the people are surely more sensible than here.

USC colleague Gen Giuliano (with grad student Dhiraj Narayan) looked at a large sample of travel diaries from the UK and found that, "how people travel in Britain has very little to do with low-, mid-, or high-density living."

Another USC grad student, Bumsoo Lee, and I compared settlement trends in Canada with those here. We found that, as in the U.S., jobs and people are suburbanizing -- in spite of even tougher policies in Canada to get people to do the right thing.

Social engineering is very hard work because people's preferences find a way of being honored. It's not easy being Green.

Put enough money into a government program and they can put a man on the Moon. In a world of scarcity, however, the truism is irrelevant. Put enough money into a government program and can they keep us safe and secure?-- a responsibility that they are actually charged with in the U.S. Constitution.

Intelligence agencies consume a lot of money (actual amounts unknown) and they often fail miserably. Perhaps worse than the Iraq WMD failure by all of the Western intelligence agencies was their inability to detect 15 years of nuclear secrets sales by Pakistan's Abdul Qadeer Khan. Yesterday's WSJ featured an op-ed by Bernard-Henri Levy whose best-seller in France, "Who Killed Daniel Pearl?" seems to have been closer to reality than anything else. Levy argued that Pearl was murdered because he was on the trail of the Pakistani clandestine nuclear secrets sales. The Khan confession (and his strange public pardon by Pres. Musharraf) gives Levy's version some substantial corroboration.

One free-lancer upends armies of professional spooks. Is anyone surprised?

On the positive side, only in open societies can we expect to get even one man who gets it right.

Writers Joel Kotkin and David Friedman list their "Top 25 Cities for Doing Business in America" in the March issue of INC. Magazine. The top three are Atlanta, Riverside-San Bernardino and Las Vegas. Many such rankings are published each year but this one acknowledges where labor and capital are actually choosing to go. Of course, these places are not the darlings of planners and elites who prefer Portland and Boston. Once again, bottom-up messages and top-down plans conflict. Whereas the winners of the calculation debate are widely acknowledged to be the side that argued for markets and local knowledge, land markets are still thought to be best managed top-down. Why this exception?

Economists have argued that Americans (prompted by tax codes) have overinvested in housing and, therefore, have a demand for tough property rules that they get from local governments.

Economist William Fischel has elaborated the "homevoter hypothesis" and the appeal of small cities and their governemts as a source of property rules. The rise of private communities offers another chance for homewoners to get the rules they want. New developments with market-pleasing rules of governance thrive in the places that make the Kotkin-Friedman list of top cities. Bottom-up rules of property are on the rise. It is still unclear whether this means that top-down rule-making will recede. It has fostered an expensive "approvals process" -- and housing shortages and "afforadability crises" along the way. The resulting approvals lobby and top-down real property rules now have a considerable constituency.

The protectionists (anti-globalists seems to be the up-to-date appellation) may have the upper hand this election year. "U.S. Firms Lament Cutback in Visas for Foreign Talent ... Companies say too few in U.S. have the needed math and science skills. Critics claim the H1-B program is misused," reports this morning's LA Times. The same edition cites recent findings by USC colleague Dowell Myers, that, "Latinos are experiencing a degree of upward mobility not previously detected by demographers." The upward mobility story has always been the one that is most significant and auspicious. And most people combine geographic with social and economic mobility. Yet, politicians are typically not equipped to take the long view. We have to muddle through in spite of their input. It's a wonder that we are as prosperous as we are.

A recent World Bank study concluded that if Atlanta could somehow be remade into Boston, its annual vehicle miles traveled (VMT) would fall by 25 percent. Left unsaid was the fact that, in 1990-2000, the Boston metro area grew by 6.7 percent while the Atlanta metro area grew almost six times that, 38.9 percent. And so it goes.

Just last Sunday, the LA Times real estate section featured "New generation is right on track ... Transit villages appeal to home buyers who are willing to sacrifice square footage to be closer to rail stations." Towards the end of the article, there was brief mention of the huge subsidies involved in transit village development. Even larger subsidies to rail were not mentioned.

In 21st-century America, top-down land use planning is alive and well -- with predictable results. Pricey redistribution towards favored builders and little of the intended revitalization effect. The fact that people are steadily voting with their feet away from planners' favorite sites seems not to matter. Serious cost-benefit analysis is never considered. Whether it is World Bank economists or LA Times reporters, it is enough to simply presume that it's a good thing.

Democracies do not make war on each other and the number of democracies is increasing. So, we are headed for world peace. Well, slowly. Primitives understand that they are on the wrong side of history and are ruthless in their response. September 11 proved that they now have the means as well as the will to do great harm. This is now a war as auspicious as the ones against Nazis and Communists because precious values of freedom and liberty are at stake.

In a very harsh world, there are high costs to pay -- in lives, in treasure and in some loss of liberty and tranquility at home. High costs for high stakes is the way of the world. The fact that Americans, unlike many Europeans, are willing to make the sacrifices is profound.

The mission is never "unilateral"; there are many strong supporters -- notably those who had a front-row seat at the performance of the former East Bloc. Many others, notably Turks and Saudis, also having been recently hit, are rethinking their pre-war stance.

The "international community" by the East River UN headquarters is hardly that. It is, rather, a bloated bureaucracy with an outlandish and misplaced sense of self-importance. More unintended self-parody than heft, witness the pathetic UN performance in Bosnia and the tragic and steady non-performance in Africa's civil wars. Paul Johnson has urged that the UN relocate to an African capital. Less NYC high-life and more exposure to some harsh realities.

Historian Robert Higgs has documented how wars exact costs in terms of an expanded size and scope of centralized power. The bright side is that whereas growth spurts in the size of government during war are never fully surrendered in peace time (the "ratchet" growth effects that Higgs identifies), losses of liberty are more likely to be recovered. Ever since the Civil War, civil liberties have been many times trampled, whether by Lincoln, Wilson, FDR or rabid red-baiters in post-WWII government. Yet, in another chapter of American Exceptionalism, after all the losses, the long run progress of due process in the U.S. had continued apace. There is, therefore, reason to expect that the excesses of the Patriot Act will be tempered.

The best is always the enemy of the good. Nevertheless, eternal vigilance abroad and at home must and probably will remain standard practice. Our strength is that we are likely not to be on a slippery slope.

Charles Murray's Human Accomplishment: The Pursuit of Excellence in the Arts and Sciences, 800BC-1950 (Harper Collins, 2003) is an audacious project. The critics that I have read focused on methodological issues (which the author addresses in many of his appendices) and the predictable political ones (which he also addresses). Human accomplishment as surveyed by Murray is, of course, breathtaking. The giants identified in 21 areas (arts and sciences, east and west) and their works are astonishing. As the author suggests: "how can people do that?" There are giants among us.

One has to ask: are these giants of the arts and sciences also the moral giants? Probably not. It is reminiscent of questions over whether culture matters, or whether high culture matters. Twentieth-century Europe offers an answer; the hotbed of Western culture spawned horror and terror on an unprecedented scale. This is the continent that gave us Hitler, Stalin, Mussolini, Franco, Milosovics and many of their ilk -- plus millions of willing and enthusiastic followers. Clearly culture must be enjoyed for its own sake.

Adam Smith clarified the benefits of the market system as well as the "esteem system" (Dan Klein's appellation). The latter refers to the importance of trust in producing valuable market as well as non-market interactions. Both breed prosperity and liberty and more -- and are likely to keep spreading. These,then, are some of the sources of human goodness that we can identify. High culture, on the other hand, appears not to be a bulwark against evil. It is simply there to be savored.

A Republican Congress and President offer us an expanding welfare state financed by large deficits. Ideology is trumped by electoral politics. Public Choice economics offers the explanation that affluence is the problem. As the opportunity cost of serious political participation increases, more people choose "rational ignorance". (Yes, voter participation increases with income and education but all strata participate less now than in the past.) Most people either do not vote or they participate via a paper-thin level of interest. This is why appearances, hairdos, images and (pricey) twenty-second TV spots matter so much. The consequence of low levels of participation is that interest groups win. The shorthand way to say it is that rich societies choose to afford bad government.

There is, seemingly, no way out. The argument suggests that reform via spending and taxation caps or super-majority voting requirements is unlikely.

Yet, the courts could be helpful. Political gerrymandering is now a science. Data, hardware and software are better than ever. Within the last ten years, the proportion of incumbents re-elected in the U.S. House of Representatives has risen from 92% to 98%. It cannot go much higher. This means that in almost all Congressional (and who knows how many other) districts, large numbers of voters and would-be voters are disenfranchised. In most cases, they sense it or know it.

If we get lucky, the judges and justices may spot a Constitutional problem here. This one would not require a journey of discovery.

Forbes (Feb 16) has an update on heart disease research. It appears that there is good reason to think that leukrotines are a problem and that leukrotine inhibitors are a promising treatment. "Both Merck and Pfizer are now racing to test whether their leukrotine-blocking drugs might work for cardiovascular disease." We hope. In this political season, the demagogues are also racing -- to be the first to threaten "big pharma" for "putting profits before people." The simple answer is that this is impossible; they make profits only if they succeed in saving (extending) people's lives.

It is just like the joke about the deconstructionist who puts aside his objections that science and engineering are simply cultural (and oppressive) artifacts when he is cruising to a conference at 30,000 feet to deliver the bad news about the hegemonists in their white coats.

The demagogues will surely have their lives and the lives of their loved ones extended and/or made less miserable by the nasties who are putting people before profits. Neither group can consider the irony. It is, after all, their intellectual capital that's at stake. What would they do for a living?

Yet, beating up the messenger (deconstructionists or demagogues, even MTV) overlooks the hard fact that they only succeed because they are delivering to an audience. There are large audiences for quirky messages. Mass higher education (a U.S. invention) seems not to have made a difference.

One of my most jarring reading experiences was Peter Landesman's "Sex Slaves on Main Street" in the NY Times Magazine (Jan. 25). His depiction of the international sex slave trade reinforces all of the doubts about humanity that we try not to think about. Young (very young) girls are kidnapped and/or given up by families and condemned to a life of horror. Letters from readers (Feb. 8) echoed their disgust and dismay. Many added that in this case, they felt powerless to "do something." Yet, there are, seemingly, groups that are doing something. Have a look at www.roomtoread.org or www.thailife.de/wecare/depdc/depdc_help.html or www.licadho.org/donation/donation.php or www.streetfriends.org.
Often, a few dollars are enough to buy a young girl a uniform so that she can attend school, get off the streets, and have a chance. Lack of a uniform keeps many out of school. There are many good causes in the world. This one has to be near the top.