SPR and FRB

High gasoline prices probably bring out the worst in politicians. Econbrowser evaluates some of the proposals now coming from the White House.

But what if Strategic Petroleum Reserve manipulation becomes the norm? Markets have been trained to react to Fed policy swings (real and expected). They will now be trained to react to SPR policy swings (real and expected) in approximately the same way.

The parallel is worth thinking about. FRB policy calls have only recently become respectable and there is clamor for transparency. Will SPR policy become as problematic? Is that the price we pay for having -- and manipulating -- an SPR?

Perhaps not. Oil will sooner be replaced as a source of fuel than will U.S. dollars as a medium of exchange.

But new policies do create new worries.

Jane Jacobs

Most people find fault with what politicians do. Yet, these critics divide into two camps. Most cherish the dream of a better class of politicians and better outcomes. Others believe that this is naïve and/or silly. They pin their hopes on less politics instead of better politics.

The same divisions apply to the fans of Jane Jacobs. All sorts of people claim her as an ally. Her advocacy of more open-ended spontaneity and less ham-fisted top-down planning has been embraced by most city planning academics who, at the same time, love to assert that “regional problems have regional solutions.” In other words, in this view, Jacobs pointed to the need for “reform” and top-down planning but of a better sort.

Others see her analysis as more proof that top-down planning, even by the most worthy souls, does not hold a candle to a limited ambit for top-down interventions.

Congestion pricing and happiness

I am in Lisbon, appreciating Fado and reading about happiness economics in the Journal of Economic Perspectives. A much wiser blogger would be able to comment on how Fado relates to happiness.

The two papers are "Developments in the Measurement of Subjective Well-Being" by Daniel Kahneman and Alan B. Krueger and "Some Uses of Happiness Data in Economics" by Rafael Di Tella and Robert MacCulloch (unable to link at the moment). Knowing very little about the field, the two papers offered me a splending survey.

Kahneman and Kruger cite a happiness rating by "mean net affect". At the top are"intimate relations," "socializing after work," "relaxing." At the bottom are: "evening commute," "working," and "morning commute."

And there are policy implications. "For example, interventions that reduce the amount of time spent commuting alone (such as congestion taxes and carpool subsdidies) could possibly have a beneficial effect on individuals' emotional states." (p. 21).

Separation of race and state

The 1987 German language film Wanssee Konferenz is reputedly based on the actual minutes of the meeting. The film is well done and, of course, chilling. In several of the scenes, the primitives gathered around the table grapple with racial definitions and get stuck when it comes to consistent classifications of mixed marriages -- and who precisely should be murdered first.

We also know that leaders of apartheid-South Africa felt compelled to come up with racial categories. And the famous "one-drop" rule from U.S. history ludicrously classifies millions of mixed-race Americans as "black". These labels are all politicized and often lethal.

Yet, these days, racial categories are the bread and butter of the U.S. political left -- which is unlikely to ever retain significant power unless old racial categories and grievances are stoked.

The good news is that eventually dumb ideas die. Too slowly, to be sure, but they do recede. Today's WSJ includes the following:

"We Are All Rainbows Now"

"For decades, TV journalist Geraldo Rivera has battled the old rumor that he changed his name from Jerry Rivers to qualify as a Hispanic and thus become eligible for some news outlet's minority-hiring program. As inaccurate as the story may be, it's easy to see why many people believed that someone holding an ethnic card might try to cash it in -- and how the tale fed cynicism about America's emerging system of racial and ethnic 'preferences.'

"A serious legal debate about affirmative action rages on today and will not end anytime soon. Yet once again, an absurd story is drawing attention to the essential difficulty of trying to engineer diversity or make up for past racial wrongs generations after they occurred. Actually, there are two stories, but they both raise the same question: What if everyone in the U.S. is now holding an ethnic chip, theoretically redeemable at some college or workplace or government program? If we all try to cash them in, will the preference edifice collapse?

"We're not there yet, but some signs are pointing in that direction. The first comes from Peter Kirsanow, a member of the U.S. Commission on Civil Rights. Writing about a commission hearing on the development of questions for the 2010 census in the April 12 National Review Online, Mr. Kirsanow noted that the 2000 census let respondents define themselves according to 126 racial/ethnic categories -- up from just five in 1978. Such information is more meaningless than ever, Mr. Kirsanow writes: 'The rapid proliferation of racial and ethnic classifications does little to dampen suspicions that the categories are, at a minimum, arbitrary -- and probably specious. Someone may have been Black of Hispanic origin in 1990, but today that person might be Cuban or 'some other race.''

"What criteria should we use to determine a person's race? Some Americans are trying to use DNA testing to win success or riches in the diversity sweepstakes. A New York Times article Wednesday opened with the story of adopted twins, born of white parents. Since DNA tests purport to show that the boys have a bit of Native American and African blood, their father hopes the newfound ethnicity will help them qualify for college financial aid. Is this the new 'one-drop rule'?

"Then there is the 98% 'European' woman who applied to college as an Asian after a DNA test found a 2% "Asian" strain. And with all that casino money out there, it's no wonder that some Indian tribes face people demanding a share of it based on only DNA 'evidence.'

"Evidence is in quotation marks because DNA testing for genealogy involves as much supposition as science at this point. Human beings have so many genes in common that assigning slight variations to countries of origin or specific ethnic groups is often just guesswork. Even so, it is not that difficult to imagine a flood of Americans trying to milk the preference cow this way. Now picture officialdom struggling to respond. In a world where everybody is a rainbow, where does the sorting begin?

"Come to think of it, though, this was always the ultimate goal of people of goodwill: no sorting by race, color or creed. It may just happen by ways and means we never expected."

C'est la vie

France is the world's #1 tourist destination country and Paris is the #1 tourist destination city. And most Paris visitors go to their Disney Park (!); the Louvre is second.

The center of Paris, the only part that most tourists ever see, is certainly splendid and most (not all) of the surroundings look pretty awful. Yet the Ville de Paris (the core) lost population -- from 2.9 million in 1921 to 2.1 million in 1999. Over the same period, Ile de France (the greater Paris area) grew from 5.9 million to 11 million. (Thanks, Wendell Cox.)

And what are Paris planners doing? They are converting boulevard traffic lanes to bus lanes. This is supposed to get people out of their cars and onto transit. Sound familiar? As usual, people are not cooperating. So the cars move more slowly and foul the air more. Claude Raines would be shocked(!).

Prof Remy Proud'homme and his colleagues have done the math and found a $1 billion annual net loss.

Central planning will always be hard work. Tourists will keep coming to the city (including it's Disney Park) and Parisians will keep moving to the suburbs.

Teaching economics

Does teaching economics make a difference? Many of us fervently hope so. Today's International Herald Tribune (April 8-9), includes the following front page story:

"Economics, French-style...looking behind the rebellion on jobs law ... PARIS: Danielle Scache tries to avoid using the term 'capitalism' in her economics class because it has negative connotations in France. Instead, she teaches her high school students about the market economy, a slightly less controversial term she started using last year after a 2-month internship at the dairy giant Danone. That was an experience that did away with one of her own predjudices, she said. 'I was surprised to see that people actually enjoyed working in a company,' said Scache, who is 59. 'Some of them were more enthusiastic than many teachers I know.'... Scache, who has been teaching economics for 37 years, said her stint at Danone made her realize how little the official syllabus focuses on the market...."

The article is priceless in how it depicts economics instruction in France. Many of us hope that ours in the U.S. is more friendly to the idea of markets and spontaneous orders -- but you never know.

I have been teaching in Paris for two weeks now and must say that my students were bright, attentive and open -- and much more sophisticated than the curriculum described in the IHT piece.

A world of internalities

The Economist (April 8, 2006) includes "The new paternalism: The avuncular state," a nice summary of the views of "behavioural" economists and the policy implications that follow.

Referencing company pension plans, the article cites a study of "soft paternalism" whereby the default was changed from the employee not in the plan (and he has to join but with minimal effort) to the opposite (and he can withdraw with minimal effort). The punchline is that the enrollment rate jumped from 49% to 86%, indicating a benign application of policy.

Who can object? There is always the slippery slope argument. One can imagine all sorts of intrusions being sold under the guise of SP. For example, the article mentions "internalities", a reference to how our demons can dominate our better angels. Taxes and subsidies could help the good side win.

Acquiesce to that program and the slippery slope becomes the precipice that no one wants. Most of my students have been weaned on the idea of an external cost (and an associated fix) around every corner. Economists have now compounded the problem by adding a world of internalities.

It's not easy being rich

China's move to prosperity includes more suburbs and more chunky folks. Therefore suburbs make you fat.

According to the messages from the people at National Public Health Week, almost anything in our surroundings contributes to our being fat or unhealthy. Add the no trade-offs mentality to the no personal responsibility view and you get their menu of "solutions" to redesign the world.

Good, then, to see that the Transportation Research Board's Does the Built Environment Influence Physical Activity? Examining the Evidence leans in the agnostic direction.

Yes, our French brothers and sisters are thinner than so many shockingly fat Americans. So, by all means, let's not let our fellow citizens (oops, and non-citizens) off the hook by painting them as simply victims of their environment.

Manifestations

Time stops when you're in love or in revolution.

I have met any number of Parisians over a certain age who are neither. In fact many are embarrassed by the "manifestations" (great word) that emerge at train stations, monuments and highways -- at odd moments. The participants that I have seen seem to be rag-tag, young and prone to the romance of the barricades.

What is so sad is that they are willing to trade job security at their first job (!) for the prospect of growth and development. Sinecure over career prospects and challenges.

One Parisian, writing to the International Herald Tribune (April, 3, 2006) muses: "The unemployment among French young people is linked to global unemployment. If you reduce job security, you also reduce the faith people have in their future and, by the way, reduce their consumption. If there is a decrease in consumption, France will have to face a decrease in growth which will produce an even higher unemployment rate. If that is the aim of the French government, fine; but do not expect reasonably not-too-stupid students let France go to ruin."

The writer apparently eschews "Anglo-Saxon" economics. We may like our demand curves downward-sloping but that may simply be an acquired taste.

2006, not 1968

And what did you do during the (Paris) revolution?

Most people went about their lives, little affected by sturm und drang a few blocks away. No reference to that in the papers.

Nevertheless, it's a good time to be reading Benjamin Friedman's The Moral Consequences of Economic Growth. "Economic stagnation begets movement away from openness, tolerance, mobility, fairness, democracy."

Some of many reasons to opt for growth -- and to banish the equity-efficiency trade-off idea that so many textbooks still peddle.

A thing to behold

Charles Murray does the math and shows that we are rich enough to engage in serious redistribution but without the politicians and without an army of bureaucrats.

In today's WSJ, Murray describes "A Plan to Replace the Welfare State ... Give every American $10,000 a year -- and nothing else." And require that $3,000 per year must be spent on health care. Job lock-in would disappear. Incentives to build families would increase. It is all elaborated in his new book, In Our Hands, How to end poverty and restore the American Dream.

The plan is bold, provocative, and (as they say) dead on arrival. Yet the mountains of literature on how to tinker with what we have amounts to a failure of imagination. Bold strokes are welcome.

Productivity is surging and will only accelerate. It is the New Economy of unprecedented wealth. All that we are missing is the good sense to move ahead with sensible redistribution.

When Milton Friedman proposed school vouchers many years ago, the idea was also radical; it now has every teachers' union on the defensive. The power of good ideas is a thing to behold.

Tricky for oldies

The March 20 New Yorker has a fascinating article, "The Raid: How Carl Icahn came up short," referring to his aborted raid on Time-Warner. It's all about big deals and big stakes.

The story also includes: "With much less success, Icahn went after Blockbuster. In December, 2004, he announced that his nearly ten-percent ownership of the video-rental chain made him its largest individual shareholder, and he championed a merger between Blockbuster and a rival, Hollywood Entertainment. Icahn also demanded that shareholders be paid a three-hundred-and-thirty-million-dollar dividend, and he waged a proxy fight to elect himself and two other dissidents to the seven-member board of directors. Icahn won the three seats, but he misjudged the business.'He operates on instinct,' an Icahn advisor said. 'He thought Blockbuster was a monopoly and was poorly run. He didn't know about Netflix ...'"

Making big bucks bets in the fast-moving digital world is tricky for oldies.

That's why they call it dogma

In the April, 2006, Reason (no link available yet), Bob Nelson writes, "Local government has been increasingly privatized since the 1960s. I don't mean government services; I mean government itself. In 1965 less than 1 percent of all Americans lived in a private community association. By 2005, 18 percent -- about 55 million people -- lived within a homeowners association, a condominium, or a cooperative. Since 1980 about a half of all new housing units in the U.S. have been built within such associations; in California, the figure now is at least 60 percent."

Impressive numbers. But the phenomenon, as far as I can tell, is largely ignored in the academic urban planning journals. When it is cited, it is wrongly characterized as all about gated communities, which constitute a very small part of the trend.

Bob Nelson has been documenting the rise of private communities for many years. He elaborates in his 2005 book, Private Neighborhoods and the Transformation of Local Government. I have been using it in my economics for real estate developers class.

Chris Webster and Lawrence Lai, in Property Rights, Planning and Markets (2003) elaborate five emerging spontaneous orders:

"Organizational order emerges as individuals pool property rights to form firms. Institutional order emerges as society invents systems of rules and sanctions that reduce the costs of competition. Proprietary (ownership) order emerges as those institutions allocate property rights over scarce resources. Spatial order emerges as individuals and firms seek locations that minimize both travel-related transaction costs and information search costs and that balance these against congestion costs of crowded cities. Public domain order emerges as individuals engage in collective action through governments and other agencies to clarify property rights over jointly consumed goods (externalities, public goods and natural resources) and thereby to reduce the costs of competition and in the extreme, the costs of anarchy."

Several of these orders are evolving simultaneously in the private comunities trend that Nelson writes about.

And events are undermining planning dogma which remains stuck in the time warp of top-down ("sustainability") planning.

Central planning is hard work

Central planning is very hard work (impossible according to some) and the one-size-fits-all fallback usually makes things worse.

Today's WSJ includes "China's Winter of Discontent ... Mao-Era Policy Provides Heat Up North but None in South; Shivering Citizens are Fed Up ..."

Sad but true. Planners drew a line across the map of one of the world's largest land masses and ruled heat on one side of the line, no heat on the other.

It's an old story but the absurdities have to be pointed out. The fallback position of many smart people all over the world is still that "the government" will somehow take charge and make things right.

No new taxes

California folklore has it that once upon a time, wise government in Sacramento and sensible taxpayers planned and funded forward-looking infrastructure mega-projects. Then in about 1978, mean-spirited tightwads voted for Prop 13, cutting property taxes and the golden age ended. Gov Schwarzenegger will soon be asking for bond measures so that neglected and underfunded projects can again be implemented.

There are some problems with the tale. First, public officials have ways of wasting the funds and the cost-effectiveness of their choices is always open to question. "Chaos Reigns at Model School ... Newly opened South L.A. High has Big Mac's. a chef's kitchen and a ballet studio. It also has drugs, guns -- and gangs posturing on the quad," reported the LA Times. Not a case of underfunded infrastructure.

A highly politicized school board cannot deliver no matter how gilded the buildings. Meanwhile, far away from the Left Coast, "Indiana Gov. Mitch Daniels has embarked on an ambitious plan to lease the Hoosier state's 157-mile toll road to a private company in order to save money and improve the condition of the road. The plan calls for a 75-year lease to an Australian-Spanish consortium that will pay Indiana $3.85 billion to maintain and collect tolls on the road." The Bluegrass Institute provides the details. No new taxes.

(Blogger not accepting links today).

Japan's dual economy is made up of a world class export sector and an overregulated domestic sector. The U.S. economy includes a dynamic private sector and a sluggish public sector -- but with some exceptions.

Cut out the middleman

Howard Husock writes about "Privatizing the Welfare State" in today's WSJ:

“No matter whose priorities prevail in this year’s budget debate, it is a certainty that the federal government will continue to devote billions to activities known as ‘social services.’ These include everything from foster care to drug abuse prevention; indeed, the Administration for Children and Families alone supports no less than 60 such programs at an annual cost of $13 billion, in addition to the cash welfare payments it handles. Billions more are spent on purposes by state and local governments, often through contracts with private ‘providers.’ Robust public debate has developed as to whether other parts of the New Deal legacy still make sense, but the central role of government in providing or paying for social services appears settled – with the only question being how best to achieve efficiency and effectiveness.

"But should this role be considered beyond debate? It is a question worth pondering today because of a historic confluence of circumstances: an impending wave of charitable giving at an unprecedented level; long-term projections of federal deficits, undermining the assumption that social programs can best be funded by government; and a new generation of so-called social entrepreneurs, looking to try creative approaches to help those in need, and do so on a large scale. These circumstances, moreover, emerge in the context of heightened, post-Katrina public dissatisfaction with the quality of government-provided public services. Together, they provide the possibility of imagining a modern society where major social service efforts are provided on a large scale outside the government, through privately funded, not-for-profit charitable organizations. ...

And right on schedule, today's LA Times reports: "Panel Run by Reiner to Be Audited ... Lawmakers react to reports of spending by First 5 California Children and Families Commission on ads for a new preschool initiative ... A state commission founded by Hollywood filmaker Rob Reiner is facing increased state scrutiny ... "

It just may be that money raised from taxpayers "for the children" is being used, instead, to further the political agenda of a well known Hollywood-left actor.

As Husock reminds us, we can be much more other-regarding when we do not involving a third-party Leviathan.

Help is on the way

Those of us who teach introductory economics are always sifting through all the new products that regularly become available. Some years ago, I was smitted by Paul Heyne's The Economic Way Thinking -- which is now in its 11th editon, by Heyne, Boettke and Prytchitko after Paul's untimely passing.

I have just discovered Arnold Kling's Learning Economics. How could I have missed something so wonderful? It will now appear on my various syllabi, right next to HBP.

Grad students from various disciplines who have wandered into my classrooms have been challenged by Heyne. They will undoubtdely be challenged by Kling. The challenge from both books is not via obfuscation but the opposite. They make ideas so clear and so pointed that they engage readers who might not be disposed to agreeing with them. What could be better?

In Hollywood, they think that Oscar-winner Crash describes the world. Good that we have incisive writers who have a shot at penetrating even the thickest skulls.

Supply and demand not an option

Growth control advocates have always been stymied by the pesky fact that their policies push up housing prices and limit housing affordability -- and hurt families at the lower end of the income distribution most.

There are many other areas where the controllers' positions make no sense -- such as the notion that it is a good idea to "get people out of their cars." People like their cars and mobility and choice.

And the externalities can be managed by pricing.

Today's NY Times Magazine covers all this and more in (in "Home Economics"), citing Ed Glaeser and research by him and his colleagues that exposes the costs of a dumb agenda -- one that presumes that paying attention to supply and demand is an option.

We can only hope that the news does not cause fainting spells all the way from Boston to New York.

Wal-mart, the critics, and time machines

The Economist (Feb 25, 2006) includes a review of the latest Wal-Mart books as well as an Economc Focus column that summarizes some of the recent research. Creative destruction is not popular in polite company so economic efficiency, innovation, low prices, consumer satisfaction -- as evidenced by high profits -- come in only as occasional after thoughts.

The focus is onWal-Mart's impacts on the status quo, wages employment, etc. "There are two sides to every penny it pinches."

It's a no-brainer but what if all of the critics (enjoying their current longevity and lifestyles) were somehow able to subject all of (or just some of) the many past innovations that contributed to their present well being to the same scruitiny -- and the ensuing politics?

Ignorance of historical fact is always a problem -- and we do not have time machines. Yet.

Before his time

George Dantzig had already established his reputation as one of the most important applied mathematicians of our time (think linear programming) so he can be excused for writing a dumb book. Compact City: A plan for a liveable urban environment (1973) is one of those instances where smart person overreaches and embarrasses himself.

Just a little urban economics would have been sufficient to reveal to the great man that there are agglomeration-congestion trade-offs -- and they are peculiar to each setting. In downtown NYC, the trade-off is met via one urban form and in Silicon Valley it is met via another. One size does not fit all.

USC's Bumsoo Lee reports that in 2000, drive-alone commuters to Manhattan's CBD averaged 56 minutes each way; at the other extreme (among the largest U.S. metros) were those driving to dispersed places of employment in Phoenix (25 minutes each way).

Which is better? What are we optimizing? The point is that (fleeting) equilibria work out differently in light of history and available infrastrucutre.

Why bring all this up? Because compact settlement is still the implicit or explicit prescription in hundreds of today's New Urban plans and projects.

In that sense, Dantzig was not simply wrong but wrong and ahead of his time.