Rise and fall

Niall Ferguson's op-ed in today's LA Times is a fine conversation starter. Seeking patterns in the rise and fall of nations is an old sport and not ever likely to go away. Predictions of a U.S. eclipsed by fill-in-the-blank (the USSR, the EU, Japan, Islam, China, etc.) have (mostly) come and gone. Along the way, there are inevitably some silly things that are asserted, but this is in my view interesting, not as forecast, but as discussion.

Over the last three years, the complex system of the global economy flipped from boom to bust -- all because a bunch of Americans started to default on their subprime mortgages, thereby blowing huge holes in the business models of thousands of highly leveraged financial institutions. The next phase of the current crisis may begin when the public begins to reassess the credibility of the radical monetary and fiscal steps that were taken in response.

Neither interest rates at zero nor fiscal stimulus can achieve a sustainable recovery if people in the United States and abroad collectively decide, overnight, that such measures will ultimately lead to much higher inflation rates or outright default. Bond yields can shoot up if expectations change about future government solvency, intensifying an already bad fiscal crisis by driving up the cost of interest payments on new debt. Just ask Greece.

Ask Russia too. Fighting a losing battle in the mountains of the Hindu Kush has long been a harbinger of imperial fall. What happened 20 years ago is a reminder that empires do not in fact appear, rise, reign, decline and fall according to some recurrent and predictable life cycle. It is historians who retrospectively portray the process of imperial dissolution as slow-acting. Rather, empires behave like all complex adaptive systems. They function in apparent equilibrium for some unknowable period. And then, quite abruptly, they collapse.

Washington, you have been warned.

Yikes!

The April 2010 Reason (not yet online) features a cover story on "The Big Lie ... The White House claims the economy is on the mend. That's a fantasy." Editor-in-chief Matt Welch's column is "Obama and the L-Word ... the president's habit of telling untruths." In 2008, millions fell in love with candidate Obama because they believed he was not a standard politician. Falling in love with politicians is never a good idea.

The March 1 New Yorker included a profile of Paul Krugman which noted editing help that he gets from wife Robin Wells.

He had written, “As Obama tries to deal with the crisis, he will get no help from Republican leaders,” and after this she inserted the sentence “Worse yet, he’ll get obstruction and lies.”

There are intelligent adults in the world who go to bed each night believeing that the other side tells lies, but their side is above all that.

New frontiers for twelve-step programs?

Adam Smith did not invent capitalism, but he explained it in ways that resonate. Joyce Appleby's The Relentless Revolution: A History of Capitalism does a splendid job of documenting the complex social and technological developments that occurred way before (and after) 1776. Her story shows the roots of the tensions and antipathies (and confusions) that we see to this day. Guy Sorman's Economics Does Not Lie re today's points and counterpoints brings the story up to date.

Sorman's words are cited in the yesterday's Bret Stephens column in the WSJ, "Europe's Crisis of Ideas". "All European economic policies are the cultural derivative of one dominant, nearly totalitarian statist idoelogy: the state is good, the market is bad." The column is about the Greek crisis and Greek Prime Minister Papanderou's musings that, "This is an attack on the euro zone by certain other interests, political and financial ..."

Tiger Woods took the path of admitting he has a problem. He did not blame "certain other interests." Twelve-step programs for certain heads of state?

News flash: NY Times editorial writer on the side of the angels

How do we assure the survival of endangered species? (i) Place them in preserves and police these places? (ii) Persuade people not to hunt or poach them? (iii) Farm them and let markets provide incentives for breeding and preservation? What if the setting is among relatively poor people and where law enforcement is sketchy? An editorial in today's NY Times ("China's Tiger Farms") is squarely on the side of the angels and wants Chinese authorities to "find a way to alter consumers' tastes". Trouble is we may run out of tigers long before Chinese authorities "find a way".

I love LA

Good food is a wonderful thing. Spectacular international variety of good foods is even better. Here Jonathan Gold toasts some of what Los Angeles has to offer. He even gives a nod to urban planners:

Los Angeles, as urban planners are fond of telling us, is a constellation of a hundred languages and a thousand micro-ethnicities, a complex, Blade Runner–esque metropolis. Does such a postmodern city provide the road map for the future of American food? As a hungry native Angeleno, I can say, We should only be so lucky. —

But the critics often lament that LA is so "unplanned". As always, it depends on what you mean. Jane Jacobs (and many others) did have something to say about the kind of city you get when you stand back and let buyers and sellers do their thing. (H/T TMG).

What evidence?

Happiness researchers keep looking for the link between money and happiness. But it is clear that being poor is not attractive. A lot of research on poor neighborhoods finds reduced consumer choice and higher retail prices. Interpretations are all over the place, including discrimination and the assorted evils of capitalism.

But Debabrata Talukdar's study ("Cost of Being Poor: Retail Price and Consumer Price Search Differences ...") concludes that the carless are hampered from doing comparison shopping and (so to speak) pay the price. (H/T Marginal Revolution).

Public transit does not help -- even though it is promoted as a way to "help the poor." A half-minute of introspection suggests what is obvious: getting around to comparison shop via public transit is too costly in terms of people's time and patience. Declining ridership in spite of rising subsidies provide hard evidence that no one really cares to look at. The transportation reauthorization proposals now before Congress suggest even more money for public transit. Politicians from both parties are on-board. And why not? They get to dole out money to favored constituencies while posturing about how "equitable" and "green" it all is.

And policy making is now all about being "evidence-based"

Matches

There are some changes on my film favorites list.

We all see and hear ads about "scientific" matching that the online dating services now offer. I have not used them (and am not in that market), but Netflix tries very hard to match me with movies. I have been a member for some years (and have rated 662 of their movies as of this morning). I have also seen that they have invested serious money in developing better matching algorithms. But no luck. Either I am too quirky or the algorithm they use is severely limited. They send me recommendations; they direct me to the suggestions and reviews of other members who have "similar" tastes; they predict how much I will like various films as I browse the Netflix site. But I think that I can count the number of successes via this process on one hand.

There are many reasons that I fervently hope my wife keeps me around. Add to that the perils of online matchmaking if it's anything like my Netflix movie matching experience.

What do they know?

Wendell Cox compares various aspects of development in Portland and Atlanta here. Atlanta wins. But Portland, we hear all time, is the more "livable". Never mind that many more people, voting with their feet and wallets, choose Atlanta. But what do they know? Top-down planned livability is now on its way to becoming national policy.

Campus speech

Some who hang out at universities and claim to be involved in academic discourse are actually clueless about it. Here is what happened to Israeli ambassador Michael Oren when he tried to speak at UC Irvine the other day.

Almost a half century ago, the students at another UC campus made history with their Free Speech Movement. But that was then.

About those EV1 charging stations

Today's WSJ includes "The U.S. Needs an Industrial Policy" by former Shell Oil pres John Hofmeister. Well, no. It's about the last thing anybody "needs". But special pleadings by oil execs (and others) is nothing new. Separation of church and state is a good thing, as is separation of big business and big government.

Yesterday's NY Times included this story about the new Tesla electric car. The article noted: "A few blocks from the Tesla Motors dealership here is one of California's charging stations for electric vehicles. But the Tesla Roadster, just the car that planners had in mind when the statewide network was conceived, cannot be charged there." Yup, these stations are all over the State and they are relics. They were put there by industrial policy makers who wrongly bet that many of us would be driving a GM EV1. Things did not work out that way.

The joys of getting governments (politics) involved in picking green winners is now a staple. But not from Tea Party hoi polloi, but rather from captains of industry and Ivy League brainiacs.

Do it in public

Alex Tabarrok and and Tyler Cowen at Marginal Revolution have been good at bringing examples of Markets in Everything to our attention (summarized here). I now see the theme popping up in various blogs. Why not Markets in Everything? Buyers and sellers have strong incentives to help each other. They even find ways to overcome legal prohibitions and taboos.

Today's WSJ includes "Bucks Populi: Making Democracy A Going Conern in Kiev ... Rent-a-Crowd Entrepreneurs Find People Fast to Cheer or Jeer for $4 an Hour." No one can be shocked that there is money in politics or gambling at Rick's. It is only a question of whether the rent-seekers and the rent-extractors do the dance in public or not. Given those options, the choice is clear.

Transit-oriented development?

The LA Times calls this an "interesting experiment" and "an urban complexity." A new Hollywood high-end hotel complex with subway access -- in LA!

Will more arrivals be by limo or by subway? Who cares? LA's MTA, always short of funds and always threatening to cut bus service, owns the land.

Yes, you cannot make this stuff up.

Economic thinking via YouTube

Dan Klein sent this.

Teaching about markets can be great fun. It is all common sense to some, but obscure or exotic (or worse) to others. The video captures this exquisitely.

Shoes dropping

The Watergate conspirators not only burgled, but they badly misjudged the size and scope of their problem. And covering up only made it worse. The rest is history.

How will Climategate play out? Look at this from The Guardian.

H/T The Browser.

No mystery to the mood swing

Prof. Shiller discusses the mood swings among market participants. It is now clear that most people were too optimistic circa five years ago and it is perhaps not unreasonable that they swing to the pessimistic side today. What can be done?

Wendell Cox discusses the high-speed rail boondogle ("The Runaway Subsidy Train") in today's WSJ and I cannot imagine that these investments can make anyone beyond the Baptists and bootleggers (greens and construction interests) involved (thank you, Prof. Yandle) less gloomy. I can imagine that they signal, instead, that policy makers are confused and spenders are in charge.

In this week's Becker-Posner blog, Judge Posner writes about subsidies and deficits. He ends with this:

There is an enormous amount of idle productive capacity in the U.S. economy at present. There is thus a case, as liberal economists such as Paul Krugman keep urging, for further stimulus spending. The problem is that such spending is irresponsible unless coupled with a credible commitment to repay, after the economy recovers, the money borrowed to finance the spending. Not only is there no such commitment; at present the only realistic prospect is of staggering deficits stretching indefinitely into the future ...

I would say that the extreme unlikelihood of getting a "credible commitment to repay" explains the "malaise" that worries Shiller.

Three items on finance

Bankruptcies are no picnic, but politicized bail-outs are also unattractive. Here a couple of smart people introduce the idea of the "bail-in" alternative.

How would it have worked? Regulators would be given the legal authority to dictate the terms of a recapitalisation, subject to an agreed framework. The details will vary from case to case, but for Lehman, officials could have proceeded as follows. First, the concerns over valuation could have been addressed by writing assets down by $25 billion, roughly wiping out existing shareholders. Second, to recapitalise the bank, preferred-stock and subordinated-debt investors would have converted their approximately $25 billion of existing holdings in return for 50% of the equity in the new Lehman. Holders of Lehman’s $120 billion of senior unsecured debt would have converted 15% of their positions, and received the other 50% of the new equity.

The remaining 85% of senior unsecured debt would have been unaffected, as would the bank’s secured creditors and its customers and counterparties. The bank’s previous shareholders would have received warrants that would have value only if the new company rebounded. Existing management would have been replaced after a brief transition period.

The equity of this reinforced Lehman would have been $43 billion, roughly double the size of its old capital base. To shore up liquidity and confidence further, a consortium of big banks would have been asked to provide a voluntary, multi-billion-dollar funding facility for Lehman, ranking ahead of existing senior debt. The capital and liquidity ratios of the new Lehman would have been rock-solid. A bail-in like this would have allowed Lehman to open for business on Monday.

Many investors would no doubt complain about the rough justice of a regulator-imposed reorganisation. To preserve value, officials would have to move very, very quickly, leaving little time to fine-tune various claims or observe normal procedures. The new structure would be based on bankruptcy reorganisation principles, allocating value in accordance with investors’ seniority and ensuring that each class of investors would be better off than in liquidation. The process would not be pretty but overall, investors should be relieved by the result. In this example the bail-in would have saved them over $100 billion in aggregate, and everybody—other than short-sellers in Lehman—would have been better off than today.

Where and how did investors fail? Where and how did politicians fail? Who will unscramble the eggs?

In "Why Didn't Canada's Housing Market Go Bust?" James McGee finds that "Housing markets in the U.S. and Canada are similar in many respects, but each fared quite differently since the onset of the financial crisis. A comparison of the two markets suggests that relaxed lending standards likely played a critical role in the U.S. housing bust." It seems that the Canadians never got around to creating a Fan and a Fred. What were they thinking?

In "Alt-A: The Forgotten Segment of the Mortgage Market," Rajdeep Sengupta describes "aggressive underwriting" by various banks. What were they thinking?

No falsifiability

Strange things happen when people put their faith in politicians. Noted economists have recently discovered the concept "jobs saved". Others have discovered the win-win two-fer of clean environment plus economic recovery from one investment.

Today, it's high-speed rail in Florida. This project will save-or-create jobs. And it will save-or-create clean air and/or global warming relief.

But if serious people can live with the save-or-create idea, then anything goes. In fact, plausibly serious people have one more line of defense. If the save-and-create results (somehow) fall short, then the obvious response is that we just did not push hard enough. Even more stimulus (high-speed rail, "green" jobs, you name it) will surely be the remedy.

There simply is no falsifiability.

UPDATE

Here are some Florida high-speed rail project numbers from Bob Poole.

Barter

Money exists to reduce the inefficiencies of barter. But barter makes a comeback where money is suspect (think Zimbabwe). It also makes a comeback when and where people experience liquidity shocks (think U.S. circa now) and where they have access to cheap information exchange opportunities (think Craig's List).

Look at "Let's Make a Deal ... The growing role of barter in the marketplace" in yesterday's WSJ.

Modern communications have changed our lives (mostly for the better) in uncountable ways. Now add people (and businesses, according to the article) finding ways to cope with the recession.

Consumer sovereignty

Karen Stabiner's piece in this morning's LA Times is the latest contribution to the LA-NYC-compared literature.

Among the items compared are women's hair treatments.

Blonds. Clairol's 1960s ad campaign, "Is it true blonds have more fun?," implied that being a genetic minority made life more worth living. But now a highlight and lowlight epidemic on both coasts has turned the stubborn brunet into the outlier. Is it true blonds have more fun? Hard to tell; there are too few non-blonds left for a viable comparison.

This brings to mind Malcolm Gladwell's wonderful "True Colors: Hair Dye and the Hidden History of Postwar America," a chapter in his What the Dog Saw and other adventures.

Do blondes have more fun? Is blondness more alluring? I guess the market has spoken. Gladwell alludes to a "blondness periodic table" published in Big Hair: A Journey into the Transformation of the Self by Grant McCracken, which I must read.

There are appatently six categories in the periodic table ("bombshell" [Mae West, Marilyn Monroe], "sunny" [Doris Day, Goldie Hawn], "brassy" [Candice Bergen], "dangerous" [Sharon Stone], "society" [C.Z. Guest] and "cool" [Marlene Dietrich, Grace Kelly].

All that may have been so in 1995. But, Stabiner would probably agree, the six have have multiplied in NYC as well as in LA as well as in-between.

Consumer sovereignty is a wonderful thing.

2010 economic freedom

I was introduced to the (possible) endogeneity of market friendly institutions some years ago via John Powleson's Centuries of Economic Endeavor. Since then, the possibility of a virtuous cycle (economic freedom prompts prosperity and prosperous people demand more economic freedoms) has received increasing attention.

The evidence keeps accumulating. Yesterday's WSJ included the Heritage-WSJ 2010 Index of Economic Freedom rankings. There is more than one way to create an index, but the results (general rankings) are fairly robust.

This year's ranking has the UK at #11 and the US at #8. But of the 179 countries ranked, but eight of the top 11 have been significantly influenced by British institutions. Yes, British colonialism had a dark side, but Hong Kong, Singapore, Australia, New Zealand, Ireland, Canada, the US (seven of the top eight) were able to send the colonialists home and build relatively free and prosperous societies on the foundations they left behind.