Wednesday, December 31, 2008

Arnold Kling sums it up

Arnold links to his Congressional testimony, in which he provides an exquisite history and explanation of the crisis. Some excerpts:

To understand the problems inherent with securitization, imagine that you are a bank executive faced with two alternative routes for obtaining mortgage loans—a direct route and an indirect route. In the direct route, your loans are originated by your own staff. You establish standards, policies, and procedures for loan origination. You choose the markets in which you would like to originate loans, and you will probably focus on communities where you know the local economy. You hire and train personnel to follow internal guidelines.

Your compensation policies incorporate incentives for them to accept or reject applicants in accordance with company policy. Once the loan has been made, if the borrower misses a payment, your staff follows company procedures for contacting the borrower and resolving the problem.

In the indirect route, loans are originated by persons unknown to you, following guidelines established by someone else. The loans may come from communities with which you are totally unfamiliar. The originators may very well be paid on commission, which they can only receive if they close a loan—never if they reject an applicant. If the loan gets into trouble, you will have no control over how the delinquency is handled.

No sane bank executive would choose the indirect route over the direct route. In economic jargon, the "agency costs" of the indirect route are prohibitive. The originators of mortgages in the indirect route are operating under incentives that are contrary to the bank's interest. The misalignment of incentives between the bank and those acting as its agents in the indirect route will force banks to incur additional costs to monitor and review the work of the originators. Even with most diligent efforts, the bank is likely to incur higher losses from defaults, as originators squeeze bad loans through the cracks of the bank's monitoring systems.

It is surprising, therefore, that as of 2008, nearly three-fourths of mortgage debt in the United States had been originated using the indirect method. To reach this point required a combination of Wall Street ingenuity and regulatory anomalies.

I like this part too:

The suits treated mortgage securities as bonds, ignoring the power of the embedded options. In August and September, when policymakers began to perceive the severity of the crisis, the suits thought that mortgage securities could not possibly have lost as much value as their market prices indicated. Federal Reserve Board Chairman Ben Bernanke insisted that if the securities were "held to maturity" that they would have higher values. Treasury Secretary Henry Paulson proposed to have the government buy and hold these securities in order to "unclog" the financial system. However, this thesis, which in effect was arguing that the geeks had mispriced mortgage securities, proved to be incorrect. The banks that had invested heavily in these securities were truly under-capitalized. The mistakes had been made by the suits, not the geeks.

I always wondered what finance was really about, or rather why it has become this huge behemoth, representing some 40% of U.S. profits. Now I think I know. It's kind of like law, in that the big money is in finding novel ways to subvert the law, causing more laws to be created, and more opportunities for subversion, etc. Looks like a big part of those profits are nothing more than rent seeking.

This also makes me think that no amount of regulation will ever fix the problem, and that maybe the Austrians are right: we should return to competitive banking.

Sunday, December 28, 2008

One word: Mariachi

As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

“I’d lie if I said every piece of documentation was properly signed and dated,” said Mr. Parsons, speaking through wire-reinforced glass at a California prison near here, where he is serving 16 months for theft after his fourth arrest — all involving drugs.

While Mr. Parsons, whose incarceration is not related to his work for WaMu, oversaw a team screening mortgage applications, he was snorting methamphetamine daily, he said.

“In our world, it was tolerated,” said Sherri Zaback, who worked for Mr. Parsons and recalls seeing drug paraphernalia on his desk. “Everybody said, ‘He gets the job done.’ ”

At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.

Read the rest here. The really funny part is I owned stock in this company. I recall thinking "the banks always seem to win, I should own a bank."

Wednesday, December 17, 2008

Republicans have a death wish?

Not sure how this works, but my guess is that it's ultimately about cheap land and open spaces. Republicans apparently value these things more than whatever benefits accrue from being around others, which in this case is relative safety.
The death map comes from here, and the red state blue state map is here.

Tuesday, December 16, 2008

Me and Paul: The joys of blogging

Paul Krugman shows you don't win the Nobel prize by thinking small. He's calling for a massive Keynesian fiscal stimulus. Not just here, but all over the world! I just hope he remembers to tell us when to stop:

To understand the problem, think of what would happen if, say, New Jersey were to attempt to boost its economy through tax cuts or public works, without this state-level stimulus being part of a nationwide program. Clearly, much of the stimulus would “leak” away to neighboring states, so that New Jersey would end up with all of the debt while other states got many if not most of the jobs.

Individual European countries are in much the same situation. Any one government acting unilaterally faces the strong possibility that it will run up a lot of debt without creating much domestic employment.

For the European economy as a whole, however, this kind of leakage is much less of a problem: two-thirds of the average European Union member’s imports come from other European nations, so that the continent as a whole is no more import-dependent than the United States. This means that a coordinated stimulus effort, in which each country counts on its neighbors to match its own efforts, would offer much more bang for the euro than individual, uncoordinated efforts.

He even provides us with the math, so there can be no doubt. Except I still have doubts, and so do many others. See all the comments, especially this one. Here is mine:
Sounds like you're claiming there are spill over effects with a fiscal stimulus, which I agree with. Thus you're calling for coordination in Europe. Wouldn't that rosy scenario lead to spill over effects outside Europe? So would you really like to see world-wide coordination? Even if that were possible, and all spill-over effects neatly cancelled each other, then where are we? Yes, we might have a short term benefit of slightly higher demand than otherwise would be, but we'd be stuck with the very real and enduring cost of more government control of the economy. If that sounds good to you, I suggest you go to your local post office and think about it while you stand in line for hours.

Saturday, December 13, 2008

Postrel summarizes the research on bubbles

Read the whole thing, but here's a snipet:

At least that’s what economists would have thought before Vernon Smith, who won a 2002 Nobel Prize for developing experimental economics, first ran the test in the mid-1980s. But that’s not what happens. Again and again, in experiment after experiment, the trading price runs up way above fundamental value. Then, as the 15th round nears, it crashes. The problem doesn’t seem to be that participants are bored and fooling around. The difference between a good trading performance and a bad one is about $80 for a three-hour session, enough to motivate cash-strapped students to do their best. Besides, Noussair emphasizes, “you don’t just get random noise. You get bubbles and crashes.” Ninety percent of the time.

Incidentally, my dissertation is building upon this work. I'll let you know how it turns out after I corner the stock market.

(HT to Tyler)

Addendum: Where is the next bubble likely to occur? This research tells us it will likely occur where we have little experience, just as the dot com bubble occured in a new technology we had little experience with, and the real estate bubble occured after a generation of flat prices and no record of significant nation wide declines. My guess is that treasury bonds are the new bubble, since it was roughly a generation ago that they performed this well. You'd think knowledge of history would matter more, but it doesn't. Only experience.

Friday, December 5, 2008

Things you can do in authoritarian China that you can't do here

China plans next month to raise tax on regular gasoline by five fold and diesel fuel tax by eight fold, in a move to take advantage of falling crude prices and encourage energy conservation, state-run media reported Friday.


Government officials see the dramatic fall in global crude oil prices -- currently around $43 a barrel, down from a high of about $147 in July -- as "a perfect opportunity" for the increase, the report said.

Read the rest here. Of course, it's a pretty bad time to be raising taxes, but in the long run this is good policy. China and India and many other heavy polluters have been subsidizing gas consumption, not taxing it. You could probably make the argument that we in the US have also been subsidizing gas consumption on balance, when you take into account the highway subsidies.

But is there any country currently proposing to lower taxes, gas or otherwise, in this likely deflationary environment? Has any country ever tried lowering taxes in a deflationary environment? Is there any reason why? I see only two, niether of which make me optimistic about the future:
1) We have only the experience of the Depression, and only the Keynesian reaction, so we are too afraid or stupid to try anything else.
2) With voters paralyzed in fear/stupidity, the most successful politicians, i.e. the most venal, will sieze this "perfect opportunity" to expand their power.

Merry Christmas and to all a good night!

Thursday, November 20, 2008

The patience of 8th graders

Something to keep your mind off your 401k. Marco Castillo and Regan Petrie, two visiting economists at GMU, have an interesting study which certainly breaks new ground in education research. From the abstract:

We experimentally investigate the distribution of children's time preferences along gender and racial lines. Black boys have significantly larger discount rates than any other demographic group. Discount rates among Black girls are comparable to rates among White girls. Although White boys exhibit higher discount rates than girls, the difference is small and not statistically significant. These results are robust to alternative measures of patience and to regression analyses that control for socio-economic background and school performance. The measured differences in discount rates are large. All things equal, a Black boy requires expected returns to education 13-15% higher than Black girls to compensate for his larger discounting of future payoffs. Equally importantly, we show that impatience, as measured by discount rates, has a direct effect on behavior. An increase of one standard deviation in the discount rate increases by 5 percent the probability that a child incurs at least 3
school-related disciplinary actions. This result suggests that experiments capture new and relevant information on children. Overall, our results suggests that time preferences might play a large role in setting appropriate incentives for children. Understanding the factors behind these differences in preferences is an important area for future research.

Mind you, given their data limitations, they cannot fully identify the conditions which create such differences in time preferences, e.g. family characteristics such as education of the parents. But this is a start.

Common sense

"I don't think they should bail them out because ... obviously something's not right in the way they're running their business, and why should the American people have to bail them out if they can't figure out how to do it right?" September Quinn, the busy waitress, said after the lunch rush at the Inn Between.

More here. It's people like this that keep the dollar afloat, not the spendthrifts in Congress.

Wednesday, November 19, 2008

Somalian stimulus plan (SSP)

"There are more shops and business is booming because of the piracy," said Sugule Dahir, who runs a clothing shop in Eyl. "Internet cafes and telephone shops have opened, and people are just happier than before."

More here.

Tuesday, November 18, 2008

Google's accidental innovators

In their 1998 paper, the Googlers cited Prof. Ben Bagdikian's theory of Media Monopoly. Page and Brin swallowed the idea that U.S. media markets were controlled by a cabal of corporations, manipulating content to protect advertisers, and stifling competitive entry to protect their shareholders. According to Bagdikian, just four megacompanies share the U.S. Media Monopoly: Disney, News Corp., Time Warner and Viacom. (News Corp. is the corporate parent of Dow Jones, publisher of Barron's.) Resistance was futile.

If Brin and Page had been deterred by the bleak forecast offered by Bagdikian, Google today would not be worth some 90% of the capitalization of the four media oligarchs combined.

That's GMU's Thomas Hazlett in Barron's.

Monday, November 17, 2008

Probability of being the swing voter

There are 4 senate races that are still too close to call (I believe they are all in recount), and Missouri is too close to call in the presidential race. By the latest count, Al Franken is within 206 votes of winning the senate race in Minnesota, where the total number of votes was around 2.9 million. From Time:

But Jacobs says he does not expect a huge shift in recounting residual votes. "The bigger issue is how we handle these absentee ballots [which are the subject of the Franken lawsuit]," he says. Mark Jeranek, who voted for Franken, cast an absentee ballot in Beltrami County, located in northwestern Minnesota, that was rejected because he didn't sign the envelope in which he placed his ballot. The Franken campaign sent him an affidavit that he is considering signing. "I don't want to be a cause for revolution, but at the same time I want my vote to count," the 39 year-old environmental consultant says. "It's kind of neat — at least for a senatorial race — that it really does come down to every individual vote."

None of this squares with the typical public choice assumption, going back to Downs and Tullock, that the liklihood of being the swing voter is 1/n, where n is the number of voters. That is, the number of close elections indicates it is not a uniform distrubution, i.e. you need to take into account the median voter theorem. For this reason, I think a binomial distribution is more appropriate, such as that used by Barzel and Silberberg. The following graph illustrates how these two assumptions differ over the size of the electorate. I've assumed p=1/2 for the binomial distribution, and calculated P as the probability of being within 1 vote of a tie.

Clearly, in large elections such as those at the state and national level, both probabilities approach zero. Thus, voters in these elections aren't paying too much attention to this sort of calculus. Rather, expressive voting is probably a more important factor.

Addendum: To illustrate the main point here I've reproduced the same graph below but on a log-log scale. You can now see that especially in large elections the choice of binomial versus 1/n is critical. For instance, in Al Franken's race with 2.9 millions voters, if one assumes a binomial distribution, then there is a 1/711 chance of effecting the outcome. Therefore, if we assume the cost of voting is, say, $1, due to time lost, travel expense, etc., then one need only expect benefits greater than $711 for it to make sense to vote for one's preferred candidate. Compare that to the case of a uniform distribution, where benefits would need to exceed $2.9 million. You can see that the paradox of voting is not such a paradox if one makes realistic assumptions, even if we restict our analysis to non-expressive, i.e. instrumental, benefits.

Sunday, November 16, 2008

Remember modesty?

The hubris of the military imperialists was bad enough without adding to it the hubris of the aid imperialists.

That's Bill Easterly on Paul Collier's Bottom Billion. (HT to Tyler)

Saturday, November 15, 2008

Stuff I don't usually read

I would not be surprised to see the G-20 monetize at least 20% of the U.S. debt markets. THAT MEANS …

Gold would be priced at over $10,000 an ounce.

Currencies would be devalued by a factor of at least 12 to 1, meaning it would take 12 new dollars or euros to equal 1 old dollar or euro.

That's Larry Edelson at Money and Markets. I don't know what to say. Buy gold.

Also see this montage of clips by Peter Schiff, who predicted our current financial mess whilst being laughed at.

The dangers of complexity

I hope none of you voted for Obama thinking this would put an end to special interest politics, or the wars. It looks like the military-industrial complex, along with all the other government-industrial complexes, will continue unabated. From the New York Times:

John L. White, a former Clinton official charged with overseeing the new Defense Department, is a partner in a firm that invests in defense contractors. Michael Warren, charged with overseeing Treasury, is chief operating officer of a firm that lobbies for clients including the U.S.-India Business Council.

Several of the officials have ties to Fannie Mae, the government-backed mortgage firm whose implosion this fall contributed to the financial meltdown. Thomas Donilon, overseeing the State Department, is a partner in the law and lobbying firm O’Melveny and Myers who until three years ago lobbied for Fannie Mae. Wendy R. Sherman, the other official charged with reviewing the State Department, once headed Fannie Mae’s charitable foundation.


The vast majority involved are second-tier officials of the Clinton administration, eager to help another Democrat take control of the White House. With the exception of a few academics, almost all of them spent the intervening years in the private sector, usually capitalizing on the connections and expertise they developed in the Clinton years.

Maybe this is why the Framers preferred a simple solution: strict and severe constitutional limits on the power of government.

Tuesday, November 11, 2008

Highway robbery

If you're wondering why the stock market is back near 5 year lows, I think it has something to do with the eagerness of Democrats, including Obama, to hand over more billions to the car companies. It certainly frightens me. Bush is no paragon of free-market virtue, but he is apparently the only one standing in the way of this non-sense. Once he's gone, we're looking at two years to life of binging at taxpayer expense. I expected as much from Pelosi and Reid, but I wanted to give Obama the benefit of the doubt. Truly disheartening. Politics continues unabated.

Here's what the Wall Street Journal has to say about it, and they're quite a bit more tempered than I:

Which brings us back to what the government should do. If public dollars are the only way to keep General Motors afloat, as the company contends, a complete restructuring under a government overseer or oversight board has to be the price.

That is essentially the role played by the federal Air Transportation Stabilization Board in doling out taxpayer dollars to the airlines in the wake of 9/11. The board consisted of senior government officials with a staff recruited largely from the private sector. It was no figurehead. When one airline brought in a lengthy, convoluted restructuring plan, a board official ordered it to come back with something simpler and sustainable. The Stabilization Board did its job -- selling government-guaranteed airline loans and warrants to private investors, monitoring airline bankruptcies to protect the interests of taxpayers -- and even returned money to the government.

As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family's control of Ford Motor. But keeping the family in the driver's seat wouldn't be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.

Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. "Since the mid-Seventies," one Detroit manager recently told me, "I have sat through umpteen meetings describing how we had to beat the Japanese to survive. Thirty-five years later we are still trying to figure it out."

Which is why pouring taxpayer billions into the same old dysfunctional morass isn't the answer.

Also see this and this.

Obama =? Hitler

From the AP:

Broun cited a July speech by Obama that has circulated on the Internet in which the then-Democratic presidential candidate called for a civilian force to take some of the national security burden off the military.

"That's exactly what Hitler did in Nazi Germany and it's exactly what the Soviet Union did," Broun said. "When he's proposing to have a national security force that's answering to him, that is as strong as the U.S. military, he's showing me signs of being Marxist."


"We can't be lulled into complacency," Broun said. "You have to remember that Adolf Hitler was elected in a democratic Germany. I'm not comparing him to Adolf Hitler. What I'm saying is there is the potential of going down that road."

The educated Democrats among you are saying this is crazy and alarmist. But ask yourselves how many Obama voters, or voters generally, are aware of this history.

Monday, November 10, 2008

Krugman, I still don't get it

He offers very sound logic as to why a fiscal stimulus works in the short run:

The economic lesson is the importance of doing enough. FDR thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It's much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.

Now tell me how we're going to muster the political courage to cut government spending and fire people once the economy recovers. Federal spending never decreased in the 20th century, except in the years immediately following the huge spending increases of WWI and WWII.

As a percent of GDP federal spending went from roughly 3% pre-Depression to a peak of 25% in 1982, and declined to 20% during the 90s essentially because GDP outgrew government.

For this very reason, wouldn't tax cuts be a more sensible stimulus? He's a smart guy and he won the Nobel prize so you know he's thought about it. But he just can't bring himself to say it. At least he gives us the converse, that tax increases reduce economic growth:
Well, it wasn't as major as you might think. The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren't felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.

So why doesn't he simply recommend a tax cut now, particularly a capital gains tax cut, and reduced spending later? This is why I'll never win a Nobel prize.

Alex Tabarrok has more. And Tyler offers some better advice. So does Greg Mankiw.

Wednesday, November 5, 2008

The Obama Effect: Al Gore starting to make sense

Business -- and by extension the capital markets -- need to change. We are too focused on the short term: quarterly earnings, instant opinion polls, rampant consumerism and living beyond our means. As we have often said, the market is long on short and short on long. Short-termism results in poor investment and asset allocation decisions, with disastrous effects on our economy. As Abraham Lincoln said at the time of America's greatest danger, "We must disenthrall ourselves, and then we will save our country."

At this moment, we are faced with the convergence of three interrelated crises: economic recession, energy insecurity and the overarching climate crisis. Solving any one of these challenges requires addressing all three.

For example, by challenging America to generate 100% carbon-free electricity within 10 years -- with the building of a 21st century Unified National Smart Grid, and the electrification of our automobile fleet -- we can encourage investment in our economy, secure domestic energy supplies, and create millions of jobs across the country.

We also need to internalize externalities -- starting with a price on carbon. The longer we delay the internalization of this obviously material cost, the greater risk the economy faces from investing in high carbon content, "sub-prime" assets. Such investments ignore the reality of the climate crisis and its consequences for business. And as Jonathan Lash, president of the World Resources Institute recently said: "Nature does not do bailouts."

Read the rest in the WSJ. I've never heard him make such sense. He seems to have read some basic microeconomics. What's wrong with the world? It must be the Obama Effect.

Now, the next lesson is public choice. That's where we disabuse ourselves of the dream that government can somehow address these problems in a better way than the market. I have hope, sincerely, that Al and Barack will eventually learn these lessons.

Addendum: Let me illustrate. The simplest policy improvement would be an increase in gas taxes. Will it happen? Probably not, it's unpopular.

Monday, November 3, 2008

Get out the vote for Cheech and Chong!

You have always been big supporters of pot legalization. Do you think that's imminent?

Chong: The more they study it, the more they find out that it's good for you. It treats so many ailments. It really is a medicine, and it has been since the beginning of time. The Bible was actually written by people under the influence of cannabis, there's a lot of proof of that. I think personally that the marijuana culture is the answer to America's economic woes right now. Because this is the biggest cash crop in the world, and the stock market falling has not hurt the pot industry whatsoever. So whether they legalize it or not it really doesn't matter, because it's here to stay and it's up to the government to decide if they want to keep spending billions of dollars on a hopeless cause.

Cheech: I just want it to be legal so we can be the spokesmen, and then we never have to work again!

That's change I can deal with!

Read the rest here.

Greenspan and the gold bugs

Greenspan's testimony on October 23rd makes a lot of sense, and I agree that high finance got a little too high. It was a bubble, for God's sake, meaning most people bought into it, including the masters of the universe on Wall Street. But Greenspan ignores the fact that he was the true master, or maestro, as they called him. He had the most power of all and thus bears at least a large part of the blame. Namely, he lowered interest rates to below 2% following 9/11 and kept them there until mid-2004, extending what was then a mild bubble in house prices into a record breaker (see the chart from wikipedia).

During this time it became global, as do all bubbles, in the form of world-wide investor sentiment and the expansionary policies of the world's central banks. Many of the world's stock markets doubled or tripled between 2003 and 2007. And now the party is over.
Greenspan is making Ron Paul and the other gold bugs look more and more reasonable, even the Wolf Wave guy:

UP 38% year over year and almost triple the size of any monetary expansion since 1985; and you haven't seen ANYTHING yet. This is the face of FUTURE inflation. Add to this the HUGE expansion of government to save and provide for you, where $1.00 goes in and .10 cents of goods or services comes out; the rest goes to line the pockets of their CAMPAIGN contributors and the government enforcers they have SPAWNED in leviathan government. THIS IS WHY THE STOCK MARKETS ARE COLLAPSING and will continue to do so until they turn higher in a ZIMBABWE-like rally to escape the debasement and the “Crack-Up Boom” EXPLODES in your face.

The nuttiness of these guys makes me doubt their story. Please read the whole thing, there's plenty of truth in it, and I am now more than ever ready to consider returning to the gold standard. But I am buying stocks, particularly emerging market stocks. Gold keeps falling because we are not in the "Crack-Up Boom" apocalypse. We have reasonable leaders, such as Bernanke who knows the Depression inside and out, and even Obama I think will make measured decisions that often go against the most radical elements of his party.

Early hints about Obama appointees

From Politico:

His personal assistant, Reggie Love, will wear jeans, as he always does on election days. And Jen Psaki, the press secretary who has traveled with the Obama press corps almost every day since the Iowa caucus, will slip into the cowboy boots that she bought during the Texas primary—if for no other reason than she feels they are “lucky.”

About 20 guys in the Ohio office haven’t shaved since Obama pulled ahead of McCain, Pickrell said, pausing to point out a bearded colleague who walked by. “We shower, we change clothes, we do all that stuff,” he said, but they haven’t put a razor to their faces. “It’s ridiculous, I admit it, but what else are you going to do?”

I don't fear Obama, I fear all the kooks and goobers in the Democrat party who he will be forced to turn to fill all the appointments. Imagine James Carville running the Education Department. God knows who gets to run the Treasury, someone from Goldman Sachs I presume. Buy that stock. As for HUD, I'll make a wild prediction that someone from ACORN gets that, say the embattled founder Wade Rathke.

Saturday, October 18, 2008

Rank fetishism

Elias Khalil gave an excellent talk yesterday at ICES, providing a compelling explanation for why we continue to put up with politicians. Here's the abstract:

The dominant view of corruption is based on the principal-agent framework: corruption undermines the interest of the principal. This view cannot explain why corruption, in many cases, is accepted and even demanded by the public, the principal. This paper provides a general theory that provides an answer. It redefines corruption as privileges enjoyed by people of high rank, what is called "rank fetishism." The principal demands people in authority to indulge in privileges to enhance, via heightened neurotransmitters, their own neural capital.

Essentially, blame Smithean sympathy, the peculiar kind. Peculiar sympathy is when we imagine ourselves as others, to avoid the pain of our own frustrated ambitions. Setting up leaders thus psychologically benefits us, the followers. Likewise the designated leaders benefit in more than the obvious way, they psychologically rise to the occasion, e.g. Sarah Palin. It is therefore a kind of free lunch, up to a point. Eventually the process can get out of hand, e.g. the French revolution, or Emelda Marcos and her 3000 shoes. Let's hope it doesn't come to that.

Sunday, October 5, 2008

Why did it take so long for this to happen?

Everything about Alison Gannett is green, from her straw-bale house to her solar-powered appliances. But when you're as serious about curbing carbon as she is, a mere hybrid won't do. That's why she spent $35,000 to install an extension cord on her Ford Escape Hybrid.

She is among a small but vocal — and growing — number of people who aren't waiting for automakers to deliver plug-in hybrids. These early adopters are shelling out big money to have already thrifty cars like the Toyota Prius and Ford Escape Hybrid converted into full-on plug-in hybrids capable of triple-digit fuel economy. "I love watching the mileage go up," says Gannett, a world champion extreme skier and dedicated eco-evangelist. "The highest I have gotten is 232 mpg. I average around 80-100 mpg."

Read the rest here.

Ig Nobel prizes announced

We all know it and science has proved it - wires, string, and hair will inevitably tie themselves in knots.

This astonishing non-revelation is one of 10 pieces of real research honoured this year with Ig Nobel Prizes.

The spoof alternatives to the rather more sober Nobel prizes were presented in a ceremony at Harvard University.

Other winners included studies that showed coca cola was an effective spermicide; and that fleas on dogs jump higher than fleas on cats.

Read the rest here.

Thursday, October 2, 2008

What is Dodd after?

From the WaPo:

Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, acknowledged last night that it was tempting to oppose a bailout and "stick a finger in the eye of the bankers and the tycoons whose greed brought us to this crisis."

"But after the rush of righteousness fades, what then?" said Dodd, an architect of the package. "We can take a cut at Wall Street, but Wall Street won't feel the brunt of the pain."

From this we might conclude that Dodd is for reducing the capital gains tax. Or we might conclude that he just wants to spend more money. I wonder which it is.

Monday, September 29, 2008

Let's do nothing

Tyler posts about Brad DeLong and the gang who are arguing for nationalization:
Now it's time to go back to three principles. There are three

* Do nothing.
* Bailout (a la Paulson)
* Nationalization (a la Sweden 1992)

Do nothing was last tried in 1929-1932. The result was called the Great Depression. Let's not do that again. Let's decide between bailout and nationalization. Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem.

Except Hoover didn't do nothing. In January 1932 he bailed out the banks:

Consider what happened during the 1930s. In the fall of 1931, the Hoover administration realized that financial institutions no longer held the trust of depositors, investors, businessmen or each other. These organizations were losing deposits so rapidly that the financial system faced complete collapse. These organizations needed to cleanse their balance sheets of assets, which under current conditions, had little immediate value and could not be used to raise cash.

In January 1932, the Hoover administration created the Reconstruction Finance Corp., an entity authorized to extend loans to all depository institutions in the nation. The RFC could accept as collateral a broad array of assets, including those deemed to be of little immediate worth but of potential long-term value. During its first year, the RFC lent nearly $1.5 billion and acquired equity stakes in thousands of financial institutions. As a share of the capital of the financial industry, this lending would be the equivalent of roughly $100 billion today. During its second and third years, the RFC extended loans to banks and acquired equity positions in financial institutions amounting to more than $3 billion dollars, equal to roughly $200 billion today.

The financial crisis slowed temporarily, but the bleeding continued. Bankers restricted lending to entrepreneurs, consumers and each other. Industrial production plummeted. Unemployment skyrocketed. The financial meltdown resumed, forcing the president to declare a national “banking holiday.”

It’s worth reiterating the theme of this historical analogy in stark terms. In the past, we faced a similar situation and employed similar policies. The policies marked a deepening of the downturn, not an end to the agony. The policies signaled the demise of the financial system and the need to construct new institutions.

It's time to let creative destruction run its course.

Sunday, September 28, 2008

OK, just blame the Democrats

Vernon Smith, writing in 2007, blamed Bill Clinton:

The joint housing and mortgage-market crisis once again reminds us that all financial implosions stem from the same cause: borrowing short and lending long without enough equity to weather periodic storms in the gap between.

But this bubble was different. Besides being fueled by housing purchases and repackaged loans, each with inadequate equity -- doubling down with other people's money -- at the end of the capital-gains rainbow was the right to take up to $500,000 of profit, tax free.

Thank you President Bill Clinton for your 1997 action, applauded by the banks, the realtors and all citizens in search of half-millionaire status from an investment they could understand and self deceptively believe to be low risk; thank you for fueling the mother of all housing bubbles; thank you for enabling so many of us who bought second or third homes, and homes before construction began, which we then sold to someone else who dreamed of riches from owning homes long enough to sell to another fool.

Once again, try as we might and in spite of our political rhetoric, we have failed to help the poor in applauding government action intended to help ourselves.

Read the whole thing in the WSJ. He even brings in a little Adam Smith.

Thursday, September 25, 2008

How Democrats and Republicans created the financial crisis

My mom alerts me to this article by Kevin Hassett, who blames the Democrats:

It is easy to identify the historical turning point that marked the beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even "on the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a "world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.

The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie "continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. "We are placing the total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: "It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

OK, that's pretty convincing. But what was Bush doing? He was cheerleading the bubble with his calls for an "ownership society," a phrase which he failed to mention last night in his explanation of the causes. I think on balance Democrats deserve more of the blame, because they fundamentally believe more in government intervention. However, too many Republicans, including Bush and McCain, don't understand the market, and so cannot defend it against the inevitable and relentless calls for government intervention.

Tuesday, September 23, 2008

Like Adam Smith, Russ Roberts keeps it simple

The turmoil in the housing market and the resulting financial crisis is just the latest example of political failure. Politicians wanted more home ownership than the market produces on its own, especially among low-income families. To encourage this politically popular goal, Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) were allowed to privatize their profits and socialize their losses. At the same time, Housing and Urban Development (HUD) required them to expand their commitment to affordable housing. Freddie and Fannie achieved this goal by buying bundles of subprime mortgages.

Both presidential candidates will promise a risk-free world with high returns. But peddling that fantasy is the cause of the current crisis. We treat our children this way--we do our best to insulate them from harm and still allow them to grow. I'd like politicians to treat me as an adult, paying the price for my recklessness and reaping a reward when I am prudent. Returning to that world, the world of markets, is the beginning of a return to stability.

Read the rest here in Forbes. So this is simple, right? Then why do most people not get it? Clearly that's more complex, but simply put I think we've produced a monster with our social democracy, and it thrives on the weaknesses of human nature, not just stupidity, but laziness, greed, and deceiptfulness.

Thursday, September 18, 2008

Nationalists, Socialists, and Wall Street's just desserts

A friend asked me to comment on Meyerson's op-ed in today's WaPo:

Someone needs to invest in the United States of America. For the past decade and, in a broader sense, for the entire duration of the Reagan era, both government and Wall Street have opted not to. Should Barack Obama win, the era of neglectfulgovernment will probably come to an end. No matter who wins, Wall Street is vanishing before our eyes. And by the measure of their contribution to America's economic strength and well being, both Reagan-age government and Wall Street's investment banks plainly deserve to die.

Here's what I wrote him:

Meyerson here is quite right that investment has decreased in America, and increased in the rest of the world. But he seems to think this is a real bad thing, because we're Americans damn it and we deserve to be richer than everyone else? This guy is both nationalistic and socialistic, a wonderful combination of sentiments, which has been tried before, it's called National Socialism, aka Nazism.

A more fruitful question is why are investors bailing on America? I have some ideas, like out of control government no longer limited by the Constitution so that we're pretty much no longer such a special place. But I'd love to hear the candidates weigh in on this, rather than scapegoating.

Wednesday, September 17, 2008

The long goodbye

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80 percent of all new vehicles in this country, according to Autodata. Today, it sells just 45 percent.

That's from the NY Times. Hope you're invested in other countries!

Sunday, September 14, 2008

Bum strategy

George, a lanky man who pedals a bicycle around town and sleeps on a building roof, said paparazzi and parking valets can be a problem when he panhandles outside celebrity haunts. But being close to wealth can lead to $100 handouts, or finds such as gold jewelry, video cameras and an Armani suit.

He was so thrilled with the suit that he wore it panhandling until he noticed he wasn't doing too well.

"You have to have a certain look to get sympathy — dirty, kind of stupid, not aware," he said.

He also knows an opportunity when he sees one. For a couple months, he hung out in a vacant house, lounging by the pool drinking up the liquor he found in a cabinet until the owner walked in on him. He managed to flee.

"I was just using the facilities," George said. "I wasn't robbing no one."

Read the rest here.

Thursday, September 11, 2008

National service as therapy

I'm watching CNN's national service forum. Obama and McCain seem to agree national service is the way to go. If you're feeling selfish, lazy, or pathetic, serve the nation. If you're otherwise just down in the dumps, serve the nation. If you want to be social and connect with others, serve the nation. If you want to be helpful and charitable, serve the nation. If you want to kick some aaaaaass, serve the nation. If you want to do something greater than yourself, you need to serve the nation, fool. (Mr. T for president!)

Interestingly, one of the interviewers (not Judy Woodruff) brought up Touqueville's observation that American's are crazy about voluntary associations. Then the interviewer asked if national service crowds out voluntary service. Obama: "No. Those are old arguments. ... Part of my job is to make government cool again." I guess Hitler, Stalin and Mao kinda gave it a bad name?

OK, Obama would say that's extreme, instead the problem is the special interests. I agree, so how the fuck are you going to keep special interests out of the national service racket?

Thursday, September 4, 2008

So she's hot, and she gives a great speech

But Sarah Palin adds little more than stage presence to the ticket (Did you see the contrast when McCain walked on stage? He looked like he was in pain.) Of course, that's pretty much all that matters in politics. That and finding a good scape goat. For Republicans, there are the foreigners-cum-terrorists, and to a lesser extent the elites in the media, academia, and politics. For Democrats there are the Americans who are uneducated, religious, and xenophobic, i.e. Republicans, and of course business, profits, and capitalism generally.

I wish it were different, but just listen for the lines that get the biggest applause.

No wonder the stock market is down today.

Tuesday, September 2, 2008

News from my home state

Alabama is rolling out a creative but controversial program that will subject its 37,527 state employees to possibly humiliating at-work weigh-ins and fat tests. If they tip the scales, they'll be given a choice: slim down or pay up.

I don't know if creative is the word. They're simply more willing to face facts: it's the second fattest state in the union.

Read the rest here.

Tuesday, August 26, 2008

Driving, much worse than nose-picking

From today's Post:

Motorists continue to grumble about record high gas prices, but a new study suggests there is at least one benefit: Fewer traffic fatalities.


Nationwide, traffic deaths last dipped below 37,000 in 1961. The number peaked in 1972, at about 55,000, and in recent years has hovered near 42,000, Sivak said.

High gas prices have changed the habits of commuters across the country. People are using public transportation, scooters and motorcycles, and working from home.

Lon Anderson, spokesman for AAA Mid-Atlantic, said he experienced the changes firsthand during a recent drive to Richmond. Traffic moved at a mere 70 mph.

"I can't remember when somewhere around 70 miles per hour was the average speed of traffic on 95," Anderson said of the interstate. "There are certainly many drivers out there who have taken some steps to reduce the amount of gas they are burning. . . . That is one of the few good sides to very high gas prices: That if people drive less, we're going to save lives."

But that's pretty important, life that is. And driving kills us in a lot of ways, from air pollution to unwalkable cities. Plus there are the other negative externalities which maybe don't kill us but detract from the quality of life, e.g. the isolating and anti-social nature of driving. I'm wondering why we have to wait for gas prices to curb this behavior. What happened to social disapprobation? Why is nose-picking in public not OK but driving is just fine, so long as you don't nose-pick while driving?

I believe it is because too many are confused about freedom, and particularly the connection between political and social freedom. We are too often willing to fight for social freedom, i.e. freedom from disapprobation, even at the expense of political freedom. Yes, this is a conservative position. It means I support Al Gore's disapprobation of driving, yet not his calls for government enforced higher gas mileage standards. Too many conservatives are not willing to make the trade off.

And too many libertarians don't even believe there is a trade off. Just more or less freedom. In fact, we can never be totally free. Instead, political and social freedom are substitutes to a large extent. This is why the socially restrictive Victorian era coincided with the greatest political freedom we've known, and the socially free 1960's coincided with the high tide of Marxism/Statism/Socialism.

But that's not to say there is no progress, or that libertarians are completely off base. Sometimes society gets more of both social and political freedom, and it is worth striving for. And I believe in constitutional guarantees of political freedom, precisely because politics is the most effective means of social progress. That is, many of our most unjust social traditions, e.g. slavery, ultimately had to be overcome in the political sphere. It took an Abe Lincoln to orchestrate emancipation. It took a Gandi to break down the unjust traditions of Hinduism. And maybe it takes an Al Gore or Obama or McCain to point out the injustice of environmental degradation. All of this entails political force, less political freedom. Without political power as the focal point, it seems social progress is terribly slow.

The bottomline is we must acknowledge the trade off, but favor political freedom over social freedom through heavy reliance on constitutional guarantees. Nose-picking is optional.

Tuesday, August 19, 2008

Starting over in New Orleans, Mancur Olson style

When I asked Paul Vallas what made New Orleans such a promising place for educational reform, he told me that it was because he had no “institutional obstacles” — no school board, no collective bargaining agreement, a teachers’ union with very little power. “No one tells me how long my school day should be or my school year should be,” he said. “Nobody tells me who to hire or who not to hire. I can hire the most talented people. I can promote people based on merit and based on performance. I can dismiss people if they’re chronically nonattending or if they’re simply not performing.”

Read the rest from the NY Times.

Also, the EIA looks into who's paying the bills in Denver.

Thursday, August 14, 2008

The Olympics sells much better than the Capitalism

I'm watching 2 Americans and 2 Belgians play beach volleyball in Chow Yong Park. Why are so many countries willing to fully embrace and compete in the Olympics, historically a Western institution and still slanted toward Western sports and athletes, and yet unwilling to embrace and compete in the historically Western institutions of free trade, property rights, and the rule of law? We in the West get the gold either way, i.e. through path dependence, but the rest of the world is learning how to play beach volleyball instead of how to avoid famine.

Maybe we should introduce experimental economics as an Olympic sport.

The Story of Stuff with Annie Leonard

Here it is. She claims to have 3 million viewers, so let's try to nip this in the bud.

This is a neatly packaged montage of all the familiar Marxist-Luddite gripes, and still without any real solutions proposed beyond "sustainable development, get involved, click around." This will always be the case because it is an intellectual fraud, most useful for rallying political movements, which in turn destroy millions of lives (USSR, Mao's China, Nazis).

As for her gripes, she is right to blame pollution and externalities, but what she fails to realize is that they are ultimately caused by a lack of property rights, not capitalism, profits, corporations, consumption, greed, etc. If we paid the full cost of disposing of our garbage, e.g. through a private dump rather than having goverment take it away magically, then we'd consume less and be more careful with our refuse.

Child labor is a bit more complicated, since we're talking about countries where child-slavery is still OK. Those countries have a lot of problems, chief among them is poverty. Capitalism can fix that. It worked in Europe, it can work anywhere. That's not to say that moral pressure from the world community isn't effective, especially in the short term, but ultimately we must let these countries get rich through capitalism and free trade. And remember that perhaps the most important thing we trade is ideas.

(Hat tip to Sammy, who also pointed me to this gem, a guy discussing the Georgia-Russia war with peanut butter on his face.)

Wednesday, August 6, 2008

Anthony Bourdain and Ted Nugent

...make great TV. No Reservations is the best travel show I can imagine, the only one I can stand. From Anthony's blog:

I didn't seek Ted out, by the way. I was summoned. He called a while back, said we should make television together - -and then told me exactly how. When the Nuge says jump? You ask only "How High?" and "How much ammo will I need?" In TedWorld, by the way, it all makes perfect sense.

Here they are discussing the negative externalities of obesity.

I can't wait for next week's Tokyo episode.

Tuesday, August 5, 2008

New book about Teach for America

Relentless Pursuit by Donna Foote. Here is what the Weekly Standard says about it:

The last few chapters are especially fascinating for policy enthusiasts as they offer a hopeful look at the changes taking place in public education. TFA teachers at Locke launched a special "academy" within the larger school that was showing promising results. An important component of the academy was an extra period that allowed teachers to spend time with students in subjects where they needed extra help. The TFA teachers persuaded Locke's principal to call a teachers' meeting to discuss making the extra period a schoolwide reform.

When the TFA teachers made impassioned pleas to their colleagues regarding the need for more class time, the teachers' union rep coldly retorted: "If you guys want to work 20 percent more, and not get paid 20 percent more, then vote for seven periods." The teachers voted down the proposal to extend the school day by a 72-to-36 vote. (Interestingly, Locke students supported the idea of a longer school day.)

But the story does not end there. After the 2005-06 school year, several TFA teachers left Locke to start two nearby "Green Dot" charter schools where bureaucracy and union work rules would not be an impediment to student achievement. These schools immediately proved so successful that Locke's principal, Frank Wells, saw the light and decided to join forces with Green Dot. After a protracted struggle with the union, Wells was able to convince a majority of Locke's tenured teachers to sign a petition that would allow the school to convert to charter status. Last year the Gates Foundation provided $8 million to fund Locke's transformation into 10 small Green Dot charter schools, and the new Green Dot Locke campus opened its doors last September--minus 22 incompetent teachers Wells had long sought to get rid of.

Sunday, August 3, 2008

My sympathy makes me nonexpressive

Will Wilkinson summarizes The Theory of Moral Sentiments:

We are naturally sympathetic. Of course, our sympathy is rather limited and weak. But because we are sympathetic, we sympathize with the weakness of others’ sympathy. So, being sympathetic to the limits of others’ sympathy, we mute the expression of our own emotions, so that others will not be made uncomfortable or burdened by their failure to connect fully with what we really feel. And, likewise, we appreciate it when others do this for us. A sympathetic person doesn’t put other people out. Observing many instances of this pattern of praise for the sympathetic accommodation of weak sympathy (”thank you for not asking me to be that sad for you!”), we produce a general rule. And then we apply it to ourselves and come to disapprove of freely expressing unmuted emotion even when alone — even though we are actually having our emotions and not trying to sympathize with them. Our natural sympathy, wedded to the general weakness of sympathy, generates an individual conscience that demands that we be no more emotional than other people are ready to handle. Therefore, stoic self-command is awesome. “It’s OK! Just let it all out.” Nonsense! Why would you so rudely embarrass yourself with your own emotions?

I hope my girlfriend is reading this.

Monday, July 28, 2008

What happens when politicians set prices

The oil company BP, known for thorough statistical analysis of energy markets, estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels.


Malaysia’s government incited public anger on June 4 when it raised gasoline prices by 40 percent. The prime minister, Abdullah Ahmad Badawi, announced the following week that he would retire, although he has since said that he will not do so until 2010.

Before adjusting the prices, Malaysia was spending 7.5 percent of its entire economic output on fuel subsidies, a greater share than any other nation. Indonesia follows with 4 percent.

China and India are up there too. Read the rest here. In other words, as a percentage of GDP, many Asian countries spend as much on fuel subsidies as we do on defense.

Sunday, July 27, 2008

I can hear you getting fatter

The Treasury Department gains unlimited power, until the end of 2009, to lend money to Fannie Mae and Freddie Mac or buy their stock should they need it. The Federal Reserve takes on a new "consultative" role overseeing the companies.

The measure includes $15 billion in tax cuts, including a significant expansion of the low-income housing tax credit and a credit of up to $7,500 for first-time home buyers for houses purchased between April 9, 2008, and July 1, 2009.

Democratic leaders, recognizing that the measure could be one of the last items to become law during what's left of their abbreviated election-year schedule, tacked on an $800 billion increase, to $10.6 trillion, in the statutory limit on the national debt.

Conservative Republicans were vehemently opposed to the bill, particularly the help for Fannie Mae and Freddie Mac. Critics charge the companies enjoy lavish profits in good times and wield their outsized political clout to resist regulation while depending on the government to bail them out should they falter.

Sen. Jim DeMint, R-S.C., delayed the final vote because Democrats refused to allow him a vote on a proposal to ban the companies from lobbying or making political donations to lawmakers.

"We can't have the people who are supposed to watch over these organizations getting money from these organizations," DeMint said. "At least if we're going to ask the American taxpayer to be on the hook for billions, possibly trillions of dollars, let's stop this."

That is sad.

Wednesday, July 9, 2008

Jobs for experimentalists

Within the last three years, both Google and Yahoo have built in-house economics facilities of their own to work on such tasks as optimizing their keyword auctions, and dozens of other companies have turned to outside consultants for help on specific projects. EBay used experimental economists to develop a new seller-feedback system that wound up boosting the total value of goods sold on the site by 25 percent, according to the researcher who worked on the project.

Read the rest from Wired. The article mentions Vernon Smith, but alas not the ICES lab that he built at GMU, and where I'm a research assistant.

Thursday, July 3, 2008

The real cause of the housing bubble

But one area in which Cindy McCain’s spending — and its impact on her husband’s lifestyle — can be chronicled is real estate.

Property records show that trusts and corporations controlled by her and her children spent nearly $11 million between the summer of 2004 and February 2008 on three condominiums in Phoenix and a pair outside San Diego.

Read more here. I guess the Austrians are right, bubbles are always caused by government.

Thursday, June 26, 2008

The Metro monopoly keeps serving up laughs

Another question I asked my students was the following:
1) What kind of business is Metro? Are you happy with that? How could it be improved?

The answer of course is it's a sorry-ass government monopoly, which can only be remedied by competition. In the meantime it gets to do things like raise price way above marginal cost, pack people like sardines into rush hour trains, run non-rush hour trains rediculously infrequently, completely abandon bus schedules, put you on hold for hours when you call, run off the rails, open the doors while moving and on the side without a platform, run people over, and waste money on frivolous programs and excessive salaries.

Today's Examiner finds one more reason to laugh or cry or cry through the laughter:

A Metro station manager and a Metro custodian were arrested on prostitution charges after an undercover transit police investigation found they arranged sexual trysts for money from inside the Dupont Circle Metro station.

At one point the employees used the Metro loudspeaker system to facilitate an illicit sexual arrangement, according to police who arrested the pair last week.

I think H.L Mencken's statements on democracy apply equally well to Metro:

I report only that when the suckers are running well the spectacle is infinitely exhilarating. But I am, it may be, a somewhat malicious man: my sympathies, when it comes to suckers, tend to be coy. What I can't make out is how any man can believe in democracy who feels for and with them, and is pained when they are debauched and made a show of. How can any man be a democrat who is sincerely a democrat?

This post is dedicated to Rusty at Why I Hate DC.

Have some fun, shoot the gun!

Shooting guns is not fun for me, nor do I enjoy chainsaws, but I do believe we should be allowed to own them. Of course there should be restictions on what you do with them and where you use them, e.g. not near my ear. And everyone draws the line somewhere, i.e. no sensible person believes in a right to own nuclear weapons.

So I'm glad the Supreme Court has overturned DC's ban on handguns. That it existed for 32 years, during which time we were named murder capital of the world, illustrates how out of whack democracy can get.

Tuesday, June 24, 2008

Principles of microeconomics

I just finished teaching this as a summer school course at George Mason, my first time teaching. I had no idea what to expect, but I'm happy to report that I really enjoyed it. My students were fantastic. We covered 15 of the 16 chapters in Gwartney and Stroup's Microeconomics, an excellent introduction to the subject.

Here are some of the questions I asked on the final, and for which most students gave very good answers:

1) Why are wages lower for women on average?
Answer: Specialization in the household.

2) Is the lottery fair? Explain using the difference between procedural justice and social, or redistributive, justice.
Answer: It's voluntary so it's procedurally just, but it widens income inequality so it's not socially just. See Hayek's "Atavism of Social Justice" in New Studies. (Do you think voters and pols get this distinction?)

3) Why are gas prices so high?
Answer: Many reasons, including supply constraints from OPEC and Congress, inelastic demand, and government subsidies.

4) Why do theaters offer discounts to students and the elderly?
Answer: Price discrimination.

I also wanted to ask a question about the difference between inequality and diversity, but we didn't spend enough time on that.

Monday, June 23, 2008

Cristo Rey schools

The concept of having students work to earn their tuition was borne of financial necessity. Children like Muñoz are desperate to escape the gangs and low expectations of big city public schools, but few can afford the full cost of a private education.

Over the past decade, though, members of the Cristo Rey network have discovered that requiring students to work does more than keep tuition low. It teaches children that there’s life beyond high school, with its teen-centered obsessions on things that don’t matter. It teaches them that working hard can help them get ahead—a lesson students from far nicer areas than the Pilsen/Little Village neighborhood could stand to learn, too. The model has helped revive Catholic inner-city education, and it offers some lessons for education more broadly. Anyone can create one school that works. The Cristo Rey Network has hit upon one of the few education models that can actually be replicated with reasonable success. It seems to be working everywhere it’s been tried.

More from Doublethink.

In other education news:

1) How to kill charter schools

2) Privatized student loans

Thursday, June 19, 2008

Who shall we blame for teen pregnancy?

I have no idea. Here's the story from Time:

School officials started looking into the matter as early as October after an unusual number of girls began filing into the school clinic to find out if they were pregnant. By May, several students had returned multiple times to get pregnancy tests, and on hearing the results, "some girls seemed more upset when they weren't pregnant than when they were," Sullivan says. All it took was a few simple questions before nearly half the expecting students, none older than 16, confessed to making a pact to get pregnant and raise their babies together. Then the story got worse. "We found out one of the fathers is a 24-year-old homeless guy," the principal says, shaking his head.

Gloucester's elected school committee plans to vote later this summer on whether to provide contraceptives. But that won't do much to solve the issue of teens wanting to get pregnant. Says rising junior Kacia Lowe, who is a classmate of the pactmakers': "No one's offered them a better option." And better options may be a tall order in a city so uncertain of its future.

Who shall we blame for high gas prices?

From the LA Times:

The lines are getting longer, and Tang Yao is finding fewer gasoline stations open in his neighborhood here. But the 48-year-old motorist has no gripes about the price at the pump.

While consumers in much of the world have been reeling from spiraling fuel costs, the Chinese government has kept the retail price of gasoline at about $2.60 a gallon, up just 9% from January 2007.

During that same period, average gas prices in the U.S. have surged nearly 80%, to about $4 a gallon. China's price control is great for people like Tang, who drives long distances in his gas-guzzling Great Wall sports utility vehicle.

But Tang and millions of other Chinese are bracing for a big jump in pump prices. The day of reckoning? Everybody believes it's coming right after the Summer Olympics in Beijing conclude in late August.

"Everything will change after the Olympics," said Tang, a real estate businessman, as he waited for an hour to fill up at a service station in a Shanghai suburb.

Sorry, Tang, it's today:

Oil fell below $134 a barrel on news that China will raise retail gasoline and diesel prices for the first time in 8 months to help refineries recoup losses from record oil prices.

More from the a-holes who are playing with prices:

At a meeting of energy ministers in Japan over the weekend, a senior official at China's top economic policymaking body said the surge in crude prices should not be attributed to rising demand from developing countries such as China and India. Rather, Zhang Guobao, vice chairman of China's National Development and Reform Commission, blamed the high oil prices on speculators.

Which is exactly what our a-holes are doing:

In a pair of lengthy and sometimes testy closed-door sessions in the Senate last week, executives from Goldman Sachs and Morgan Stanley, two of Wall Street's largest investment banks, made the case that their multibillion-dollar investments in energy contracts have not led to higher oil prices. Rather, they told Democratic staff members of the Energy and Natural Resources Committee that the trades allow international markets to operate efficiently and that the run-up in oil prices results not from speculation but from actual imbalances of supply and demand.

But the executives were met with skepticism and occasional hostility. "Spare us your lecture about supply and demand," one of the Democratic aides said, abruptly cutting off one of the executives, according to a staff member in the room.

Another aide at the meetings warned the executives that no matter what arguments they muster, it would be hard to prevent Congress from acting. Referring to a vote earlier this year to impose new mileage standards on automobile makers, the aide said, "At 90 bucks a barrel, Congress rolled the autos for the first time in 30 years -- is it too much to think that Congress will impose more restrictions on you if oil goes to $150 dollars a barrel?"

Guess who's to blame.

Iowa flooding

"Cities routinely build in the flood plain," Enshayan said. "That's not an act of God; that's an act of City Council."

Read more from the Post.

Tuesday, June 17, 2008

Since when does DC pass up federal money?

When the teachers' unions demand it. Here's Dan Lips describing Del. Norton's absurd battle:

How much funding for the education of students is District of Columbia Delegate Eleanor Holmes Norton willing to lose to prove a political point? At least $18 million, apparently.

Del. Norton is using her voice in Congress to try to end the D.C. Opportunity Scholarship program, a federally-funded program that currently helps more than 1,900 disadvantaged kids attend private schools in the District.

This program has proven widely popular with D.C. families. Since it began in 2004, approximately 7,200 students have applied -- about four applicants per scholarship.


Unfortunately, Del. Eleanor Holmes Norton remains fiercely opposed to vouchers. She was honest about her intentions: "I can tell you that the Democratic Congress is not about to extend this program." As the House Appropriations Committee considers whether to fund the program, Norton appears intent on leading an effort to block the $18 million in funding for scholarships.

For D.C. taxpayers, this is a costly way to score points in the political struggle over public education. Terminating the program would pull $18 million out of the D.C. public education system and increase the burden on the school budget by sending 1,900 kids back into public schools.

For families with children in the scholarship program, it's impossible to quantify what taking these scholarships away will mean. You can hear directly from participating families themselves by visiting There, families explain how they are benefiting from the opportunity to choose a safe and effective private school for their children.

Conveniently, as the House Appropriations subcomittee considers the issue today, the Department of Education issues a report claiming no significant improvement from vouchers. From the Post:

The congressionally mandated study, conducted through the Institute of Education Sciences, the department's research arm, compared the performance and attitudes of students who had scholarships with those of peers who sought scholarships but weren't chosen in the lottery.

Both groups took widely used math and reading tests, such as the Stanford Achievement Test. Overall, there was no statistically significant difference in performance.

But some groups of voucher recipients showed improvement. For instance, among students who earned relatively high reading scores before the program started, those with scholarships progressed faster and are now about two months ahead of their peers.

Students who previously attended struggling schools -- a group the program is designed to help -- showed no boost in test scores compared with their peers. Grover J. "Russ" Whitehurst, director of the institute, said one possible explanation is that those children lagged far behind academically and had trouble adjusting to what may be a more demanding classroom.

Parents of students with scholarships were more satisfied with their children's new schools and were less likely to worry that schools could be dangerous, the report found. Students showed no difference in their level of satisfaction.

First, the program has purposely been hobbled by its political enemies through regulations and spending limits, precisely to limit any significant effects. Second, insignificance indicates just that, i.e. neither significantly positive nor negative effects. This is not surprising in a new (and hobbled) program. Third, so why give up the federal money? There's no loss to DC taxpayers. Fourth, a little perspective is in order. We're talking about allowing parents and kids, poor parents and kids, the freedom to choose a way out of a miserable state run monopoly. If monopoly is so great, why not expand it to shoe sales, let the government do that. Or consider the beautiful irony of the Senate's monopolized cafeteria, courtesy of Jonah Goldberg:

As befits a government-run commissary, the Senate cafeteria has a decidedly Soviet attitude toward variety. It has averaged only two new menu items a year over the last decade. The food is so bad, every lunch hour Senate staffers rush to the House side of the Capitol, like starving New Yorkers of the future storming the last Soylent Green vendor.

According to auditors, the chain of restaurants run by the Senate food service, including the snooty Senate Dining Room, has almost never been in the black. It's lost more than $18 million since 1993 and dropped about $2 million last year alone. If the food service doesn't get an emergency bridge loan of a quarter-million dollars, it won't be able to make payroll.

So how will the Senate fix the problem? Well, with California Sen. Dianne Feinstein taking the lead, the Democrats -- that's right, the Democrats -- have called a classic Republican play: Privatize it.

The House of Representatives made the switch in the 1980s, and its food service is now better. And profitable: the House has made $1.2 million in commissions since 2003. True to the founders' vision of the Senate as the more slow-moving branch of government, the Senate has taken 20 years to follow suit.

This was a painful decision for many Democrats who believe that privatization cannot be justified simply because it delivers better service and higher quality for less money. "What about the workers?" they cried. Apparently, some in the Democratic caucus feel that the top priority in the restaurant business is to generate paychecks for people who are bad at their jobs.

Feinstein, head of the Senate Committee on Rules and Administrations, was forced to deal with reality. "It's cratering," the Washington Post quoted Feinstein as saying. "Candidly, I don't think the taxpayers should be subsidizing something that doesn't need to be. There are parts of government that can be run like a business and should be run like businesses."

Yes, yes, go on Dianne. Run with that thought. Explore it, as the therapists say.

Perhaps you might meditate on the District of Columbia's public school system, which spends roughly $14,000 a pupil in exchange for one of the worst educations in the country. Every year, one of the greatest mysteries in the nation's capital is whether textbooks have been delivered to the right kids, or even to the right schools. It can take until Christmas to get it all worked out. FedEx Corp., meanwhile, can tell you where any of its millions of packages are in more than 100 countries, right now. (Why not just FedEx the textbooks to the kids?)

And fifth: There's an immense amount of evidence that vouchers work. See Salibury and Tooley's international overview, especially Lewis Andrews chapter on special education.

Sunday, June 15, 2008

American weddings

This is not Monsoon Wedding, this is a real wedding in downtown DC! Manan Shah married Swati Raval at the Ronald Reagan building. He rode in on an elephant. Read more, courtesy of today's Post.

Occasionally I wonder about the extravagance of American weddings. Especially when I'm forced to buy a $100 herb grinder for my friend because that's all that's left on his Williams-Sonoma registry. I've been to a few weddings that probably cost upwards of $100,000. I know some couples who have taken out loans to pay for it. According to this site, the average wedding costs $28,732. What gives? Why not get married in Safeway, as I plan to do?

I figure part of it has to do with credible commitment, i.e. the bride and groom will think twice about redoing such a costly venture. And in this way they are also tying their own and each others hands to some extent. This of course was accomplished by the bonds of marriage before divorce became socially and legally acceptable, with the advent of no-fault divorce, etc. So has the cost of marriage gone up as a result? I can't really tell from this site (or without paying for a subscription), but I would need to correct for increased income anyway. One thing to look at is divorce rates by state and see if that is correlated with average wedding cost. It looks like states in New England and the Midwest have the lowest divorce rates. So I would expect them to have the cheapest weddings.

So does that mean India, with notoriously extravagant weddings, should have high divorce rates? Good luck finding those numbers!